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 taxed this way.

The state pension is paid by the Department for Work and Pensions (DWP) 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 – their pension provider takes the state pension into account when calculating how much tax to deduct under PAYE.

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

Recently there have been some concerns that an increasing number of pensioners in this position may find that they are liable 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 tax allowance at £12,570, which is the level it reached in 2021/22.