Chancellor John Healey has announced a new Pension Tax Allowance giving state pensioners a tax-free allowance of £13,037, equivalent to the full new state pension after the next triple lock increase in April. However, not all state pensioners will be eligible for the boosted allowance, and the Treasury has confirmed that those with a total income of £13,319 or more will receive no Pension Tax Allowance at all.
How the new allowance works
The new system applies to all state pensioners, both pre-2016 and post-2016, allowing a tax-free allowance up to the value of the full new state pension for a new state pensioner with a full National Insurance record. The full new state pension will be £13,036.40, and this becomes the tax threshold for all state pensioners regardless of income type, including earnings from work, savings, Additional Pension, or property income.
Those exceeding the threshold will see their tax-free allowance tapered off, with the tax exemption turning into a tax reduction up to a threshold of £13,319. For every £3 of income above the full level of the new state pension, the allowance reduces by £1.
Four groups ineligible
The Treasury has identified four groups of state pensioners who will not receive the full allowance due to their income levels.
Group A: Older state pensioners with maximised state pension and AP payments. Additional Pension payments include all of the Second State Pension and SERPs schemes, which are closed to new claimants but still paid to existing ones. A full basic state pension pays £192 per week from April, and AP payments are already at £230.54 per week maximum. The combined total for a pensioner with maximum basic state pension and maximum AP payment would be £21,972 a year.
Group B: State pensioners still in work with a maximum National Insurance record. An old state pensioner will get more than £9,900 per year from basic state pension payments with a full National Insurance record, while a new state pensioner gets £13,037. Almost any earnings at all will push them out of eligibility, as the average part-time wage in the UK is £14,713.
Group C: State pensioners with property income. Property income could push a pensioner beyond the thresholds, especially with a full National Insurance record. The average UK rent is £1,343 a month, and even after deducting the £1,000 Property Allowance and allowable expenses, most rental income would push a landlording pensioner beyond the £13,319 annual limit once added to the state pension.
Group D: State pensioners with large amounts of savings interest. State pensioners can access savings allowances such as the starting rate for savings, Cash ISAs, and the Savings Allowance, potentially earning up to £18,570 without paying tax on savings interest. However, large amounts of taxable savings interest taking total income beyond £13,316 would make them ineligible.
Official guidance
The Treasury published new guidance explaining the system. From April 2027, if total income is no more than the full annual value of the new state pension, pensioners receive the full allowance and will not be brought into paying tax because of state pension uprating in this Parliament. This applies regardless of income source, including state pension, private pension, earnings, self-employment, savings, property, or dividend income.
If total income is slightly higher, pensioners may still receive an income tax reduction. The allowance reduces by £1 for every £3 of income above the full new state pension level. Pensioners do not need to contact HMRC or make a claim, as HMRC will apply the allowance automatically using information it holds on state pension age and income.
From the tax year beginning 6 April 2027, the full annual value of the new state pension will increase to £13,036.40. Those with income below the Personal Allowance of £12,570 pay no tax; those with income between £12,570 and £13,037 receive the full allowance worth up to £94; those with income between £13,037 and £13,319 receive some allowance; and those with income of £13,319 or more receive none. For tax years 2028-29 and 2029-30, the allowance will be uprated in line with the full annual value of the new state pension.
