Summary 

The state pension is taxable based on the amount recipients are entitled to each year, rather than the amount they actually receive. This requires a calculation based on two years’ weekly rates, which creates complexity and is not widely understood, making it difficult for pensioners to check tax calculations. 

We suggest either providing state pensioners with a year-end summary of the taxable amount, or moving the state pension to being taxable on a receipts basis, so the relevant figures can be reconciled more easily. 

Detail 

The state pension is paid four-weekly in arrears, but is taxable based on the amount a pensioner is entitled to each tax year, rather than the amount physically received in that year. Under the ‘triple lock’, the state pension increases each year. 

Unlike private pensions, where a P60 is issued after each tax year, state pension recipients are not sent a summary figure of their taxable amount each year. A calculation is therefore required to work out the taxable amount for each tax year using a hybrid of two weekly rates. As a further complexity, the payment day is determined by a pensioner’s national insurance number, which further separates entitlement from physical receipts. 

This requirement is not widely understood, and is one of many confusions regarding the taxation of the state pension. Many pensioners wrongly assume it is not taxable as no PAYE is operated. They also often assume when calculating annual figures that there are 12 payments in a year (monthly) rather than 13 (four-weekly). 

Whilst many pensioners do not need to actively declare income to HMRC (their income may be below the personal allowance, or tax can be collected via PAYE for those who have private pension income), even for pensioners whose tax is all collected at source, the calculation required to work out the taxable amount of state pension each year makes it difficult to check any calculations prepared by HMRC. 

Potential solutions 

Three options would simplify the taxation of the state pension: 

1. The Department for Work and Pensions (DWP) could provide a summary figure of the amount taxable after each tax year, similar to a P60 for private pensions and employment. This would provide certainty for pensioners, and could be shared with HMRC for consistency to help, where relevant, with PAYE coding and pre-population into tax returns. This could be combined with existing communications regarding state pension entitlement, so as not to increase postage costs.
2. Move the state pension to a receipts basis, making the amount taxable each year easier to identify for pensioners. This would require a transition year, in which there would be a minor adjustment in the amount taxable.
3. Tax 52 weeks of payments at the weekly rate applicable from the start of each tax year (which is already notified to state pensioners every year). 

A more radical solution for pensioners would be to enable tax to be collected from the state pension by the DWP. This would remove the need for simple assessments for pensioners whose state pension exceeds their personal allowance, or who have taxable bank and building society interest. As noted in our separate ask on simplifying simple assessment, simple assessments can be difficult for recipients to understand and many people prefer to have tax deducted at source. 

With the personal allowance freeze extended at Budget 2025 until 5 April 2031, increasing numbers of state pensioners will have tax to pay as state pension rates continue to increase under the triple lock. Enabling collection of tax from the state pension would simplify administration for these individuals, taking away some concerns around making sure they pay any tax they owe.