HMRC is sending demands for £4,500 to state pensioners who "didn't realise it was taxable." The tax authority is targeting individuals receiving the state pension from the Department for Work and Pensions (DWP) after many failed to recognize that this income is subject to income tax.
Widespread Lack of Awareness
According to new research from Royal London, 41 per cent of adults are unaware that the state pension is liable for income tax. In her Autumn Budget, the Labour Party chancellor confirmed that the personal allowance – the amount of income you can earn before paying tax – will remain frozen at £12,570 until April 2031.
At the same time, the state pension is rising. From April 2026, the full new state pension has increased to a level that leaves a buffer of less than £30 before it hits that £12,570 tax-free limit. This means if you have even a tiny amount of additional income – such as a small private pension, earnings from part-time work, or unsheltered savings interest above your allowance and outside of an ISA – you will almost certainly exceed the personal allowance.
Expert Warnings
Alex Edmans, product director at Saga Money, says: "We often view the state pension as a guaranteed safety net, but in the eyes of the taxman, it is simply income. No-one likes to get an unexpected tax bill. The key is to treat your state pension as the foundation of your taxable income, not a tax-free bonus."
Government figures show a jump from 6.47 million in 2020/21 to a forecast 8.72 million in 2025/26. That number is set to climb further as the freeze continues through the rest of the decade.
How Tax is Collected
Saga explained: "If you have a private or workplace pension, HMRC will usually adjust your tax code to deduct the tax owed on your state pension from your private pension payments. A growing number of people have a state pension that exceeds their personal allowance, but no private pension income to collect the tax from. In these cases, HMRC uses a system called simple assessment."
Under simple assessment, HMRC calculates what you owe based on data they receive from the DWP and banks. You will then receive a calculation in the post (usually a P800 or PA302 form) telling you exactly how much you owe. This bill must be paid directly to HMRC, usually by January following the end of the tax year.
Financial Impact
Sarah Pennells, consumer finance specialist at Royal London, says: "The fact that approximately 4 in 10 adults do not know the state pension is taxable is not surprising as it’s paid without tax being taken off. However, from April, the full new state pension will be less than £30 below the personal allowance, so it’s more important than ever that people understand what tax they may have to pay. Most of those over state pension age who paid tax (88%) expected to do so, but 12% didn’t. The average amount of tax paid was over £4,500 but the majority (66%) didn’t know how much tax they’d paid or couldn’t remember."
