HMRC has cleared up confusion about the state pension and paying tax ahead of further changes to the tax system set to affect retirees in future.

For years, state pensioners who only have the state pension income – so no private pension, work or other income – have not had to pay any tax on their DWP state pension payments.

This has led to many to consider the state pension ‘tax free’ and even led to reporting of state pensioners preparing to pay tax on the state pension ‘for the first time’ when the triple lock increases pension payments to above the £12,570 tax-free allowance, which is due to happen in 2027.

But the state pension has always been liable to tax, which HMRC reconfirmed in a message to a state pensioner.

One HMRC customer was asking HM Revenue and Customs why they have had a change of tax code.

HMRC explained that the state pension is taxable, but DWP does not take the tax off payments, instead leaving HMRC to recover any tax owed later.

HMRC’s Customer Support account on X told them: “The State Pension is taxable, but the DWP doesn’t take tax at source, so we change your tax code to give enough of your tax free allowance to match the State Pension, leaving whatever’s left for a private pension.”

In future, the situation is set to become more confusing still. Chancellor Rachel Reeves confirmed following her latest Budget that state pensioners wo only get the state pension with no other income will be given a special exemption from tax on their DWP payments.

Next year, the triple lock, which automatically increases state pension payments each year, is set to increase state pension payments for new state pensioners to above £12,570, which means those with only the new state pension income would owe tax.

However, the government is yet to confirm how the exemption will work in practice, except that older, basic state pensioners who get extra ‘Additional Pension’ payments will not be exempted.

Rachel Vahey, head of public policy at AJ Bell, said: “Under the triple lock guarantee, the state pension rises annually by the highest of average earnings growth in May to July, September’s inflation figure or 2.5%. With earnings growth coming in at 4.8%, the state pension will increase to around £12,548 – putting it above £12,000 for the first time and within inches of the frozen personal allowance.

“Low income pensioners have been promised that, from April 2027 when the full state pension is projected to exceed the tax-free personal allowance, nobody will pay tax if their only income came from the state pension. That measure is designed to avoid the unwelcome optics of government giving pensioners a benefit on one day, only to then ask for some of it back the next.

“It is still unclear exactly how the policy will be implemented and it’s hard to see how such a measure can last long-term. State pension incomes will continue to grow faster than the frozen personal allowance until at least 2031, by which time the tax break could be worth hundreds. But it will only apply to those with the state pension as their sole source of income and there are no plans to extend it to low income pensioners with private pension income. It means two pensioners on identical incomes could find only the one with private savings has to pay any tax.”