Pension Tax Allowance 2027: State Pension Tax Explained

How this guide was checked: the policy details have been checked against HM Treasury’s Pension Tax Allowance explainer. The worked examples are my own illustrative calculations, based on the assumptions stated with each one.

Quick answer

The State Pension is taxable income. From 6th April 2027 the full new State Pension rises to £13,036.40 a year, above the frozen £12,570 Personal Allowance for the first time. The government’s answer is a new Pension Tax Allowance, a reduction in your income tax bill.

When does it start? 6th April 2027, subject to the legislation being passed.

Who qualifies? People at or over State Pension age during the tax year, depending on their total income.

How much is it worth? Up to £94 a year.

Full relief income limit: £13,036.40 in 2027/28.

Income where it runs out: £13,319.

Do you need to apply? No. HMRC will apply it automatically.

Will it last? It is set to apply for 2027/28, 2028/29 and 2029/30.

If you are retired, or close to it, the question is simple. Will you pay tax on your State Pension from next April? For a lot of people on modest incomes the answer is now no, but the rules have some sharp edges.

The gap between the full new State Pension and the Personal Allowance has been closing for years. It was over £3,200 in 2021/22, it is £22.40 in 2026/27, and in April 2027 it goes altogether. In November 2025 the government promised that people living on the State Pension alone would not be taxed on it, but it did not say how.

At the Budget on 28th October 2026, the Chancellor, John Healey, announced how. The Pension Tax Allowance is more generous than many expected, because it looks at your total income rather than asking whether the State Pension is your only income. For example, you can qualify on a partial State Pension with a small workplace pension. But it fades out over the next £282 of income above the limit and then stops, and savings interest outside an ISA counts even when you pay no tax on it.

This article explains who qualifies, what it is worth, where the traps are and what you can do about them. This guide is part of our complete guide to UK retirement rules.

01What is the Pension Tax Allowance?

Despite the name, it is not a bigger tax-free allowance and it does not make the State Pension tax-free. The State Pension is still taxable income and your Personal Allowance stays at £12,570. The Pension Tax Allowance is a tax reduction. HMRC works out your income tax in the normal way and then takes up to £94 off the bill. It can bring your bill down to zero, but never below, so it never creates a refund.

To get the full amount in 2027/28 you need to meet two conditions.

You are over State Pension age, or you reach it during the tax year.
Your total taxable income is no more than the full new State Pension, which is £13,036.40 in 2027/28.

That is it. You don’t need to receive the full new State Pension, or any State Pension at all. Someone on a partial State Pension with a small workplace pension can qualify. So can someone who has deferred their State Pension and lives on part-time earnings.

What matters is your total income from every taxable source: State Pension, workplace and private pensions, earnings, self-employment, rent, savings interest and dividends. Income inside an ISA does not count.

Your total income in 2027/28	What happens
Up to £12,570	No income tax to pay, so the allowance isn’t needed
£12,570 to £13,036.40	Full Pension Tax Allowance. Your income tax bill is reduced to zero
£13,037 to £13,318	Partial allowance. It shrinks by £1 for every £3 of income above £13,036.40
£13,319 or more	No allowance. You pay income tax in the normal way

The allowance still needs legislation to be passed and it’s due to apply for 2027/28, 2028/29 and 2029/30. Each year the income limit rises in line with the full new State Pension. HM Treasury estimates that around 290,000 pensioners will pay no income tax at all in 2027/28 because of it, around 500,000 will pay less, and roughly 1 million will benefit by the end of this Parliament.

02How much tax will you pay in 2027/28?

Here is the calculation step by step, so you can follow it with your own numbers.

Worked calculation: full State Pension plus £100 of other income

1. Total income: £13,036.40 State Pension + £100 = £13,136.40

2. Tax before the allowance: (£13,136.40 minus £12,570) x 20% = £113.28

3. Amount over the limit: £13,136.40 minus £13,036.40 = £100

4. Allowance after the taper: £94 minus (£100 ÷ 3) = £60.67

5. Tax to pay: £113.28 minus £60.67 = £52.61

The taper starts from £94, not £93.28. That matches HM Treasury’s own worked example (someone £150 over the limit keeps £44, which is £94 minus £50) and its £13,319 cut-off (£13,036.40 + 3 x £94). Someone with exactly £13,036.40 has a bill of £93.28, so they only need £93.28 of the allowance to clear it. HMRC’s final rounding could differ by a few pence.

The table applies the same method to different amounts of extra income for someone who also gets the full new State Pension. It assumes income tax rates for England, Wales and Northern Ireland and that the extra income is from a pension, earnings or rent.

