2025 Autumn Budget submission – LITRG recommends bringing the state pension into PAYE.

Increasing numbers of state pension recipients are finding that they owe tax on their state pension for the first time because the amount they receive exceeds the tax-free personal allowance.

With the personal allowance frozen until 2027/28 and the state pension rising annually under the triple lock, the number of people affected will grow rapidly in the coming years. Therefore, we believe that there is now a pressing need for the system to be changed and for the state pension to be taxed under its own scheme of PAYE – rather than relying on other PAYE income sources to indirectly collect the tax due, or year-end simple assessment tax bills.

Operating PAYE on the state pension would mean that any tax due on the income would be collected during the year for all state pensioners. This will help state pensioners to understand their tax affairs and manage their cashflow. It will also allow HMRC to collect the tax in-year and reduce their administrative burden. 

We recognise that will give rise to challenges, including the cost and complexity of integrating PAYE into the Department of Work and Pensions (DWP) systems. There is also potential for short-term cashflow pressures for some pensioners when PAYE deductions begin. However, we believe that the long-term benefits of simplification, efficiency and transparency outweigh these concerns.

If the government concludes that the state pension cannot be brought within PAYE, we request that DWP and HMRC collaborate to improve annual communications with all state pension recipients to confirm the taxable amount of their state pension each year and how the tax will be collected, and provide end-of-year statements equivalent to a form P60.