Budget 2026: State Pensioners with incomes under £13,037 a year to pay no Income Tax as new allowance introduced
A new Pension Tax Allowance will be introduced from April 2027 to stop low-income pensioners having to pay small amounts of Income Tax, the Chancellor John Healey has announced.
The Chancellor's Budget on Wednesday 28 October brought final confirmation that the State Pension will rise by 3.9% next April, taking the full new State Pension to £13,036.40 a year – above the standard £12,570 tax-free Personal Allowance for the first time.
To prevent this from creating a tax bill for pensioners on the lowest incomes – which the Government had pledged to avoid – a new Pension Tax Allowance (PTA) will be introduced. The move is expected to benefit some 500,000 pensioners in total, with 290,000 paying no Income Tax as a result.
Watch: Martin Lewis explains how the new Pension Tax Allowance will REALLY work
MoneySavingExpert.com founder Martin Lewis broke down how the new system will work on ITV's The Martin Lewis Money Show Live on Thursday 29 October. Here's what he said:
From The Martin Lewis Money Show Live on Thursday 29 October 2026 courtesy of ITV. All rights reserved. Watch the full episode on ITVX.
Read the full video transcript
Martin Lewis: "£99 of income more, £52 of tax more. That is quite a high marginal rate, isn't it? The tax-free Personal Allowance is £12,570. The current full new State Pension – there's an old State Pension, you might not be on the full one either – is here. Just a tiny bit below that threshold. But that threshold is frozen, whereas the State Pension goes up with the triple lock, which means next April, it will be going up 3.9%, which puts it here.
"So if nothing happened, if you were just on the full new State Pension, you would have to be paying tax on the difference above that amount, which is on £466, which is £94 – 20% to £466 is £94. Now, in last year's Budget, [the then-Chancellor] Rachel Reeves said that if you just got the full new State Pension, you wouldn't pay tax on it.
"My big question has been, well hold on, what about if you have a tiny little income above? What are they going to do? And that is what is going on here. So let me take you through this, and it does take some explaining...
"Rule number one: If you have total income up to £13,037 a year – note the full new State Pension is £13,036.40, so it's slightly higher, that's the accurate figure – you will not pay income tax. Let me be plain. This is whether you're on the new State Pension or the old State Pension or whatever your total income is. As long as you're of State Pension age, if you earn below that, you don't pay any tax.
"And this extra Pension Tax Allowance is worth up to £94 a year. It can't be part of the Marriage Tax Allowance. It's based on what they call your total income – not taxable income. I've been trying to dig into this one today, to be honest, and we're pretty sure the two are the same, but it is getting very nerdy in that, so I would probably keep it as taxable income for the moment. I'm sorry, that's confusing, but it's just a slight definition change. Just think of it as taxable income.
"It will be uprated until at least 2030 in line with the State Pension. So it's going to go up each year as the State Pension moves up. That's the simple rule.
"The second rule is there's a tapering system in effect. So for each £3 you earn over £13,037, you lose £1 of the Pension Tax Allowance. Let me try and take you through this in a bit more detail.
"Here we go. So let's take someone at exactly that level. Well, they would normally pay £94 of tax because they're £466 above the tax-free allowance. But they get the £94 allowance, therefore they don't pay any tax. Are you with me so far? Good. Lots of nodding heads.
"Let's complicate it a little bit more. Let's say somebody earns £99 above that threshold. There we go. I've chosen £99 because it makes the maths easier. So normally, they've got £566 worth of income, somebody who wasn't a State Pensioner above that threshold, 20% of that is £113. That's the tax that they would pay.
"Their Pension Tax Allowance, because they're £99 above, we divide it by three and then you get £1 for each of those. So that's £33. £94 minus £33 is £61. £113 minus £61 means you would pay £52 of tax.
"It is worth noting: £99 of income more, £52 of tax more. That is quite a high marginal rate, isn't it? And then you get to my – are we still getting it? Yes.
"I woke up in the middle of the night and came up with an idea of how to – genuinely, four in the morning – of how I was going to explain this because it's so complicated.
"Here's the third column. Once you get to income of £13,319 a year, normal tax would be £150. Well, your Pension Tax Allowance has gone at this point, so you would pay £150 and any income above that, you would just – somebody who is of State Pension age – would pay the same as someone who is of working age."
The key need-to-knows on the new allowance
Here are the key need-to-knows:
-
State Pensioners whose total income is £13,037 a year or less will effectively get a tax cut of up to £94. The new allowance will effectively cover the basic-rate tax that would otherwise be due on the £466 gap between the standard £12,570 Personal Allowance and the full new State Pension.
