The Treasury has responded to reports that money could be taken from the state pension before it is added to recipients’ accounts. Income tax could be deducted from the payment before the cash is paid, it has been suggested. This would be similar to how the PAYE system takes money from wages. This would be a major change to the current pensions system, as, at the moment, pensioners pay what they owe to the government through HMRC after receiving their money – which is taxable like salaries or private pension earnings.
Officials are purportedly considering how the overhaul would work, with one option involving bringing in a private company to administer the system. Currently, the government collects tax owed from state pensions by adjusting tax codes for those with employment or private pensions, via self-assessment returns, or through simple assessment. The new way of doing things would involve applying a standard 20% basic rate deduction to all state pension payments.
Any differences would be made good at the end of the tax year according to pensioners’ other income sources, it has been reported.
“There has been no change to the tax treatment of the state pension,” a Government spokesperson said, according to GB News.
They added: “The Government routinely undertakes research to better understand pensioners’ experiences with the tax system.”
It comes as the state pension triple lock has been questioned. The likely next prime minister, Andy Burnham, has been urged to scrap it to fund tax breaks for families, but has committed to keeping the guarantee.
Maike Currie, vice president of personal finance at PensionBee, said: “It’s important not to present this as a choice between supporting pensioners and supporting younger people. Rising youth unemployment and the growing number of young people who are not in education, employment or training are complex, structural challenges that require targeted solutions.
“Pensioners also need protection against inflation, particularly those who rely heavily on the state pension, so any reforms to the triple lock should be carefully considered and accompanied by a clear, credible alternative that gives people confidence to plan for the future.”
She added: “The ongoing debate over the triple lock highlights an important reality: pension policy can and does change. There have been reforms to the state pension age, National Insurance rules and tax allowances over the years.
“While the triple lock remains in place today, no government can guarantee what the system will look like decades from now. The state pension should be viewed as an important foundation, but it’s your private pension that provides greater choice, flexibility and financial resilience in later life.”