Measure
As announced at Budget 2025, the government will introduce legislation in Finance Bill 2026/27 to implement the ‘Pension Tax Allowance’, a tax credit of up to £94 a year from 6 April 2027 for individuals who have reached State Pension age, equal to the tax that would otherwise arise on a year's worth of the new State Pension (£13,037 in 2027/28). This ensures pensioners whose only income consists of the State Pension, without increments, remain outside the scope of income tax, without the administrative burden of HMRC having to collect small amounts of tax via Simple Assessment.
The Pension Tax Allowance is a tax reduction, not an increase to the personal allowance itself. Its value is calculated by applying the basic rate of income tax (20%) to the difference between the full new State Pension and the personal allowance. This applies regardless of where an individual's income comes from, whether that is the State Pension, a private pension, employment income or any other source, provided their total income does not exceed the full new State Pension amount.
To ensure the credit is targeted at low-income pensioners, it is tapered by £1 for every £3 of income between £13,037 and £13,319, so that the benefit is not lost entirely as soon as an individual's income exceeds the threshold. The aim of the policy is to reduce, rather than remove entirely, the potential administrative burden of collecting small amounts of tax from a large population of pensioners.
Individuals will not need to contact HMRC or make a claim for the Pension Tax Allowance. HMRC will apply it automatically.
The Pension Tax Allowance is available for tax years 2027/28, 2028/29 and 2029/30. For 2028/29 and 2029/30, its value will be uprated to reflect changes in the full new State Pension and the personal allowance in those years.
In 2027/28, the Pension Tax Allowance is expected to mean that around 290,000 pensioners who would otherwise have become liable to pay income tax for the first time, solely as a result of their State Pension exceeding the personal allowance, will not need to do so.
Individuals above or approaching State Pension age.
The changes will take effect from 6 April 2027, and the Pension Tax Allowance will apply for tax years 2027/28, 2028/29 and 2029/30. The government has said it will keep the Pension Tax Allowance under review and will consider its approach beyond 2029/30 in due course.
This is a targeted and proportionate response to a problem created by the interaction of two separate policies, the frozen personal allowance and the triple lock, rather than a reversal of either policy. Structuring the measure as a tax reduction calculated by reference to the gap between the full new State Pension and the personal allowance, rather than simply raising the personal allowance for pensioners, keeps the relief narrowly targeted at the specific group the government is trying to protect, those whose income is at or close to the full new State Pension, without creating a broader, more costly change to the personal allowance that would benefit higher earners as well.
The taper, withdrawing the credit by £1 for every £3 of income above the full new State Pension threshold, avoids a sharp cliff-edge where a pensioner with income just above the threshold would otherwise lose the full benefit of the allowance in one step. Applying the allowance automatically, without the need for a claim also reduces the potential administrative burden.