Chancellor Rachel Reeves is developing proposals to deduct income tax from state pension payments before they are issued, a move that could see pensioners receiving the full new state pension lose approximately £193 per month. The plan, reported by City A.M., is being drawn up in collaboration with the Department for Work and Pensions (DWP).
How the Current System Works
Under existing rules, pensioners whose total income exceeds the personal allowance of £12,570 may need to file a tax return and pay income tax after receiving their pension. The proposed change would shift this to a system similar to Pay As You Earn (PAYE), where tax is deducted upfront.
Proposed Deduction Details
One option under discussion is taxing all state pension payments at the basic rate of 20 per cent. For someone receiving the full new state pension of £965 per month, this would result in a deduction of around £193. At the end of the tax year, the amount deducted would be reconciled against the pensioner's total income from other sources.
A retiree responded angrily to the speculation: "The state pension counts towards your personal allowance, pensioners with private pensions have been paying tax for years because of this, to exempt pensioners who only receive the state pension would create two tier state pension and would lead to more tax avoidance."
Public Reaction
Another commenter noted: "Assuming you are not referring to public sector pensions there is a procedure to follow to get a NT code so payments can be made gross, have a quick Google. Be aware that income that is exempt from tax in this country such as ISA interest on pre-existing accounts is typically chargeable in other countries."
A third person fumed: "They seemed to have ignored the glaringly obvious fact that the state pension should never ever be taxed."
Impact on Pensioners
The change would affect pensioners who currently do not pay tax on their state pension because their total income is below the personal allowance. However, those with additional income from private pensions, investments, or part-time work could see a significant reduction in their monthly payments. The Treasury and DWP have not yet confirmed the proposals, which remain under review.
