The Treasury is drawing up plans to automatically withhold income tax from the state pension before it is paid out. The proposal would put the Department for Work and Pensions into the collection process, using a PAYE-style system before pension money reaches recipients.
The plan is being shaped because the state pension is expected to rise above the Personal Allowance threshold as soon as next year. One option under consideration would apply a default 20 per cent basic rate to state pension payments, then reconcile the final tax position against other income at the end of the tax year.
Rachel Reeves in November
Rachel Reeves told Martin Lewis in November that pensioners whose only income was the state pension would not be forced to fill in a tax return. In that ITV interview, she said: “So if you just have a State Pension, you don’t have any other pension, we are not going to make you fill in a tax return… I make that commitment for this Parliament,” before adding, “But people will have to pay the tax. They just won’t have to do a return? Or will they not have to pay the tax?”
She then said: “In this Parliament, they won’t have to pay the tax,” a line that now sits alongside the Treasury’s plan to collect the tax automatically before payment. That creates a practical split between how the tax is collected and whether pensioners are sent a return, with the Treasury now examining a system that would gather the money upfront instead of relying on later self-reporting.
Treasury and the Department for Work Pensions
The Treasury is drawing up the plan with the Department for Work and Pensions, and the government intends to outsource the operation to a private sector contractor if the policy is implemented. The Department for Work and Pensions would deduct the tax in a way similar to businesses using PAYE to withhold employment tax from salaries.
The immediate effect would fall on pensioners whose state pension pushes them over the Personal Allowance threshold, because tax would be taken before payout rather than handled later. That would also reduce the need for some people to deal with the tax through a return if their income profile fits the system the Treasury is designing.
Whether the Treasury acts
A final decision has yet to be made, and the Treasury and the Department for Work and Pensions declined to comment. The next step is whether the Treasury turns the plan into policy and, if it does, how the default 20 per cent deduction is matched with each pensioner’s other income at year-end.
For recipients who rely only on the state pension, the change would move the tax point to before payment and could leave them outside the return process Reeves described in November. The question now is whether the Treasury follows through on the withholding plan or leaves the tax collection system unchanged as the state pension moves above the Personal Allowance.
