Money-saving expert Martin Lewis has explained how the Government's new rules will prevent State Pensioners from getting caught in a tax trap as the annual uprating rises above the personal allowance next year.
The full rate of the new State Pension is currently £241.30 a week, though the amount you get may differ depending on various factors. These include whether you were contracted out before 2016; the number of National Insurance qualifying years you have; and whether you paid into the Additional State Pension before 2016.
State Pension uprating and the tax threshold
Under the triple lock commitment, the State Pension rises by one of three measures annually: wage growth; inflation; or 2.5% - whichever is highest. Last week it was effectively confirmed that the State Pension would rise by 3.9% when it's uprated in April next year, based on wage growth figures for the May to July period of 2026, which were confirmed to outstrip inflation.
Years of increases mean that from April 2027, the annual rate for those with full entitlement will rise to around £13,040. It means for the first time the State Pension is higher than the £12,570 tax-free personal allowance, which has been frozen for more than five years.
How the new Pension Tax Allowance works
It raised concerns that pensioners who had contributed fully to their National Insurance records and relied on the state pension would ironically start to lose out as a result of the uprating. The Government confirmed that older people living solely on their State Pension wouldn't be taxed on income in excess of the allowance. The Chancellor John Healey laid out the mechanism for achieving this in his first Budget on October 28.
Mr Lewis explained how it works on ITV's The Martin Lewis Show Live, saying the current full new state pension is now just below the personal allowance threshold. He explained that, without any Government intervention, from April you would have to start paying tax on the amount above the threshold.
The excess would come to £466, meaning if you were taxed at 20% you'd lose £94 to HMRC. He noted that, as Mr Healey's predecessor, Chancellor Rachel Reeves said, people living solely on their State Pension wouldn't be taxed on it, despite the uprating.
"My big question has been, 'Well, hold on, what about if you have a tiny little income above, what are they going to do?'"
The taper rule and automatic application
He then ran through the complicated workaround the Government has adopted, which will come into effect next year. The first rule is that if you have total income up to £13,037 a year - just above the £13,036.40 of the full rate of the new state pension - you won't pay income tax. This applies to whether you're on the new state pension, the old state pension, or whatever your total taxable income is, provided you're of State Pension age.
"This extra pension tax allowance (PTA) is worth up to £94 a year". Mr Lewis noted that it will be uprated until at least 2030 in line with the State Pension.
The second, more complicated rule, is that a tapering system will come into effect for those whose income exceeds the new threshold to prevent a cliff-edge where people suddenly pay a much higher tax rate. This works by ensuring that for each £3 you earn above the £13,037 baseline, you lose £1 of the PTA.
To illustrate how this will work, Mr Lewis took the example of a State Pensioner with an income of £13,037, who would be shielded from the personal allowance threshold by the £94 PTA, and wouldn't need to worry about the taper. But if a State Pensioner had income say £99 above the £13,037 benchmark (£13,136) they would pay £52 in tax. To show how you can calculate this, he divided the £99 excess by three, which comes to £33. That figure is then deducted from the PTA (£94 minus £33), leaving £61. If you subtract that from £113, which would be the normal tax bill without protections, it comes to £52, which is the amount of tax a State Pensioner would pay.
"It is worth noting: £99 of income more, £52 of tax more. That is quite a high marginal rate, isn't it?" Mr Lewis said. For a final example, he showed what will happen for people with income of £13,319, by which point the PTA is completely wiped out. At this stage, a State Pension age person would pay £150 in tax, just as someone of working age would.
The third rule is that you don't have to contact HMRC; it will be applied automatically.
