Andy Burnham will oversee the tax exemption (Image: Getty)
HMRC will increase your tax-free Personal Allowance all the way to £13,037 if you’re a state pensioner following one rule.
Normally, the tax-free Personal Allowance is set at £12,570 and this has not been increased since 2021. Despite pressure for a boost to the threshold, it will remain held at the same level in 2027-28, pushing more households into paying more tax in a process known as ‘fiscal drag’, because wages and incomes rise for inflation but the threshold has been frozen.
But for state pensioners, HMRC will raise the tax-free Personal Allowance all the way to £13,037, even for older state pensioners on the lower, basic state pension.
That’s because of the new Pension Tax Allowance announced in the Autumn Budget by Chancellor John Healey, which will hand those who are in receipt of a state pension a larger, increased tax-free Personal Allowance on any amount of income.
The amount, £13,037, has been set to match the amount a new state pensioner can receive if they have a full National Insurance record, from April 2027, thanks to the latest triple lock boost.
The triple lock will put someone on the full new state pension, so who hit state pension age after April 2016 on course to receive £250.70 per week from next April – up from £241.30 per week currently, if they have a full National Insurance record, or £13,036 per year.
This will continue in April, but it will mark the first time that the state pension payments themselves already break the threshold, at £13,036.40.
The rules state that a state pensioner must have no income above the value of the full, new state pension. Only the maximum value of the state pension payments from the DWP are exempted. This is for both new state pensioners and older state pensioners, although older pre-2016 state pensioners would not exceed the limit in 2027 anyway from the basic state pension alone.
The HMRC’s one rule is that this new Pensions Tax Allowance is withdrawn for those with income over £13,037, though this withdrawl is not a ‘cliff edge’ but will be taken away gradually for those with income above £13,037.
Those earning between £13,037 and £13,319 will see the allowance ‘tapered off’ until it reaches £13,319. All earnings above £13,319 will then be taxed at the normal rate. But, even state pensioners earning more than this will be able to keep the full £13,037 tax-free Personal Allowance and the tapered allowance between £13,037 and £13,319. The allowances are not lost even if you have too much income, making it an effective £13,037 tax-fre Personal Allowance and a tapered reduction on the next £282 on top.
The Budget documents explain how this will work in practice. It says that the difference between the £12,570 tax-free Personal Allowance and the full new state pension will be calculated at 20%, and then slowly withdrawn with a taper.
This effectively gives older state pensioners a higher tax threshold though, as they can get income up to the value of the new state pension without tax too.
It also confirms state pensioners will be able to get the allowance ‘regardless of source’ of their income.
It says: “The government will introduce the Pension Tax Allowance (PTA), ensuring that pensioners whose total income is up to the value of the full new State Pension do not have the administrative burden of paying small amounts of tax.
“The value of the PTA is calculated by applying the basic rate of income tax (20%) to the difference between the full new State Pension and the Personal Allowance. Individuals over State Pension age are eligible for the automatic tax deduction if their income, regardless of source, is below or at the value of the full new State Pension.
“For those with incomes just above the value of the full new State Pension, the allowance will be gradually withdrawn through a taper. The allowance will apply from 6 April 2027 until 5 April 2030 and will be uprated in line with the full new State Pension across this Parliament. It will be legislated for in Finance Bill 2026-27 and the government will consider arrangements beyond April 2030 in the usual way.”
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.”
Baroness Altmann, another former pensions minister, welcomed the Budget announcement.
She also suggested that it could have “cost the Treasury more to try to implement tax collection from hundreds of thousands of poorer elderly people who have never done a tax return before and who would owe less than £100 a year”.
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