The Pension Tax Allowance – How it affects you

The Autumn Budget on 28 October introduced a new relief with a potentially confusing name.

The Pension Tax Allowance is not about how much you can pay into a pension. It is aimed at pensioners on modest incomes, but the wider Budget carries messages for every saver.

How the Pension Tax Allowance works

The full new State Pension is due to rise to around £13,037 a year from April 2027, taking it above the frozen £12,570 Personal Allowance.

From then, anyone over State Pension age with total income of £13,037 or less will pay no income tax. HMRC will apply this automatically.

The allowance is worth up to around £93 a year. For every £3 of income above £13,037 it falls by £1, so it disappears entirely once income reaches £13,319.

Someone with total income of £13,100 would normally owe £106 in tax. Their income is £63 over the threshold, so their allowance falls by £21 to around £72, leaving around £34 to pay.

The relief is due to run until April 2030, though most people with a private pension will sit above the taper.

A steady Budget for pensions

Elsewhere, the Chancellor left pensions largely alone. The £60,000 annual allowance and the £268,275 cap on tax-free cash are unchanged, and tax relief still comes at your marginal rate. After months of speculation, this will come as a relief.

Changes already in law remain. From April 2029, only the first £2,000 a year of salary sacrificed into a pension will escape National Insurance.

Inheritance Tax is the real shift

From 6 April 2027, most unused pension funds will count towards your estate for Inheritance Tax. The Budget confirmed this and will let executors ask pension schemes to pay the tax directly.

The pension has long been the ideal asset to pass on. That is changing. Where death occurs after 75, beneficiaries may also pay income tax, so it may be time to rethink which assets you draw on first and who you have nominated. Spouse and civil partner exemptions still apply.

What to do now

If you would like to review your pension and estate plans, please get in touch.