State pensioners could end up having tax taken straight from their payments before the money even reaches them, according to a new report. The plans are said to be under discussion behind the scenes to tackle cases where pensioners owe tax on their state pension.
Last year, Chancellor Rachel Reeves said pensioners who only rely on the state pension — with no extra income from savings, work, or property — would not be dragged into paying tax on it, even if the triple lock pushes payments above the current frozen £12,570 income tax threshold. This situation is expected to arise from April 2027, when even a minimum 2.5% rise could take full state pension payments over that limit for people with a complete National Insurance record under the post-2016 system.
Speaking on ITV’s Martin Lewis Money Show Live in November, Reeves reaffirmed that exemption for those with no other income.
She said: “I’m only making that commitment for people who just get the state pension… it wouldn’t be the right thing to do to try to tax those small amounts of money.”
However, anyone with additional income alongside their state pension will still be liable for tax, as is already the case. There is no change to the basic rule that pension income can be taxed if total earnings go over the threshold.
The reported change, revealed by City AM, suggests tax could instead be collected directly from the state pension before payment is issued by the DWP, rather than being handled later through self-assessment or adjustments to tax codes.
Under the proposals, the system could even be handed to a private contractor once introduced. One option being considered is applying a standard 20% deduction on all state pension payments upfront, with final tax amounts reconciled at the end of the tax year based on total income.
A government spokesperson told the Express: “There has been no change to the tax treatment of the State Pension.”
They added that the government regularly carries out research to better understand pensioners’ experiences with the tax system.