Extra income on top of the full State Pension	Tax in 2026/27	Tax in 2027/28 before the allowance	Tax you pay in 2027/28
None	£0	£93.28	£0
£100	£15.52	£113.28	£52.61
£150	£25.52	£123.28	£79.28
£200	£35.52	£133.28	£105.95
£250	£45.52	£143.28	£132.61
£300	£55.52	£153.28	£153.28
£500	£95.52	£193.28	£193.28
£1,000	£195.52	£293.28	£293.28
£2,000	£395.52	£493.28	£493.28
£5,000	£995.52	£1,093.28	£1,093.28

Two things stand out. First, once your extra income passes about £282 the allowance has gone and you are taxed exactly as before. Second, anyone on the full State Pension with more than a small amount of other income will pay around £98 more tax next year than this year, simply because more of the State Pension now sits above the Personal Allowance.

A small band with a 53% tax rate

The taper creates an odd pocket in the tax system. Between £13,037 and £13,319, every extra £3 of income costs you 60p in normal tax plus £1 of lost allowance. That is £1.60 on every £3, an effective marginal rate of about 53%. It only applies to income inside that £282 band, not to the rest of your income.

The sums are small, never more than £94 a year. But if you control when you draw money from a pension, it is worth knowing where that line sits so you don’t drift into it by accident.

03Five examples for 2027/28

Illustrative examples

Margaret has the full new State Pension of £13,036.40 and nothing else. Without the allowance she would owe £93.28. With it, she pays nothing and HMRC won’t send her a bill.

Keith has a partial new State Pension of £11,800 and a small workplace pension of £1,100, so £12,900 in total. He would owe £66. Because his total income is under £13,036.40, the allowance cancels it.

Pat has the full State Pension plus £150 a year of rental profit, a total of £13,186.40. Tax before the allowance is £123.28. Pat is £150 over the limit, so the allowance is cut by £50 to £44. Pat pays £79.28.

Sam has the full State Pension and a £1,200 workplace pension, a total of £14,236.40. That is above £13,319, so there is no allowance. Sam pays £333.28, which is £240 on the workplace pension and £93.28 on the part of the State Pension above the Personal Allowance. It will usually be collected through the tax code on the workplace pension.

Jean has the full State Pension and earns £300 interest on £7,500 in an easy-access savings account. That interest is covered by the starting rate for savings, so she pays no tax on it. But it still counts towards her total income, which is £13,336.40. That puts her over £13,319, so she loses the allowance and owes £93.28 on her State Pension. If the savings were in a cash ISA, her total income would be £13,036.40 and her bill would be zero.

Jean’s example is the one I expect to catch most people out. It is not intuitive that interest you pay no tax on can still cost you tax elsewhere, but HM Treasury’s explainer is clear that taxable savings income counts towards the limit even when the savings allowances cover it.

04Why is the State Pension now over the tax-free limit?

Two long-standing policies have been heading towards each other for years.

The Personal Allowance is frozen. It has been £12,570 since April 2021 and the Budget confirmed it will stay there until at least April 2031. As incomes rise and the threshold stands still, more people are pulled into paying tax. This is known as fiscal drag.

The State Pension keeps rising. Under the triple lock it goes up each April by the highest of CPI inflation, average earnings growth or 2.5%. The Budget confirmed a 3.9% rise for April 2027, taking the full new State Pension to £250.70 a week.

Tax year	Full new State Pension	Personal Allowance	Allowance left over
2021/22	£9,339.20	£12,570	£3,230.80
2022/23	£9,627.80	£12,570	£2,942.20
2023/24	£10,600.20	£12,570	£1,969.80
2024/25	£11,502.40	£12,570	£1,067.60
2025/26	£11,973.00	£12,570	£597.00
2026/27	£12,547.60	£12,570	£22.40
2027/28 (confirmed)	£13,036.40	£12,570	None (£466.40 over)

Analysis by the House of Commons Library estimated that the freeze means around 1.6 million more pensioners paying income tax in 2027/28 than if the allowance had risen with inflation. The new allowance takes some of the lowest-income pensioners back out, but it does nothing for the majority who have a modest private or workplace pension on top.

05Who is most affected?

The new State Pension

State Pension age reached on or after 6th April 2016.

You usually need 35 qualifying years of National Insurance for the full £250.70 a week in 2027/28. Each missing year knocks off around £7.16 a week. If your State Pension is below the full rate, you have more room for other income before you reach the £13,036.40 limit, so a partial State Pension plus a small pension can now sit entirely inside the allowance.

The old basic State Pension

State Pension age reached before 6th April 2016.

