State pensioners handed £13,037 tax-free Personal Allowance with ‘any income’
New tax allowance rules will come with a higher limit.
State pensioners of all ages will be handed a new tax-free Personal Allowance threshold of £13,037 thanks to the new Pension Tax Allowance announced by Chancellor John Healey.
More detail has now been released by the government about the new Pension Tax Allowance which gives state pensioners both young and old a tax-free allowance of £13,037, which is the equivalent of the full, new state pension (rounded up by 60p) after the next triple lock increase takes effect in April and pushes the pension handout to £13,036.40.
The new system will allow all state pensioners, both old pre-2016 and new post-2016 state pensioners, to collect a tax-free allowance up to the value of the full, new state pension for a new state pensioner with a full National Insurance record. The full new state pension will now be £13,0346.40, and this will be the new 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.
Then, 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.
The Treasury published new guidance which explains how it works.
It says: “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.
“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.
“If your total income is slightly higher than the full annual value of the new State Pension, 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 The value of your Pension Tax Allowance will gradually reduce as your income increases until it is fully withdrawn.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.
“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 your total income is below the Personal Allowance (£12,570) you are not liable for any tax.
If your total income is between £12,570 and £13,037, you will receive the full Pension Tax Allowance (worth up to £94).
If your total income is between £13,037 and £13,319, you will receive some Pension Tax Allowance and pay less income tax than you otherwise would.
If your total income is £13,319 or more, you will not receive any Pension Tax Allowance.
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.”
Paul Farmer, chief executive at Age UK, said: “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 who is now a partner at consultants Lane Clark & Peacock, said: “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.”
