A leading pension provider has warned that new state pension tax rules, announced in the Autumn Budget, could add complexity and prove difficult for pensioners to understand. The measure, called the Pension Tax Allowance, is designed to protect those reliant solely on the state pension from paying income tax.
New Allowance Details
Chancellor John Healey unveiled the plan as the full new state pension is set to rise to £13,037 next April, surpassing the frozen personal allowance of £12,570. The new allowance, coming into effect from April 2027, will provide an extra tax-free amount for certain pensioners. However, industry experts fear the relief is hard to grasp.
Kate Smith, head of pensions at Aegon, said: "It introduces a level of complexity for a relatively small uplift. It may be difficult for those affected, especially vulnerable pensioners, to understand, and for the Government to deliver by next April."
Who Is Affected
The allowance applies to anyone of state pension age, even if they are not yet receiving their state pension. Smith explained: "The Pension Tax Allowance is based on your total income, regardless of the source. This includes income from the state pension, other pensions, work, savings, dividends and property."
Smith added: "Those above state pension age will need to understand their income sources, ensure their HMRC records are up to date and check whether they will benefit from the new Pension Tax Allowance." Once total income exceeds £13,037, the allowance tapers off by £1 for every £3 earned, disappearing entirely at £13,319 a year. Above that, pensioners fall back to the standard £12,570 personal allowance.
Impact and Alternatives
Aegon acknowledged the financial cushion the allowance provides but said the Government chose a cumbersome mechanism over a cleaner tax change. Smith said: "Affected pensioners above the state pension age will welcome the new Pensions Tax Allowance. Those whose total income is no more than the value of the new state pension (£13,037) will no longer face the administrative hassle of paying income tax. The taper between £13,037 and £13,319 per year will also be a relief to those with slightly higher incomes, including from work or pensions, and helps to remove the cliff edge."
Smith suggested a simpler approach: "A simpler way to ensure that those living on the state pension alone do not pay income tax would have been to increase the personal allowance to align with the state pension, ideally for everyone to avoid intergenerational unfairness. This would be simpler but comes at significant cost. In theory, the new Pension Tax Allowance ends in 2030, when the Government will need to look at alternative solutions, which should include increasing the personal allowance for all." More details on the new allowance are available on the Government website.
