Key changes to tax on the state pension will be coming in soon while others are rumoured
The DWP has issued a statement regarding a significant change to state pension taxation. State pension payments go up each April in accordance with the triple lock policy, which delivered a 4.8 per cent rise to payments this past April.
Currently, state pension payments are transferred into your bank account without any deductions being applied. But your payments are classed as taxable income, just like other earnings including wages or pension income you might receive. Should you be liable to pay tax on your payments, HMRC can collect this through several methods. This may be done by adjusting your tax code if you have a private pension or are employed, via self assessment if you complete one, or through simple assessment.
However, a report by City AM indicated the Treasury was looking at changing this arrangement, and was “drawing up plans” to automatically deduct income tax from state pension payments before they are distributed. The article suggested the Treasury was collaborating with the DWP on proposals to deduct tax at source from payments, similar to how employers deduct work-related taxes from salaries before transferring them into staff bank accounts.
Tax treatment of the state pension
The DWP was asked about the progress on the proposal. A Government spokesperson said: “There has been no change to the tax treatment of the state pension.
“The Government routinely undertakes research to better understand pensioners’ experiences with the tax system.” However, tax officials are working on a significant change to the tax of the state pension, which coming in shortly.
Chancellor Rachel Reeves announced at the Autumn Budget 2025 that a new policy would come into force, ensuring that those whose sole income is the state pension, without any additional increments, would not be liable for income tax. This tax exemption is necessary as the full new state pension is almost at the point of crossing the threshold and triggering an income tax liability.
Almost triggering a tax bill
The full new rate currently stands at £241.30 per week, or approximately £12,550 a year, falling only marginally below the £12,570 personal allowance. This is the standard maximum amount an individual can earn in a tax year before you have to pay income tax on your earnings.
State pension payments rise each April in accordance with the triple lock policy, which uplifts payments by whichever is highest out of 2.5 per cent, the rate of inflation, or the increase in average earnings. This means the full new state pension will definitely incur a tax bill next year under the current rules.
Treasury statement
The Government was recently asked for an update on progress towards implementing the new policy. An HM Treasury spokesperson responded: “Anyone whose only income is the full new or basic state pension without any increments will not pay income tax, and we are committed to that over this Parliament.
“By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest personal allowance in the G7.”
HMRC officials previously told MPs that new legislation would be required to implement the change. They suggested to the Treasury Committee that this could be introduced via the 2026 autumn finance bill.
