Chancellor John Healey has announced a new Pension Tax Allowance that will give state pensioners of all ages a tax-free Personal Allowance of £13,037, matching the full new state pension after the next triple lock increase takes effect in April.
The government has released further details on how the allowance will work. It will apply to all state pensioners, whether they receive the old pre-2016 or new post-2016 state pension, allowing them to collect a tax-free allowance up to the value of the full new state pension for someone with a full National Insurance record.
How the new allowance works
The full new state pension will rise to £13,036.40 in April, and this will become the tax threshold for all state pensioners with any type of income, including from work, savings, Additional Pension, or property income, not just the state pension itself.
Those whose income exceeds the threshold will see their tax-free allowance tapered off, with the tax exemption converted into a tax reduction up to a limit of £13,319.
The Treasury has published guidance explaining the mechanics. It states that from April 2027, if total income is no more than the full annual value of the new State Pension, the pensioner will receive the full Pension Tax Allowance and will not be brought into paying tax because of State Pension uprating in this Parliament.
Income brackets and taper rules
The guidance confirms the allowance applies regardless of income source, including the State Pension, private pensions, earnings from work, self-employment, savings, property, dividend income, or a combination of these.
For those with income slightly above the full new State Pension level, the allowance gradually reduces: for every £3 of income above that level, the Pension Tax Allowance decreases by £1. No contact with HMRC or a claim is needed, as HMRC will apply the allowance automatically using information it holds on State Pension age and income.
From the tax year beginning 6 April 2027, the full annual value of the new State Pension will increase to £13,036.40. The Treasury's guidance sets out the following brackets:
- If total income is below the Personal Allowance (£12,570), no tax is liable.
- If total income is between £12,570 and £13,037, the full Pension Tax Allowance is received (worth up to £94).
- If total income is between £13,037 and £13,319, some Pension Tax Allowance is received and less income tax is paid.
- If total income is £13,319 or more, no Pension Tax Allowance is 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.
Reactions from industry figures
Paul Farmer, chief executive at Age UK, welcomed the move, saying: “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.”
Sir Steve Webb, a former pensions minister now a partner at consultants Lane Clark & Peacock, cautioned: “There is a real risk that this ‘quick fix’ will turn into a long-term headache for this Government and its successors.”
Patrick Heath-Lay, chief executive at People's Pension, said: “We support any measures that offer more help to lower income households. It’s important that these changes don’t overcomplicate how the state pension works and how it links to private pension saving.”
