Pension Tax Allowance

It was announced in last Wednesday’s budget that a new Pension Tax Allowance would be introduced from April 2027. This is being introduced to prevent those whose only income comes from the state pension from paying any tax.

This works as a tax reducer, like the marriage allowance transfer, rather than an income allowance such as the personal allowance.

Entitlement

All those of state pension age (or reaching state pension age within the tax year) will be entitled to the Pension Tax Allowance. The allowance can be used against pensions or other sources of income, such as employment or savings interest.

The State Pension

For the current tax year, the full new State Pension entitles recipients to £12,547.60 per year.

This is below an individual’s personal allowance of £12,570. So, if your only income was from the state pension for 2026/27, your income would be below the personal allowance and hence you would pay no tax.

However, for 2027/28, the state pension will increase to £13,036.40 per year. The personal allowance though has been frozen for many years and will remain at £12,570 again for 2027/28.

Those on the state pension, therefore, would have taxable income of £466.40. And without this measure, at the basic rate of tax, an individual would have £93.28 tax payable.

The Pension Tax Allowance is, therefore, a tax reduction set at £94 for 2027/28.

For 2028/29 and 2029/30, it will be increased in line with the full new state pension.

Taper

However, the allowance is tapered once your income exceeds £13,037 (i.e. above the full new state pension). The taper reduces the allowance by £1 for every £3 you exceed the threshold.

Example – full taper

An income of £13,319 would mean exceeding the threshold by £282.

This means the allowance is tapered by £94 and hence your remaining Pension Tax Allowance is nil.

You pay the full basic rate of tax on the £749 income above the personal allowance. If all your income is from pensions, this leaves you with tax payable of £149.80.

You are left with income after tax of £13,169.20.

Example – partial taper

An income of £13,178 would mean exceeding the threshold by £141.

Your allowance is tapered by £47 and your remaining Pension Tax Allowance is also £47.

Your tax is calculated on the £608 above the personal allowance which is £121.60 if all your income is pension income.

This is reduced by the remaining Pension Tax Allowance of £47 and hence the tax you pay is £74.60.

You are left with income after tax of £13,103.40.

The taper can therefore make your tax calculation, even with comparatively low levels of income, more complicated next year and in the future.

If you have any questions or would like to discuss the changes further, please contact your local Perrys branch.