The UK government has introduced a Pension Tax Allowance that will benefit around 500,000 pensioners, with approximately 290,000 no longer paying any tax. The allowance, confirmed in the Chancellor's Budget, applies from April 6, 2027, until April 5, 2030.
Over 13 million people in the UK receive the State Pension, and the current State Pension age stands at 66. It is gradually rising to 67 for those born on or after April 6, 1960.
State Pension Rise Above Personal Allowance
The Budget confirmed the State Pension will rise by 3.9% next April, taking the full new State Pension to £13,036.40 a year. This takes it above the standard £12,570 tax-free Personal Allowance for the first time.
The Pension Tax Allowance is a tax reduction for people who are above State Pension age, or those who reach State Pension age within the tax year. The measure aims to reduce the administrative burden for some pensioners who would otherwise have a small amount of tax to pay.
Most pensioners already pay tax on their income, including their State Pension where applicable. In many cases, any tax due is collected through PAYE or Self-Assessment.
How the Allowance Works
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. 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.
By the end of this Parliament, around one million pensioners will benefit from the Pension Tax Allowance.
Automatic Application and Latest Advice
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 allowance automatically when calculating your income tax.
From the tax year beginning April 6, 2027, the full annual value of the new State Pension will increase to £13,036.40:
- If your total income is below the Personal Allowance (£12,570), you are not liable for any tax.
- If your total income is between £12,570 and £13,037, you will receive the full Pension Tax Allowance (worth up to £94).
- If your total income is between £13,037 and £13,319, you will receive some Pension Tax Allowance and pay less income tax than you otherwise would.
- If your total income is £13,319 or more, you will not receive any Pension Tax Allowance.
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.”