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The new allowance will apply regardless of whether your income comes from the State Pension, a private pension, work or savings. You won't need to receive the full new State Pension to qualify, provided your total income is below the threshold.
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It will be applied automatically – you won't need to claim it. The Government has confirmed it will use existing information that HMRC holds about your income and age.
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The standard Personal Allowance will remain at £12,570 for everyone. The PTA is a separate tax reduction, not a higher tax-free allowance.
You'll still benefit even if your income is slightly above £13,037 a year
Whether you'll get the new allowance will depend on your income:
-
Total income below £12,570: you won't pay Income Tax anyway, so you won't need the PTA.
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Total income between £12,570 and £13,037: you'll get the full PTA, worth up to £94 in 2027/28, wiping out the Income Tax you would otherwise pay.
-
Total income above £13,037 but below £13,319: you'll still get some PTA, but the amount will gradually reduce via a taper. For every £3 of income above £13,037, your PTA will reduce by £1.
-
Total income of £13,319 or more: you won't get any PTA and you'll pay Income Tax at your usual rate.
New: What counts as 'income'?
The Government told us it will use the existing definition of 'total income' that's used for working out Income Tax.
This can get really complicated, but it generally DOES include earnings from:
- Private pensions;
- The State Pension (which has always been taxable);
- Employment (and profits from self-employment);
- Savings interest outside ISAs;
- Investment dividends outside ISAs;
- Renting out property;
- Carer's Allowance and any other taxable state benefits (see the full list on Gov.uk);
- Other sources subject to Income Tax.
Crucially, some income counts even if you don't actually pay tax on it. For example, savings interest outside an ISA will usually count towards your total income EVEN IF it's within your tax-free Personal Savings Allowance.
However, 'total income' DOESN'T include:
- Savings or investment income within ISAs, including the Lifetime ISA;
- Premium Bonds prizes;
- Tax-free pension lump sums within the 25% allowance;
- Capital Gains;
- Attendance Allowance, Disability Living Allowance, Pension Credit, Personal Independence Payment or other tax-free state benefits (see the full list on Gov.uk).
The full new State Pension will rise by almost £490 next April
Around four in 10 (41%) of state pensioners – 5.4 million – get the new State Pension. You'll be on it if you reached State Pension age on or after 6 April 2016.
Year | Weekly payment (1) | Annual amount (2) |
|---|---|---|
2026/27 (current) | £241.30 | £12,547.60
|
2027/28 (new – when increased by 3.9%) | £250.70
| £13,036.40
|
Increase | £9.40
| £488.80
|
(1) The weekly amount is usually rounded to the nearest 5p when the rise is applied. (2) This is the weekly amount multiplied by 52.
Those on the basic State Pension will see a smaller cash increase
Around six in 10 (59%) of State Pensioners – 7.9 million – get the basic State Pension. You'll be on it if you reached State Pension age before 6 April 2016.
Year | Weekly payment (1) | Annual amount (2) |
|---|---|---|
2026/27 (current) | £184.90 | £9,614.80 |
2027/28 (new – when increased by 3.9%) | £192.10 | £9,989.20
|
Increase | £7.20
| £374.40 |
(1) The weekly amount is usually rounded to the nearest 5p when the rise is applied. (2) This is the weekly amount multiplied by 52.
Remember: The Government has announced plans to change the State Pension triple lock from 2030. See our news story for Martin's full breakdown of the proposed changes.
MSE's Budget 2026 coverage
Check out all of our other MSE News stories following the Chancellor's announcements:
Full round-up of the key measures, including MoneySavingExpert.com (MSE) founder Martin Lewis' video analysis of what they mean for you.
The planned cash ISA limit cut for under-65s WON'T go ahead. Also, plans for a 'starter investment ISA' (something Martin's argued for) have been announced. We explain what's happening.
The Lifetime ISA withdrawal fine has been axed for homes above £450,000 in a major MSE win. Plus, the launch of the First-Time Buyer ISA has now been confirmed.
Gas Standing Charges will FINALLY be scrapped in a move MSE has campaigned on for years. Watch Martin's instant reaction and analysis.
New 'Your First Home' homebuying scheme to launch in England. It was first announced in September and now more details have been revealed – we explain how the scheme will work.
Millions of households in Council Tax bands A-D will get a £100 payment next year to help with energy costs. Funding's also being allocated to Northern Ireland, Scotland and Wales for similar schemes.
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