Some changes to how the state pension is taxed are on the way, while others remain under consideration

Millions of pensioners could one day see income tax deducted from their State Pension before the money reaches their bank account under reported Treasury plans.

The Government has now broken its silence after reports emerged that officials are considering one of the biggest changes to how the State Pension is taxed in decades.

The Treasury is drawing up proposals to deduct income tax directly from State Pension payments, similar to the PAYE system used for wages, City AM reported this week.

Under the reported plans, the Department for Work and Pensions would deduct tax before pension payments are made, rather than pensioners paying it afterwards through HMRC.

Asked about the reports, a Government spokesperson said: "There has been no change to the tax treatment of the state pension."

The spokesperson added: "The Government routinely undertakes research to better understand pensioners' experiences with the tax system."

The Treasury and the Department for Work and Pensions both declined to comment further on the reported proposals.

According to City AM, ministers are still considering different options, with one proposal involving a private company administering the system.

Treasury officials are also said to be concerned about tax avoidance among some pensioners.

At present, state pension payments arrive in recipients' bank accounts without any deductions applied, though the income remains taxable like wages or private pension earnings.

For those who owe tax on their payments, HMRC currently collects it through several routes: adjusting tax codes for those with employment or private pensions, via self-assessment returns, or through simple assessment.

The reported new mechanism would apply a standard 20 per cent basic rate deduction to all state pension payments, with any differences reconciled at the end of the tax year based on pensioners' other income sources.

The reported proposals appear to conflict with assurances previously given by Chancellor Rachel Reeves.

Speaking to Martin Lewis on ITV in November, Ms Reeves was asked whether pensioners living solely on the state pension would face tax bills.

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."

When Mr Lewis pressed further on whether people would still need to pay tax even without completing a return, the Chancellor insisted: "In this Parliament, they won't have to pay the tax."

Ms Reeves also indicated she was "working on a solution" at the time.

At the Autumn Budget 2025, the Chancellor announced a new policy ensuring that individuals whose only income is the state pension, with no additional increments, would not face income tax liability.

This exemption has become necessary as the full new state pension approaches the threshold where it would trigger a tax obligation.

The policy addresses the growing tension between rising pension values under the triple lock guarantee, which delivered a 4.8 per cent increase this past April, and the frozen Personal Allowance threshold.

Forecasts suggest the state pension could exceed the tax-free allowance as early as next year, potentially pulling pensioners with no other income into the tax system.