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DWP new statement on changes to tax deductions for the state pension

State pension payment rates increase each April

[A woman making a payment]

The DWP has issued a statement about the state pension(Image: Getty)

The DWP has issued a statement about a major change to how the state pension is taxed. State pension payments go up each April in line with the triple lock policy, which provided a 4.8 per cent hike to payments this past April.

Under the current rules, your state pension payments go into your bank account without any deductions applied, although it does count as taxable income, similar to other earnings such as any wages or pension income you receive.

If you need to pay tax on your payments, HMRC can collect this in one of several ways. This can be done by changing your tax code if you have a private pension or are in employment, through self assessment if you complete this or through simple assessment.

But a report by City AM suggested the Treasury was looking at changing this, and was "drawing up plans" to automatically deduct income tax from your state pension payments, before they are paid out. The story claimed that the Treasury was working with the DWP on plans to deduct tax at source on payments, similar to how businesses deduct work-related taxes from the wages they pay staff before paying them into employee bank accounts.

Tax treatment of the state pension

The DWP was asked what work is being done 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 an important change to tax on the state pension, which will come in soon.

Chancellor Rachel Reeves announced at the Autumn Budget 2025 that a new policy would take effect, so that people whose only income is the state pension without any increments do not have to pay income tax. This tax exemption rule is needed as the full new state pension is almost at that point where it will attract an income tax bill.

[An HMRC letter]

Changes are coming in to tax on the state pension(Image: Getty)

The full new rate currently pays 241.30 a week, or around 12,550 a year, only just below the 12,570 personal allowance. This is the standard maximum amount you can earn each tax year without paying income tax.

HM Treasury update

State pension payments increase each April, in line with the triple lock policy, which raises payments by the highest of 2.5 per cent, the rate of inflation or the rise in average earnings. This means the full new state pension will definitely incur a tax bill next year under the current rules.

The Government was recently asked for an update on the work to implement the new policy. An HM Treasury spokesperson said: "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 said that legislation would need to be brought in to enact the change. The group told the Treasury Committee that this may come in the 2026 autumn finance bill.

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