State pensioners will see their tax-free Personal Allowance rise to £13,037 from April 2027 under a new Pension Tax Allowance announced in the Autumn Budget. The increase matches the value of the full new state pension for someone with a complete National Insurance record.
Normally, the tax-free Personal Allowance is £12,570 and has not been increased since 2021. It will remain at that level in 2027-28, a freeze that pushes more households into paying tax through 'fiscal drag', as wages rise with inflation but the threshold stays fixed.
How the new allowance works
The £13,037 figure is set to equal what a new state pensioner can receive from April 2027 with a full National Insurance record, thanks to the latest triple lock boost. The triple lock will put someone on the full new state pension at £250.70 per week from next April, up from £241.30 per week currently, or £13,036 per year.
This marks the first time that state pension payments themselves will break the tax threshold, at £13,036.40. The rules state that a state pensioner must have no income above the value of the full new state pension, and only the maximum value of state pension payments from the DWP is exempted. This applies to both new and older state pensioners, although pre-2016 state pensioners would not exceed the limit in 2027 from the basic state pension alone.
Tapering for higher incomes
The Pension Tax Allowance is withdrawn for those with income over £13,037, but not as a 'cliff edge'. It is tapered off gradually for those earning between £13,037 and £13,319, after which all earnings above £13,319 are taxed at the normal rate. Even state pensioners earning more than this keep the full £13,037 tax-free allowance and the tapered amount on the next £282.
Budget documents explain that the difference between the £12,570 Personal Allowance and the full new state pension is calculated at 20% and then slowly withdrawn with a taper. The allowance applies 'regardless of source' of income, giving older state pensioners a higher tax threshold up to the value of the new state pension.
Official response
The Budget documents state: "The government will introduce the Pension Tax Allowance (PTA), ensuring that pensioners whose total income is up to the value of the full new State Pension do not have the administrative burden of paying small amounts of tax."
The allowance applies from 6 April 2027 until 5 April 2030 and will be uprated in line with the full new State Pension across this Parliament. It will be legislated for in Finance Bill 2026-27.
Paul Farmer, chief executive at Age UK, said: "We are pleased that the Government has taken on board the difficulties many low income pensioners will face when the state pension goes over the income tax personal allowance – protecting low income pensioners from facing a demand for a cash payment from the taxman is paramount and this looks to have been taken care of."
Baroness Altmann, a former pensions minister, welcomed the announcement and suggested it could have "cost the Treasury more to try to implement tax collection from hundreds of thousands of poorer elderly people who have never done a tax return before and who would owe less than £100 a year".
