HMRC has addressed confusion over state pension taxation, confirming that the state pension is taxable, though the Department for Work and Pensions (DWP) does not deduct tax at source. Instead, HMRC adjusts tax codes to recover any tax owed later.
Currently, pensioners whose only income is the state pension typically do not pay tax because the full state pension is below the £12,570 personal allowance. However, the triple lock is set to increase the new state pension to around £12,548 in April 2025, bringing it close to the frozen allowance. By 2027, it is projected to exceed £12,570, potentially making some pensioners liable for tax for the first time.
Chancellor Rachel Reeves has announced that from April 2027, pensioners with only state pension income will be exempt from tax on those payments. However, the government has not yet detailed how this exemption will work. It will not apply to those receiving the basic state pension with additional payments or to low-income pensioners with private pension income.
Rachel Vahey, head of public policy at AJ Bell, noted that the exemption could create anomalies where two pensioners with identical incomes face different tax treatment based on the source of their income. She also highlighted that the policy's long-term sustainability is uncertain, as state pension increases are expected to outpace the frozen personal allowance until at least 2031.
