Millions of pensioners are set to benefit after Chancellor John Healey announced a new pension tax allowance that will mean pensioners with income up to the value of the full new State Pension will not pay Income Tax during this Parliament.
The move could protect pensioners as the full new State Pension is set to rise to around £13,040 a year from April 2027, taking it above the standard personal allowance of £12,570.
But pensioners receiving the old basic State Pension could be treated differently, as their payments are worth considerably less than the new rate.
Announcing the measure in his Budget, Mr Healey said: “For pensioners, I am delivering the new pension tax allowance – so that pensioners with income up to the value of the full new state pension will not pay income tax in this Parliament.”
Pensioners with income up to the value of the full new state pension (to be £13,040 from April 2027) will not pay tax. Mechanism not stated, I suspect there will be an effective increased pensioner allowance with a clawback for income above that. More when I know more. #Budget2026
— Martin Lewis (@MartinSLewis) October 28, 2026
Money Saving Expert founder Martin Lewis said the announcement meant pensioners with income up to the value of the full new State Pension would not pay tax, but warned that the precise mechanism had not yet been explained.
He said: “Pensioners with income up to the value of the full new state pension (to be £13,040 from April 2027) will not pay tax. Mechanism not stated, I suspect there will be an effective increased pensioner allowance with a clawback for income above that. More when I know more.”
What is the HMRC personal allowance?
The standard personal allowance – the amount most people can earn before paying Income Tax – is currently £12,570. It has been frozen at that level since 2021 and is due to remain frozen until April 2031 under existing plans.
The full new State Pension is expected to rise by 3.9% from April 2027 under the triple lock, taking the weekly payment to around £250.70 and the annual amount to approximately £13,040.
That would leave the full new State Pension above the standard personal allowance, potentially exposing pensioners with no other income to Income Tax under the existing rules.
How the new and old State Pensions compare
The old basic State Pension is paid to people who reached State Pension age before the new system was introduced in April 2016. The amount is lower than the full new State Pension, although some pensioners also receive additional State Pension based on their National Insurance record.
Based on the projected 3.9% increase from April 2027:
- Full new State Pension: expected to rise from £241.30 to around £250.70 a week, equivalent to approximately £13,040 a year.
- Full basic State Pension: expected to rise from £184.90 to around £192.10 a week, equivalent to approximately £9,989 a year.
- Standard personal allowance: currently £12,570 a year, under existing plans frozen until April 2031.
The full basic State Pension would therefore remain below the standard personal allowance, while the full new State Pension would move above it.
However, the tax position of someone receiving the old basic State Pension depends on their total taxable income. Additional State Pension, a workplace or private pension, earnings and savings interest may mean they have to pay Income Tax.
Healey's announcement is intended to address the tax issue for pensioners with income up to the value of the full new State Pension, although further details are needed to establish exactly how the allowance will work, who will qualify and how pensioners with additional income will be treated.
Why was the personal allowance frozen?
The personal allowance had remained at £12,570 since 2021, with the freeze previously scheduled to continue until 2031.
When tax thresholds stay fixed while earnings rise, more income becomes taxable over time. This is known as fiscal drag.
It can also push people into higher tax bands, even when their spending power has not increased by as much as their wages.
The freeze had become a major issue for households facing higher living costs, with calls for the Government to allow thresholds to rise again.
During his campaign for the Makerfield by-election, Prime Minister Andy Burnham highlighted the issue, saying: “One thing I heard the most on doorsteps…was frustration about the personal allowance frozen at £12,570.”
He had also acknowledged that changes would be “difficult given the financial circumstances in which we find ourselves”.
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How else can you reduce your income tax bill?
There are other ways eligible taxpayers may be able to reduce the amount of income tax they pay.
Pension contributions: For workers, additional pension contributions can reduce adjusted net income in some circumstances and may help people avoid crossing certain tax thresholds. Check whether your employer will match extra workplace pension contributions.
Marriage Allowance: Eligible couples may be able to transfer unused personal allowance to a spouse or civil partner, reducing the recipient's tax bill. One partner must generally be a non-taxpayer and the other a basic-rate taxpayer.
ISAs: Interest earned within a qualifying ISA is tax-free, which can help savers avoid tax on interest outside tax-free savings allowances.
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