State pension payments could be taxed by HM Revenue and Customs (HMRC) before they are paid out under rumoured plans being drawn up by the Treasury.
Proposals are understood to be being developed by Chancellor Rachel Reeves to automatically deduct income tax from pensions before recipients receive them.
This proposal, created jointly with the Department for Work and Pensions (DWP), appears to contradict earlier pledges from Ms Reeves that she would not pursue older Britons with new tax demands.
Under the scheme, the DWP would withhold income tax prior to pension disbursements, mirroring how employers deduct taxes from wages through the PAYE system.
The Chancellor has previously promised to protect vulnerable state pensioners from the tax man
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City AM reports the plan aims to address the anticipated rise of the state pension beyond the tax-free Personal Allowance threshold, potentially as early as next year.
Once implemented, the government plans to hand over operation of the system to a private sector contractor.
Among the options being considered is a default deduction at the basic rate of 20 per cent on all state pension payments, with a reconciliation process at the end of the tax year to account for pensioners’ additional income sources.
This would allow authorities to calculate the correct amount of tax owed based on each individual’s total earnings from pensions and other revenue streams.
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The Chancellor had previously assured pensioners whose only income came from the state pension that they would not face income tax on any amount exceeding the personal allowance.
Speaking to broadcaster Martin Lewis on ITV in November, Ms Reeves stated: “So if you just have a state pension, you don’t have any other pension, we are not going to make you fill in a tax return. I make that commitment for this Parliament.”
During her interview with the Money Saving Expert, she also hinted at the time that she was “working on a solution.”
When pressed on whether pensioners would still need to pay tax even without filing returns, Reeves was emphatic: “In this Parliament, they won’t have to pay the tax.”
It is understood that no final decision has been taken on whether to proceed with implementing the policy.
Analysts have long worried that state pensioners will fall victim to fiscal drag, when Britons are forced to pay more to HMRC due to their incomes slowly rising past tax thresholds.
As it stands, the full, new state pension is expected to cross the £12,570 personal allowance threshold next year thanks to the triple lock.
A Government spokesperson said: “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.”
