The state pension is edging closer to the income tax threshold, but many people still don’t realise how it’s taxed.
Research from the mutual life, pensions and investment company Royal London found that 41% of adults don’t realise the state pension is taxable. It also found that 68% of retirees who aren’t working said they paid tax on their pension income last year, paying more than £4,500, on average.
While most expected the bill, 12% said that they were caught out.
Here, Which? explains how the tax rules work, how many people pay tax on their pension income, and what you can do to avoid an unexpected bill.
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Confusion over tax on the state pension
The state pension has been classed as taxable income since its introduction in 1948.
However, in practice, it’s rarely been taxed on its own because it’s usually below the personal allowance.
In 2012, the Office of Tax Simplification considered making it tax-free, but decided against recommending the change, citing the cost to public finances and concerns that higher earners would benefit most.
At the time, around half of pensioners paid income tax because the personal allowance rose with inflation, keeping the state pension safely below the threshold. However, this changed when the allowance was frozen at £12,570 in 2021.
At the same time, the triple lock, which increases the state pension by inflation, wage growth or 2.5%, has pushed state pension payments higher.
Since 2011, state pension payments have surged by 89% according to the Institute for Fiscal Studies (IFS). As of April 2026, the full rate of the new state pension stands at £12,547.60, leaving it just £22.40 below the tax-free limit.
- Find out more: how much is the state pension?
How many pensioners pay tax on their income?
In 2020, around 6.5 million pensioners paid income tax. By the end of the 2025-26 tax year, this is expected to rise to 8.7 million.
This includes people with income from the workplace or private pensions, as well as those on the older state pension system who may receive additional payments such as State Earnings-Related Pension Scheme (SERPS).
Between 800,000 and around one million people are estimated to rely mainly on the state pension. However, even small amounts of extra income can push total earnings above the personal allowance.
- Find out more: additional state pension explained.
How the state pension is taxed
Although the state pension is taxable, no tax is deducted when it is paid.
Instead, any tax due is usually collected through your tax code if you have other income, such as a workplace or private pension.
If the state pension is your only income and it exceeds the personal allowance, HMRC will normally issue a simple assessment after the end of the tax year, requiring payment by 31 January.
Those who complete a self-assessment return will pay any tax due through that process.
Special rules apply to back payments or arrears. These are usually taxed based on the years they were originally due, although HMRC typically only collects tax for the current year and the previous four years.
Finally, if you defer your pension, no tax is due until you begin receiving payments.
- Find out more: state pension to rise by £575 in 2026.
State pension and income tax changes
In the November 2025 Budget, the government said that it would ease the administrative burden for pensioners whose only income is the basic or new state pension.
From April 2027, these pensioners will not have to pay small amounts of tax through HMRC’s Simple Assessment process if their income only slightly exceeds the personal allowance.
There was initial uncertainty on whether this would be an administrative change or a full exemption. The government later confirmed that those with no other income will not face an income tax bill on their state pension until at least 2030.
HMRC has said it is working on the changes, with further details expected in the 2026 Finance Bill.
4 ways to prevent an unexpected tax bill
While you have to pay the tax you legally owe, you can take steps to make sure you don’t overpay or face an unexpected bill:
1. Plan ahead
Before claiming your state pension, you should take stock of what your combined income will be. This includes any private pensions, state pension, income from rental property, taxable benefits or part-time earnings.
Understanding your overall income can help you plan ahead and avoid being pushed over the personal allowance without realising.
- Find out more: income tax calculator.
2. Understand your allowances
There are several allowances that can reduce how much tax you pay.
Basic-rate taxpayers can earn up to £1,000 in savings interest tax-free, while higher-rate taxpayers get £500. If your income is below £17,570, you may also qualify for the starting rate for savings, which allows up to £5,000 of interest to be taxed at 0%.
Investors also get a £500 dividend allowance.
The Marriage Allowance allows a lower-earning partner to transfer £1,260 of their personal allowance to a basic-rate-paying spouse, reducing a couple’s tax bill by up to £252.
- Find out more: tax on savings interest and investment income explained.
3. Use your Isa wrappers
Isa income is entirely tax-free and doesn’t count toward your personal allowance. If you’re currently paying tax on private pension withdrawals, it may be worth using your Isa savings instead.
This can help keep your total taxable income below the £12,570 threshold – or the higher-rate bracket.
- Find out more: best cash Isas 2026.
4. Consider deferring your state pension
You don’t have to claim your state pension as soon as you’re eligible. If you delay taking it, your payments will increase.
Deferring may reduce the amount of tax you pay overall if you’re still working or expect your income to fall later. However, this won’t be the right choice for everyone, particularly if you don’t expect to draw the pension for long.
- Find out more: state pension age calculator.
What do Which? members think?
Some Which? members said clearer rules or changes to the system could help reduce confusion around how the state pension is taxed.
Peter said the personal allowance should match the state pension, so only additional income is taxed. He said: ‘It’s the easiest and fairest solution for both pensioners and workers.’
Mandy felt the system itself was too complicated. She said: ‘It seems crazy for the government to give money and then take it away. Would be easier not to tax the state pension.’
However, others said the current approach is fair. Nigel said he was happy to pay tax if it helps fund public services, while Bob added: ‘The money needs to come from somewhere.’
- Find out more: should I top up my state pension?
