Pensioners earning up to £13,319 a year could benefit from a new tax allowance announced in the Budget, with some avoiding an income tax bill altogether. Chancellor John Healey confirmed the introduction of a Pension Tax Allowance to protect older people from paying tax when the full new State Pension rises above the personal allowance next April.
How the allowance works
The full new State Pension is set to increase to £13,036.40 a year from April 2027, taking it above the current £12,570 tax-free threshold. Without the change, pensioners relying solely on the full new State Pension could have faced an income tax bill of around £93 a year.
The new allowance means those with total annual income of up to £13,037 will not have to pay income tax as a result of the increase. There is also help for pensioners earning slightly more. Those with income between £13,037 and £13,319 will receive a reduced tax allowance, meaning they could still pay less tax than they otherwise would.
Reduced allowance for higher incomes
The allowance will gradually decrease as income rises, before disappearing completely at £13,319. Anyone earning that amount or more will pay income tax under the normal rules on income above the £12,570 personal allowance.
Former pensions minister Steve Webb explained that the changes mean pensioners with modest additional income will not suddenly lose all their tax relief. Speaking to Sky News, he said: "This means people just above the new state pension will still get some extra help as a result of the budget."
Eligibility and automatic application
The allowance will apply to eligible people who have reached State Pension age, regardless of whether their income comes from the State Pension, a private pension, employment or savings. There is no need to fill out an application. HM Revenue and Customs (HMRC) will apply the tax reduction automatically for those who qualify.
The Government says the measure will help prevent pensioners from receiving small tax bills simply because their State Pension has increased. The changes are due to take effect from April 6, 2027, and will apply until the end of the 2029/30 tax year.
Meanwhile, the existing rule allowing people to take up to 25% of their pension pot as a tax-free lump sum remains unchanged. The State Pension triple lock will also continue, meaning payments will rise each year by whichever is highest out of inflation, average earnings growth or 2.5%.