The full basic State Pension rises to £192.10 a week, or £9,989.20 a year, from April 2027. On its own that is well below the Personal Allowance. Many people on the old system also get Additional State Pension (SERPS or the State Second Pension), and that can push them well over the limit.

Illustrative example

David receives the full basic State Pension of £9,989.20 and around £4,000 of Additional State Pension, about £13,989 in total. He is over £13,319 before any private pension or part-time work, so he gets no Pension Tax Allowance and pays around £284 in 2027/28.

Check your own figures. Before State Pension age, use the Check your State Pension forecast service on GOV.UK, and our State Pension age calculator to see when you can claim. If you already receive the State Pension, your annual uprating letter from the Pension Service shows exactly what you get.

06How is the tax collected?

The State Pension is paid gross, with no tax taken off. HMRC collects any tax due in one of three ways.

Through your tax code. If you have a workplace or private pension, or a job, HMRC adjusts the tax code on that income to collect the tax on your State Pension as well. If your State Pension alone is more than your Personal Allowance, the adjustment can take the form of a K code, which adds to your taxable pay rather than reducing it. That is why a small private pension can suddenly look very heavily taxed. Your exact code depends on your wider tax position.

By Simple Assessment. If there is nothing to adjust, HMRC sends a bill after the end of the tax year, usually payable by 31st January. If the Pension Tax Allowance cancels all your tax, you won’t get one. Any Simple Assessment for 2026/27 or earlier still has to be paid.

By Self Assessment. If you already complete a tax return, for example because you have rental income, the allowance is worked into your tax calculation.

Your first withdrawal from a private pension may also be over-taxed on an emergency code. See how pension emergency tax works.

If you pay Scottish income tax, you still qualify. The allowance is calculated at the 20% basic rate rather than the 19% starter rate.

07Small amounts of income that take you over £13,319

If you have the full new State Pension, you only have £282 of headroom before the allowance is gone completely. That is not much. Any of these could do it.

A small workplace pension. An old pot paying £25 a month is enough on its own.
Savings interest. At 4%, around £7,100 in a normal savings account produces enough interest, even though that interest is tax-free under the savings allowances.
Part-time work. Earnings count in full. You no longer pay National Insurance once you reach State Pension age, but income tax still applies.
Rental income. Profit from letting out a property counts towards your total income.
Dividends. Dividends from shares held outside an ISA count too.

08How to reduce the tax, or keep the allowance

Move savings into ISAs

This is now the most useful step for many people near the limit. Interest, dividends and gains inside an ISA are tax-free and do not count towards your total income, so they cannot push you over £13,319.

The Budget also scrapped the planned cut to the cash ISA limit for under-65s. Everyone can still put up to £20,000 a year into a cash ISA, a stocks and shares ISA, or a mix of the two.

Think about when you take money from a pension

If you have a defined contribution pension, you have some control over how much taxable income you take and when. Tax-free cash, normally up to 25% of the pot, does not count as income. Taking a little less taxable income in a year, or taking only tax-free cash, could keep you inside the allowance. Taking a larger lump in one year and nothing the next could make more sense than a small withdrawal every year that drags you over the line each time.

That said, the allowance is worth £94 at most. Before changing your withdrawals, think about the wider tax position over several years and how much accessible income you actually need. Leaving money you need in a pension just to keep a small tax reduction rarely makes sense.

Use the Marriage Allowance

This can save up to £252 a year. If you are married or in a civil partnership, one of you has income below £12,570 and the other is a basic-rate taxpayer, the lower earner can transfer £1,260 of their Personal Allowance to their partner.

Illustrative example

Partner A has a private pension of £9,000 a year. Partner B has the full State Pension plus a small pension, £14,000 in total. Partner B is above £13,319, so gets no Pension Tax Allowance and pays tax on £1,430. Partner A transfers £1,260 of allowance, and Partner B’s tax bill falls from £286 to £34, a saving of £252 a year. You apply once online and can backdate the claim for up to four years.

Marriage Allowance is most useful where the receiving partner is above £13,319. If their income is inside the Pension Tax Allowance range, much of their tax may already be cancelled. The Pension Tax Allowance itself cannot be transferred between partners.

Use the savings allowances, but know their limits

Savings interest has its own allowances on top of the Personal Allowance. The starting rate for savings can make up to £5,000 of interest tax-free if your other income is no more than £12,570, reducing to nothing at £17,570. The Personal Savings Allowance adds a further £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.

These still stop you paying tax on the interest itself. They do not stop that interest counting towards the Pension Tax Allowance limit, as Jean’s example shows.

From April 2027 the tax rates on savings interest above these allowances rise by 4 percentage points, to 24%, 44% and 49%. That was confirmed in this Budget and is a bigger rise than the 2 points previously announced.

