About 500,000 UK pensioners are expected to receive an income tax reduction in 2027-28 under a new automatic allowance, a measure intended to ease tax bills as the full new State Pension rises above the standard tax-free threshold.
HM Treasury said the Pension Tax Allowance will begin in April 2027. People who are at State Pension age, or reach it during the tax year, will qualify based on their combined income from all sources.
The full reduction will apply to income up to £13,036.40, the annual value of the full new State Pension in 2027-28. Above that income, the reduction will fall by £1 for every additional £3 and will be unavailable at or above £13,319. The allowance will be worth up to £94 in its first year.
The government estimates about 290,000 pensioners will pay no income tax because of the measure in 2027-28. Others will receive a smaller reduction. HM Treasury expects around 1 million pensioners to benefit by the end of the current Parliament.
The allowance leaves the £12,570 Personal Allowance unchanged and does not make the State Pension tax-exempt. HM Treasury says the policy is designed to reduce the need for some pensioners to deal with modest tax bills as pension payments rise. Eligible people will receive the reduction automatically, without applying.
The new measure differs from a previously reported proposal to increase the general tax-free allowance for some pensioners. The Times reported that possible plan, which would have aligned the allowance with the full new State Pension; EconoTimes covered the earlier report. The government’s new policy is a separate tax reduction, rather than a higher Personal Allowance.
The measure is scheduled to run from April 6, 2027, to April 5, 2030, with its threshold rising alongside the full new State Pension over that period. HM Treasury plans to legislate through Finance Bill 2026-27 and will decide through its normal process whether the allowance continues after April 2030.