The Chartered Institute of Taxation (CIOT) has welcomed the Government's new Pension Tax Allowance but warned that some pensioners could struggle to understand how it works. The change, which comes into force in April 2027, is designed to help people whose income rises above the current £12,570 personal allowance because of increases to the State Pension.
From next April, the full new State Pension is expected to reach £13,036.40 a year, meaning some pensioners would otherwise face a small income tax bill. Under the new rules, those with total income up to that amount will receive a tax reduction worth up to £94.
How the allowance works
Pensioners earning slightly more, up to £13,319, could also benefit, although the amount of tax relief will gradually decrease. But experts say the way the allowance is calculated could cause confusion.
Antonia Stokes, senior manager at the CIOT's Low Incomes Tax Reform Group, said: "Because the Pension Tax Allowance will operate as a 'tax reducer', it could be more difficult for taxpayers to understand and make it more challenging to independently verify their calculations."
Potential confusion over eligibility
Unlike an increase to the personal allowance, the new measure will reduce the amount of income tax someone owes. And there is another detail pensioners need to be aware of. Income from savings and dividends outside tax-free ISAs will count towards the eligibility threshold, even if that money is covered by separate tax-free allowances.
This means some pensioners could find themselves receiving less relief than expected. Stokes warned: "This is the sort of nuance that could cause confusion, which makes it all the more important that HMRC provide clear, suitable guidance and support for affected taxpayers to help them understand this new measure."
Automatic application and future increases
However, the organisation also welcomed the fact that the allowance will apply to people of State Pension age regardless of where their income comes from. This includes those receiving private pensions or earnings from employment, rather than only people relying on the State Pension.
HM Revenue and Customs will apply the reduction automatically, meaning eligible pensioners will not need to make a claim. The allowance will also increase alongside the State Pension in the 2028/29 and 2029/30 tax years. For now, experts are urging HMRC to make sure pensioners understand the rules before the changes take effect.
