How is state pension taxed? The state pension is the amount of money paid by the UK government to individuals over a specific age range. The state pension amount depends on the individual’s national insurance contributions. Every income source in the UK is taxed. If you are receiving a state pension and need to know how the state pension taxed, read this article.

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How is State Pension Taxed?

Pension matters are dealt with by the Department for Work and Pensions (DWP). The DWP department does not deduct any tax through Pay As You Earn (PAYE), so you receive the total state pension paid by the UK government.

If the state pension is your only income source and it is also under your tax-free allowance, you are not liable to pay any tax on it.

If the state pension you are getting from the UK government is more than the tax-free allowance and you have other sources of income alongside the state pension, then you are liable to pay tax to the HMRC.

There are a few conditions under which tax may be applied to your state pension, which are mentioned below:

• Tax might be collected through the PAYE system if you have a source of income which is processed through PAYE, for example, a private pension or employment.
• If you file your tax return through the self-assessment system
• Tax is calculated by HMRC through a simple assessment calculation at the end of the tax year.

Collection of tax through PAYE

If your total income, along with state pension, is below the tax-free allowance, then you will pay tax to the HMRC on the part of your income which exceeds the allowance limit. PAYE issues a code to each individual for deducting tax, which is a PAYE ID. Through PAYE ID, you can check the relief you have been given and the amount of state pension included in your tax.

Starting to Receive the State Pension

The state pension is issued to a person when they reach the age limit defined by the UK government. When an individual reaches that age, he is contacted by the DWP regarding the claim of state pension because it is the right of every individual as they have been paying national insurance contributions all their life.

When a person claims the state pension, the DWP informs HM Revenue and Customs automatically, providing the details of how much state pension is awarded to them by the UK government based on their national insurance contributions. This automatic notification to the HMRC is done before you receive your first state pension.

If a person pays the tax through PAYE on their other sources of income, for example, private or occupational pension, HMRC will utilise the information given by the DWP to update the tax code and make adjustments needed in their state pension. In the first year of the state pension, the individual receives a tax statement on state pension for only part of the year before the claim is processed. After that, the HMRC generally includes a full-year state pension in the tax amount, which is processed through PAYE. The HMRC uses a week 1 or month 1 code to ensure the individual pays only the right amount of tax under PAYE.

Collection of tax through self-assessment

Let’s get the details of how is state pension taxed through self-assessment. A person who is liable to complete their self-assessment for filing a tax return will also mention the state pension in their form and pay tax on the state pension through the self-assessment form. If the state pension is taxable and it is your only source of income, then you do not need to fill out the self-assessment form. More eligibility criteria for filing tax returns through self-assessment are given on the UK government website.

If you are eligible for the self-assessment tax return process, keep in mind that the state pension will be included as an adjustment in your tax code only if you have a PAYE income source. If you have made any overpayment or underpayment of the tax, that will be sorted out through the tax calculation at the end of the year. You can always claim the overpaid amount of tax from the HMRC.

Collection of tax through a simple assessment

If you are not eligible for a self-assessment tax return process and also do not have a PAYE source of income, then you are required to proceed with a simple assessment calculation of tax at the end of the tax year. The simple assessment calculation is sent by the HMRC.

Tax on Arrears (Back-Payments) of State Pension

This happens if the wrong amount of state pension is paid to a person. The DWP reviews some state pensions after reviewing that they sent the wrong amount due to system errors. This has led DWP to make back payments for their mistake. Now, if you receive a back payment from DWP and you have already estimated your tax amount, you need to recalculate the tax amount based on the back payment received.

The DWP, on the other hand, will also share information with the HMRC regarding the bank payments to resolve arising tax issues.

Back payments of previous years are taxable in the year you are receiving them from the DWP. You will only pay tax if the total amount exceeds the tax-free allowance.

The HMRC will collect tax on the back payments of the current year and the past four years. This indicates that if you receive back payments in 2025/2026, you will only pay tax on payments after 2021/2022. All the tax updates are well coordinated between HMRC and the DWP to ensure how is state pension is taxed.

Conclusion

How is state pension taxed is a complex process involving two departments, which are the DWP and the HMRC. All tax information is well coordinated and updated regularly for each individual. If the DWP makes any back payments, it involves the HMRC in the process. The tax IC is charged on the back payments of the current year and the past four years. The tax is charged on any amount above the tax-free allowance set by the UK government, and the amount of state pension depends on the national insurance contributions of a person.

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Disclaimer: The general information provided in this blog about how is state pension taxed includes text and graphics. It does not intend to disregard any of the professional advice in the future as well.