UK pension tax allowance shields 500,000 pensioners from tax
Web StoryWatch this story in 15 seconds →Key takeaways
- The UK Budget created a new Pension Tax Allowance for low-income pensioners.
- Around 500,000 pensioners will benefit in the 2027-28 tax year.
- The full new state pension rises to £13,036 a year from April 2027.
Low-income pensioners in the UK will not pay income tax on their state pension. Chancellor John Healey confirmed the new Pension Tax Allowance in his Budget on October 28, 2026. The move protects pensioners whose total income stays within a set limit.
This article is for information only and is not financial advice.
What happened
Healey delivered his first Budget on Wednesday, October 28. He told MPs he was delivering a new Pension Tax Allowance. He said pensioners with income up to the full new state pension will not pay income tax in this Parliament.
The allowance covers three tax years. It will be available in 2027-28, 2028-29 and 2029-30. The change takes effect from April 6, 2027.
The Sun reported the confirmed details on Budget day. The Treasury confirmed the new pension rates to The Sun. Around 500,000 pensioners will benefit in 2027-28.
Of that group, around 290,000 will pay no tax at all. The rest will get a smaller, tapered allowance. The policy will cost £45 million in its first year.
Why the change was needed
The full new state pension rises by 3.9% next April. That is an increase of £489 a year. The yearly payment rises from £12,548 to £13,036.
The weekly rate rises to £250.70. That takes the pension above the tax threshold for the first time. The personal allowance is £12,570 a year.
Income above that level is normally taxed. The new pension sits £466 above the threshold. Without a fix, pensioners who live on the state pension alone would face a tax bill.
That problem was flagged before the Budget. Reports on October 26 said around one million pensioners could be dragged into tax. Sharecast reported that the rise would push the pension above the £12,570 allowance.
The BBC reported the same warning before the Budget. It said the government had already pledged not to tax people whose only income is the state pension. The new allowance is how Healey plans to keep that pledge.
How the Pension Tax Allowance works
The allowance is simple at its core. It covers pensioners whose total income is up to the full new state pension. Total income means all income, not just the state pension.
The value of the allowance comes from a simple sum. It applies the basic tax rate to the gap between the pension and the personal allowance. That gap is £466 in the first year.
Patrick Thomson works at the Standard Life Centre for the Future of Retirement. He said pensioners with income between £12,570 and £13,037 get the full allowance. He said it is worth up to £94 in the first year.
The allowance then tapers away. It falls by £1 for every £3 of income above the full new state pension. Support runs out at an income of £13,319.
Thomson said the taper avoids a cliff edge. He said the automatic application should make the process easier for people in this income band. Pensioners do not need to claim it by hand.
Who gains and who still pays
Around 13.3 million people claim the state pension. Only 500,000 will benefit from the new allowance. That means around 12.8 million will miss out.
Pensioners with larger incomes still pay tax. That includes pensioners with workplace or private pensions on top of the state pension. Their total income sits above the allowance limit.
The Sun cited figures from pensions consultants LCP. It said 8,480,000 retirees now pay basic-rate income tax. Basic rate is 20% on income between £12,570 and £50,270 a year.
It said 977,000 pay the higher rate. Higher rate applies to income between £50,270 and £125,140. Just 115,000 pay the additional rate on income over £125,140.
The old state pension also rises. It will pay £192.10 a week, or £9,989.20 a year. That is £375 more than the current rate of £9,614.80 a year.
The old pension goes to people who reached pension age before April 6, 2016. It covers men born before April 6, 1951. It covers women born before April 6, 1953.
The criticism: a 53% tax band
Not everyone welcomed the design. Steve Webb is a partner at pensions consultancy LCP. He is also a former pensions minister.
Webb said the Chancellor created a strange 53% income tax rate for around 200,000 low-income pensioners. He said each £100 of extra private pension above the new state pension rate adds £53 to their tax bill.
The 53% comes from two parts. The basic tax rate is 20%. The lost allowance adds 33%, since £1 is lost for every £3 of extra income.
Webb said such high rates are normal for top earners. He said they are not normal for people on very modest incomes. The Sun reported his warning on Budget day.
The design also creates a hard edge at £13,319. Pensioners at or above that income get no support from the allowance. People just below the line still get a small amount.
What was rumoured before the Budget
The confirmed plan is smaller than early reports suggested. Money Age reported on October 26 that up to one million pensioners could be protected. It cited reports in The Times.
Those reports put the cost at £200 million a year by 2030. The confirmed first-year cost is £45 million. The confirmed number of beneficiaries is 500,000, not one million.
One rumour did not come true. Reports said Healey might cut the tax-free pension lump sum. Savers can now take 25% of a pension tax free, up to £268,275. Reports said the cap might fall to £100,000.
Money Age reported before the Budget that Healey had decided against that cut. The tax-free lump sum stays at its current level. That is good news for people saving for retirement.
The Budget also moved on other fronts the same day. Healey doubled the bank tax surcharge on bank profits. He also confirmed a rise in the minimum wage from April 2027.
Pensioners who want to plan ahead can read about a separate pension tax change coming in April 2027. That change covers inherited pensions, not the state pension itself.
What happens next
The allowance starts on April 6, 2027. Pensioners in the income band should see the effect in their tax code. The allowance applies automatically, according to Thomson.
The Treasury has not yet published every detail. The exact rules for people with mixed incomes still need close reading. Pensioners near the £13,319 limit should check their own position.
The state pension will keep rising in later years. The allowance is set for three tax years only. What happens after 2029-30 is not yet decided.
For now, the message is clear for the lowest-income pensioners. If your total income is no more than the full new state pension, you will not pay income tax on it in this Parliament. If your income is higher, the taper decides how much help you get.
The Budget debate will now move to Parliament. MPs will vote on the measures in the coming weeks. Pensioners should watch for the final law before they act on the new rules.
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