Chancellor John Healey has announced a new Pension Tax Allowance for state pensioners, introducing a tax-free allowance of £13,037 and a tapered threshold up to £13,319. The government has released further details on how the system will work.
How the new allowance works
The new system will allow all state pensioners, both those on the old pre-2016 pension and those on the new post-2016 pension, to collect a tax-free allowance up to the value of the full new state pension for a pensioner with a full National Insurance record. The full new state pension will be £13,036.40, which will become the new tax threshold for all state pensioners with any type of income, including from work, savings, Additional Pension, or property income.
Those exceeding the threshold will see their tax-free allowance tapered off, with the tax exemption turned into a tax reduction up to a threshold of £13,319.
Treasury guidance published
The Treasury has published new guidance explaining how the allowance will work. It reads: "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 because of State Pension uprating in this Parliament."
The guidance adds: "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."
Income thresholds and automatic application
For those with income slightly above the full annual value of the new State Pension, the guidance states: "You may still receive an income tax reduction and pay less income tax than you otherwise would. The value of your Pension Tax Allowance will gradually reduce as your income increases until it is fully withdrawn. For every £3 of income above the full level of the new State Pension, your Pension Tax Allowance will reduce by £1."
The guidance also confirms: "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 Pension Tax Allowance automatically when calculating your income tax."
From the tax year beginning 6 April 2027, the full annual value of the new State Pension will increase to £13,036.40. 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 (worth up to £94) is received. If total income is between £13,037 and £13,319, some Pension Tax Allowance is received, with less income tax 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.
