Labour has scrapped most of Rachel Reeves' DWP state pension tax exemption rules in a major policy reversal, with less than six months before the changes were due to take effect.
Since the 2025 Budget, the Treasury had confirmed that state pensioners with no other income apart from the DWP state pension would be exempt from paying tax on it, even if it exceeded the £12,570 personal allowance threshold. It had also stated that state pension increments such as the Additional Pension (AP) and Second State Pension or SERPs schemes would not qualify for the exemption.
New Pension Tax Allowance System
Many of the rules planned by the former Chancellor have now been abolished and replaced with a new system. This will allow all state pensioners, both old pre-2016 and new post-2016 recipients, to collect a tax-free allowance up to the value of the full new state pension.
The full new state pension will now be £13,036.40, which will serve as the new tax threshold for all state pensioners with any type of income, including from work, savings, Additional Pension, or property income. Those exceeding the threshold will see their tax-free allowance tapered off, with the tax exemption turned into a tax reduction up to a threshold of £13,319.
Treasury Guidance Details
The Treasury has published new guidance explaining how the system will work: "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."
"This applies regardless of where your income comes from, whether that is the State Pension, a private pension, earnings from work, self-employment income, savings, property or dividend income, or a combination of these."
"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 The value of your Pension Tax Allowance will gradually reduce as your income increases until it is fully withdrawn.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."
"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."
Thresholds and Uprating
From the tax year beginning 6 April 2027, the full annual value of the new State Pension will increase to £13,036.40. If total income is below the Personal Allowance (£12,570), no tax is liable. Between £12,570 and £13,037, pensioners will receive the full Pension Tax Allowance, worth up to £94. Between £13,037 and £13,319, they will receive some allowance and pay less tax. At £13,319 or more, no Pension Tax Allowance will be received.
For tax years 2028-29 and 2029-30, the value of the Pension Tax Allowance will be uprated in line with the full annual value of the new State Pension.
