The Treasury is drawing up plans to automatically withhold income tax from the State Pension before it is paid out to recipients, City AM can reveal, in a move which flies in the face of previous assurances by Chancellor Rachel Reeves that she would not “go after” elderly Brits with
Simon Hunt
Thursday 25 June 2026 6:48 am | Updated: Thursday 25 June 2026 7:12 am
The Treasury is drawing up plans to automatically withhold income tax from the State Pension before it is paid out to recipients, City AM can reveal, in a move which flies in the face of previous assurances by Chancellor Rachel Reeves that she would not “go after” elderly Brits with fresh tax demands.
The proposal, which is being put together in collaboration with the Department for Work and Pensions, would see DWP deduct income tax ahead of pensions payouts in a similar manner to businesses deducting employment taxes from staff salaries via PAYE.
The move, which is designed to deal with the expected rise in the State Pension above the tax-free Personal Allowance threshold as soon as next year, comes amid Treasury concerns over increased tax avoidance by the elderly.
The government intends to outsource the operation of the system to a private sector contractor once the policy is implemented, City AM understands. Options on the table include deductions for all State Pension payouts at a default 20 per cent basic rate and then reconciling the tax owed by pensioners at the end of the tax year with their other sources of income.
Chancellor Rachel Reeves previously gave her assurances that pensioners whose sole source of income was the State Pension would not be forced to pay income tax on the small amount of the pension which would fall above the personal tax allowance.
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In an ITV interview with broadcaster Martin Lewis in November, Reeves confirmed this group of pensioners would not be made to file a tax return by the government.
“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,” Reeves said, but hinted that she was “working on a solution.”
“But people will have to pay the tax. They just won’t have to do a return? Or will they not have to pay the tax?” Lewis asked.
“In this Parliament, they won’t have to pay the tax,” Reeves insisted.
The Treasury and DWP declined to comment. A final decision has yet to be made on implementing the policy.
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