HMRC has issued a warning to state pensioners regarding a widespread tax misconception. Many retirees mistakenly believe their state pension is tax-free, but HMRC has clarified that it has always been taxable.
The confusion arises because the Department for Work and Pensions (DWP) does not deduct tax directly from state pension payments. Instead, HMRC adjusts the individual's tax code to recover any tax owed through other income sources, such as workplace or private pensions.
On X (formerly Twitter), HMRC explained: "The State Pension is taxable, but the DWP doesn't take tax at source, so we change your tax code to give enough of your tax free allowance to match the State Pension, leaving whatever's left for a private pension."
Under the current system, part of the £12,570 personal allowance is allocated against state pension income, with any remaining allowance applied to other taxable income, including private pensions.
Chancellor Rachel Reeves confirmed that individuals living solely on the state pension will be exempt from tax bills for the remainder of this Parliament. This measure is due to rising state pension rates under the Triple Lock.
Rachel Vahey, head of public policy at AJ Bell, commented: "That measure is designed to avoid the unwelcome optics of Government giving pensioners a benefit on one day, only to then ask for some of it back the next." She added: "It means two pensioners on identical incomes could find only the one with private savings has to pay any tax."
