The government announced the introduction of the pension tax allowance at the budget 2026, publishing an explainer and a policy paper on the day. The legislation giving effect to the pension tax allowance has since been published as part of the Finance Bill 2026-27, helping to clarify how the allowance is expected to apply in practice. The legislation has yet to be enacted and is subject to change.
Who qualifies for the pension tax allowance?
The pension tax allowance is given for the tax years 2027/28, 2028/29 and 2029/30. It is possible that it may be extended beyond 2029/30 at a later date.
To qualify for the pension tax allowance for a tax year, the person must have reached state pension age either:
- before the start of that tax year; or
- during that tax year.
In both cases, the pension tax allowance is given in full; ie, it is not pro-rated where the person reaches state pension age during the tax year.
A person's state pension age is the earliest they can start receiving their state pension. The government has published a tool which can be used to check a person's state pension age. Note that a person will still qualify for the pension tax allowance if they have reached state pension age but have deferred their state pension or are still working.
The pension tax allowance applies to taxpayers throughout the UK.
How much is the pension tax allowance?
A person's pension tax allowance for a tax year can be calculated in three stages, as follows, using the figures applying for 2027/28:
- First, calculate the gross amount. This is found by subtracting the annual allowance for the tax year (£12,570) from the annual amount of the new state pension (£13,037): £467.
- Second, multiply the gross amount (£467) by 20% to give the amount of the tax reduction: £94.
- Third, adjust the amount of the tax reduction by reference to the person's total income. Briefly, the pension tax allowance is:
- not given where the person’s total income is £12,570 or less (as, in this case, there is no income tax liability);
- given in full where their total income is between £12,570 and £13,037; and
- reduced where their total income is between £13,037 and £13,319. The personal tax allowance is reduced by £1 for every £3 of total income above £13,037. For example, where total income is £13,133, the pension tax allowance would be reduced by £32 ((£13,133 - £13,037)/3) to £62.
HMRC's pension tax allowance explainer includes examples illustrating how the pension tax allowance is calculated in a range of circumstances.
What is 'total income'?
Total income is the sum of the person's taxable income for the tax year before the personal allowance is taken into account (step one in the income tax calculation in s23, Income Tax Act 2007). Examples of taxable income include the state pension; private pension income; profits from a property business, dividends; and interest.
An important distinction is made between:
- interest on which no income tax is payable, for example, because it is within the personal savings allowance; and
- interest which is tax exempt, for example, because it is generated within an individual savings account (ISA).
Interest on which no income tax is payable is included in total income whereas income which is tax exempt is not.
How is the personal tax allowance given?
The pension tax allowance is given as a tax reduction and so is deducted (at step six in the income tax calculation) in arriving at the person's income tax liability for a tax year.
The pension tax allowance will be given before the married couple’s allowance. As currently drafted in the Finance Bill, a taxpayer who claims the transferable marriage allowance tax reducer from their spouse will be able to choose which of the pension tax allowance and the transferrable marriage allowance should be deducted first.
The pension tax allowance will not generate a refund if the person owes less tax than the full value of the allowance.
Does the person need to notify HMRC?
The pension tax allowance will be applied automatically by HMRC. Where the person thinks that HMRC may have made an error, they can contact HMRC to resolve the issue.
Although the pension tax allowance will prevent many pensioners from receiving a simple assessment, it is possible that some taxpayers who are eligible for the pension tax allowance will receive a simple assessment, for example, because they receive income of between £13,037 and £13,319 for 2027/28.
Policy intention
As explained in more detail in an earlier article, the intention behind the introduction of the personal tax allowance is to prevent more pensioners being brought within the tax system as the personal allowance remains frozen at £12,570 and state pension increases in accordance with the triple lock.
ICAEW on the budget
Latest on personal tax
The Tax Faculty
ICAEW's Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.
Further resources
Latest news
TAXwire and Tax Track
Stay up to date with the latest developments by signing up to the Tax Faculty's weekly enewsletter and listening to the Tax Track podcast series.
Listen now Newsletter sign upPractical guidance
Tax Faculty resources
The Tax Faculty offers expert guidance and support enabling you to provide the best advice on tax legislation to your clients or business. We offer clear direction in taxing times. Membership is open to everyone.
ICAEW support
Training and events
Browse upcoming and on-demand ICAEW events and webinars focused on developments in tax practice and policy.
Events and webinars CPD courses and more