State pensioners could see money deducted from their state pension payments directly by the government before they receive the cash from the DWP, a new report has claimed. New proposals are said to be being drawn up behind closed doors to deal with the issue of state pensioners who owe tax on their state pension.

Last year, Chancellor Rachel Reeves pledged that state pensioners who have no other income – such as savings, earnings or property income – would not be made to pay tax on their DWP state pension payments, even if the triple lock increased their annual payments to above the current, frozen £12,570 Income Tax threshold. This is expected to happen in April 2027, when even the minimum required 2.5% increase would raise state pension payments to more than £12,570 a year for post-2016 state pensioners with a full National Insurance record.

On the Martin Lewis Money Show Live on ITV1 in November, Chancellor Rachel Reeves confirmed the tax exemption for state pensioners with no other income.

She said at the time: “I’m only making that commitment for people who just get the state pension, obviously a lot of people in retirement do um self-assessment and do pay tax on their income, and that’s not going to change, but I do recognise that those just in receipt of the basic state pension or the new state pension it wouldn’t be the right thing to do to try to tax those small amounts of money.”

But those who do have any other income on top of their state pension payments will be made to pay tax. This is not a change in policy, as state pensioners already pay tax on their state pension if they earn more than the threshold.

However, the change reported by City AM reveals state pensioners would be taxed on their state pension payments before they even receive the payment from the DWP, as opposed to self-assessment or a change of tax code.

The government’s plan is to outsource the system to a private sector contractor once the policy is implemented. Options on the table include deductions for all State Pension payouts at a default 20% basic rate and then working out the total tax owed by pensioners at the end of the tax year when assessed with their other sources of income.

A Government spokesperson told the Express: “There has been no change to the tax treatment of the State Pension.”

“The Government routinely undertakes research to better understand pensioners’ experiences with the tax system.”