HM Treasury has confirmed a new £13,036 rule for state pensioners with income and savings that will protect them from income tax. From April 2027, people above State Pension age, or reaching State Pension age within the tax year, who have a total income up to and including the value of the new State Pension will not have to pay income tax thanks to the introduction of a new Pension Tax Allowance.
New Pension Tax Allowance from April 2027
The Personal Tax Allowance is still frozen at £12,570, but a 3.9% boost to State Pension rates from next April will see the annual new State Pension go above this at £13,036.40. In Wednesday's Budget, the Government confirmed that pensioners with incomes at or under the value of the full new State Pension will not be brought into paying tax because of State Pension uprating in this Parliament.
This will apply regardless of where your income comes from, meaning those with income from work or self-employment, a private pension, the State Pension, savings, property or dividend income will be protected.
How the tapered system works
Pensioners with an income higher than the full annual value of the new State Pension may receive an income tax reduction and pay less income tax than they otherwise would, thanks to a new tapered system. HM Treasury said: "From April 2027, if your total income is no more than the full annual value of the new State Pension, you will receive the full Pension Tax Allowance and will not be brought into paying tax because of State Pension uprating in this Parliament."
"If your total income is slightly higher than the full annual value of the new State Pension, you may still receive an income tax reduction and pay less income tax than you otherwise would. The value of your Pension Tax Allowance will gradually reduce as your income increases until it is fully withdrawn. For every £3 of income above the full level of the new State Pension, your Pension Tax Allowance will reduce by £1."
Automatic application and eligibility
HM Treasury added: "You will not need to contact HMRC or make a claim for the Pension Tax Allowance. HMRC will use information it holds on your State Pension age and income to apply the Pension Tax Allowance automatically when calculating your income tax." The new Pension Tax Allowance will apply from April 6, 2027, until April 5, 2030, and will be uprated in line with the full new State Pension across this Parliament.
The Government said in the 2027 to 2028 tax year, around 500,000 pensioners are set to benefit, with around 290,000 paying no tax at all, with the remainder receiving a tapered allowance. By the end of this Parliament, around one million pensioners are set to benefit from the Pension Tax Allowance, and this new system will be kept under review to potentially extend it beyond April 2030.
Pensioners will be eligible for the Pension Tax Allowance if, from April 2027, they are above State Pension age (or reach State Pension age within the tax year) and have a total income up to and including the value of the new State Pension. In the 2027 to 2028 tax year this will be £13,036.40. If your income is above this, you may receive an income tax reduction instead which will gradually reduce as your income increases, until it is fully withdrawn. HM Treasury has confirmed pensioners with an income at or above £13,319 in the 2027 to 2028 tax year will not receive any Pension Tax Allowance.
