LITRG: Give state pension its own PAYE scheme

With an increasing number of pensioners finding out that they owe income tax on their state pension for the first time, LITRG has told the Treasury that there is a ‘pressing need’ to change the way the payments are taxed to make the process easier to understand and manage.¹ 

LITRG has recommended that the state pension be given its own Pay As You Earn (PAYE) scheme, so that any tax is collected at source by the DWP before state pension payments are made. 

Currently, any tax due on a person’s state pension is collected in one of the following three ways: 

• an adjustment to an existing tax code applied to their other sources of PAYE income,² or 
• by requiring the taxpayer to complete a self assessment tax return, or  
• through a year-end tax bill from HMRC called a ‘simple assessment’.³  

The year-end tax demands, in particular, can be unexpected and alarming.  

The combination of the frozen tax-free personal allowance (until at least 2027/28) and the projected further increases to the state pension under the government’s ‘triple lock’ commitment, means that the number of people facing a tax charge on their state pension is likely to increase sharply in the coming years.⁴ This is in addition to those who already receive state pension in excess of their personal allowance.⁵ 

Sarah Weston, LITRG Technical Officer, said: 

“The continued freezing of the tax-free personal allowance and triple-lock pension increases mean growing numbers of people are facing a tax bill on their state pension for the first time. 

“Some people are unaware of this and can end up with a nasty shock if they receive an unexpected tax bill from HMRC after the end of the tax year. For those who are affected, it can be unclear and confusing.  

“We think that bringing the state pension into its own separate scheme of PAYE would be a simplification that will make it easier for HMRC to collect the tax it is owed and more straightforward for state pensioners to manage their own tax affairs and understand the rules that apply to them. We urge the government to take this opportunity to modernise the way the state pension is taxed and finally bring it within PAYE.”  

Notes

1. LITRG Budget 2025 representation: Operating Pay As You Earn on the State Pension. 
2. For instance, private pension or employment income.  
3. More information on Simple Assessment and Self Assessment can be found on the LITRG website by clicking the respective links. 
4. Average pay data published by the Office for National Statistics shows growth in the period May to July 2025 to have been 4.8%. For example see Pensioners could be set for bigger state pension boost than previously thought (Independent, 15 October). 
5. For example, some individuals receiving the ‘basic state pension’ are also entitled to receive the ‘additional state pension’, meaning that their total state pension entitlement may already exceed the personal allowance.