Taxation of state pension

The state pension is liable to income tax. Historically governments have taken the view that state pensions, as well as other ‘earnings-replacement benefits’, should be liable to tax.

The state pension is paid by the Department for Work and Pensions without any tax being deducted first. To ensure the right amount of tax is paid on someone’s total income – that is, their private or occupational pension plus their state pension – the state pension is taken into account when tax is deducted at source by someone’s pension provider under the PAYE system.

Generally pensioners whose only income is the state pension do not have to pay any income tax in practice. This is because their annual income falls below the income tax personal tax allowance – the amount of income taxpayers may receive tax-free.

Recently there have been concerns that an increasing number of pensioners may find that they have to pay some tax on their state pension.  This is because the government has continued to apply the ‘triple lock’ when uprating the basic and new state pension, while freezing the personal  allowance at £12,570, which is the level it reached in 2021/22. Pensioners in this position may be required to complete a self assessment tax return. For those with straightforward tax affairs, HM Revenue & Customs may send someone a bill for the tax they owe under simple assessment.

In the 2025 Budget the government announced the personal allowance would be frozen at its current level up to April 2031. It also announced that pensioners whose sole income is the basic or new state pension would not have to pay small amounts of tax via simple assessment from 2027/28 if the new or basic state pension exceeded the personal allowance from that point. To date the government has not published any further details of how this is to be done.