Topping up National Insurance is usually still worth it

If you have gaps in your National Insurance record, voluntary Class 3 contributions cost £956.80 for a full year in 2026/27 and add around £372 a year to your State Pension from April 2027. The 2027/28 cost hasn’t been published yet. It can be good value, but check your State Pension forecast first to confirm that paying for a year would actually increase what you get, as not every gap does.

The Pension Tax Allowance makes it better value for some people. Someone with 32 qualifying years and no other income would get about £11,919 a year in 2027/28. Topping up to 35 years takes them to the full £13,036.40, and because that is still within the allowance, they pay no tax on the extra. If you have other income, check whether the top-up would take you over £13,319. Even if it does, the extra pension usually repays the cost within a few years. Read more in our guide to how National Insurance qualifying years affect your State Pension.

Gift Aid

If you give to charity, Gift Aid extends your basic-rate band by the grossed-up value of your donations. At these income levels it won’t help with the Personal Allowance or the new allowance, but it can stop higher earners tipping into 40% tax above £50,270.

Deferring your State Pension

If you are still working and don’t need the State Pension yet, putting off your claim keeps it out of your taxable income while your earnings are high. Each nine weeks of deferral adds 1% to your pension, about 5.8% for a full year. You can still get the Pension Tax Allowance while deferring, as long as you are over State Pension age and within the income limit. The extra State Pension from deferring counts as income once it is paid. Whether deferring is worth it depends on your health, other income and how long you expect to draw it, not on the tax reduction. See our guide to when you can claim your State Pension and how deferring works.

09Could the rules change again?

Probably. The Pension Tax Allowance is only planned for three tax years, up to April 2030, and the government has said it will review it after that. The Personal Allowance is frozen until at least April 2031.

Separately, the government has proposed changing how the triple lock works from 2030, loosening the yearly link to average earnings. The outline was set out in a DWP factsheet in October 2026, but the detailed calculation and the law are still to come. See what the triple lock change means for you. Whatever happens, unless the Personal Allowance starts rising again, the State Pension will keep moving further above it.

If you pay Scottish income tax, the Scottish Budget on 3rd December 2026 will set your bands for 2027/28.

My view is that the sensible way to plan is to assume the freeze stays, treat the Pension Tax Allowance as a helpful bonus rather than something to build around, and expect any income you have on top of the State Pension to be taxed.

10Frequently asked questions

Is the State Pension tax-free, or will it be from April 2027?

No. It is taxable income and stays that way. It is paid without tax taken off, and any tax due is collected through your tax code on other income, a Simple Assessment bill or a tax return. From April 2027 the Pension Tax Allowance can reduce the income tax you owe, by up to £94, if your total income is low enough.

Do I need to claim the Pension Tax Allowance?

No. HMRC applies it automatically using the information it already holds about your age and income. Contact HMRC only if your income changes or you think it has used the wrong figures.

Do I need the full State Pension to qualify?

No. It is based on your total income, not where it comes from. People on a partial State Pension, the old basic State Pension, or no State Pension at all can qualify if they are over State Pension age and under the income limit.

Does savings interest count towards the limit?

Yes, even if it is covered by the starting rate for savings or the Personal Savings Allowance and you pay no tax on it. Interest earned inside an ISA does not count.

Will I get a refund if my tax bill is less than £94?

No. The allowance can reduce your tax to zero but it never creates a payment.

Can I transfer it to my husband, wife or civil partner?

No. It is worked out for each person individually and cannot be transferred.

How much can I earn before paying tax in retirement?

In 2026/27 your total taxable income can be up to £12,570 before tax is due. In 2027/28, if you are over State Pension age, you effectively pay no income tax on total income up to £13,036.40, and less than normal up to £13,319.

11What to do next

Start by adding up your expected income for 2027/28 from every source, including any savings interest outside ISAs. If it lands anywhere between £12,570 and £13,500, the steps above could make a real difference.

If you would like to talk it through with a regulated adviser, you can answer a few questions and we will put you in touch with an adviser who fits your situation.

12Sources and further reading

Important: This guide is financial education, not regulated financial advice or a personal recommendation. It reflects the rules announced at the Autumn Budget on 28th October 2026 and the 2026/27 and 2027/28 UK tax years. Tax rules change, and how they apply depends on your circumstances. If you are unsure, speak to an FCA-regulated financial adviser. You can also get free, impartial guidance from MoneyHelper, and from Pension Wise if you are 50 or over and have a defined contribution pension.

State Pension Tax in 2027: The New Pension Tax Allowance Explained

01What is the Pension Tax Allowance?