John Healey Introduces Pension Tax Allowance in 2026 Budget
Chancellor John Healey introduced a new Pension Tax Allowance to shield low-income pensioners from income tax as the state pension rises to £13,036.
Chancellor of the Exchequer John Healey announced a new Pension Tax Allowance in the 2026 Budget to protect approximately one million low-income pensioners from income tax. The measure follows a 3.9% increase in the full new state pension, which will rise to £13,036.40 in April 2027, surpassing the frozen standard personal allowance of £12,570.
The new allowance ensures that pensioners whose sole income is the state pension will not pay income tax during the current Parliament. For those with total income between £12,570 and £13,037, the allowance provides up to £94 in tax relief in the first year. This benefit tapers off at a rate of £1 for every £3 earned above the threshold, disappearing completely at £13,319. The policy is estimated to cost £45 million in its first year and £200 million annually by 2030.
Critics, including former pensions minister Steve Webb, warned that the taper creates an effective tax rate of 53% for some retirees and penalizes those with modest private savings. Separately, Prime Minister Andy Burnham announced plans to replace the state pension triple lock with a double lock starting in April 2030, basing increases on the higher of inflation or 2.5% to fund a new National Care Service in England.
Other Budget measures include raising the National Living Wage by 3.9% to £13.20 per hour and replacing the carer's allowance cliff-edge with a digital taper system to prevent overpayment debts. Healey also maintained the maximum tax-free private pension lump sum at £268,275.
