Policy paper

Reduction in Income Tax for eligible pensioners

Published 28 October 2026

Who is likely to be affected 

Individuals above the State Pension age, employers and pension providers. 

General description of the measure 

This measure introduces a reduction in the income tax liability of some individuals at or above State Pension age, known as the pension tax allowance (PTA). 

Individuals with total income up to the value of the full new State Pension will receive the full PTA. The maximum PTA is calculated by applying the basic rate of income tax (20%) to the difference between the Personal Allowance and the full new State Pension.

Eligibility is based on an individual’s total income, regardless of income source, and is not dependent on receipt of State Pension income. Individuals may therefore remain eligible where they have income from other sources, such as a private pension or income from work or self-employment.

Individuals with total income up to the value of the full new State Pension will receive the full reduction. The maximum tax reduction is equal to the tax due on income between the Personal Allowance and the full new State Pension.  

For individuals with total income above the value of the full new State Pension, the reduction will be withdrawn through a taper at a rate of £1 for every £3 of income above the full new State Pension amount. This means that the reduction continues until the Pension Tax Allowance is completely withdrawn. 

The government will uprate the value of the Pension Tax Allowance in line with the new State Pension across this Parliament. 

The tax reduction will be applied automatically by HMRC each year and eligible individuals will not need to contact HMRC or make a claim to receive it. 

Policy objective 

This measure will remove the disproportionate administrative burden faced by some pensioners when the full new State Pension exceeds the Personal Allowance, by removing the need for pensioners with income at or under the value of the full new State Pension to pay small amounts of income tax through Simple Assessment.  

Background to the measure 

The government has said it would ease the administrative burden for pensioners whose income is in line with the headline rate of the new State Pension, so that they do not have to pay small amounts of tax through Simple Assessment from 2027 to 2028. 

Detailed proposal 

Operative date 

The measure will have effect from 6 April 2027, for the tax years:

• 2027 to 2028
• 2028 to 2029
• 2029 to 2030 

Current law  

Income tax is charged by the annual Finance Act. The general calculation rules and reliefs are set out in the Income Tax Act 2007 (ITA 2007). 

Section 23 of ITA 2007 sets out the calculation of income tax liability. At step 6 of the calculation, tax reductions are applied. 

‘Total income’ is set out at step 1 of the calculation of income tax liability, detailed in section 23 of ITA 2007. 

Section 26 of the ITA 2007 sets out the list of tax reductions which can be taken into account at step 6 of the income tax calculation. 

Section 29 of the ITA 2007 sets a limit on the amount of tax which can be deducted at step 6 of the income tax calculation. The total figure at step 6 cannot exceed the amount calculated at step 5 of the income tax calculation. 

Proposed revisions 

Legislation will be introduced in Finance Bill 2026-27 to create entitlement to an income tax reduction for eligible pensioners in the tax years 2027 to 2028, 2028 to 2029, and 2029 to 2030. 

The amount of the tax reduction will be 20% of the amount by which the full value of the new State Pension for that tax year exceeds the Personal Allowance. 

The full value of the PTA will be applied for those above State Pension Age with total income at or below the value of the full new State Pension.

Where an individual’s total income for the tax year exceeds the value of the full new State Pension, the amount of the reduction is to be reduced by £1 for every £3 of income above the threshold, until it reaches £0. 

The tax reduction will never be more than the value of the individual’s total tax liability, so will not result in a payment. 

The tax reduction is given effect at Step 6 of the calculation in section 23 of ITA 2007.  

The legislation will be published in Finance Bill 2026-27. 

Summary of impacts 

Exchequer impact (£ million) 

2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031	2031 to 2032
–	-45	-90	-150	+50	-15

These figures are set out in Table 6.1 of Budget 2026 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2026. 

Economic impact 

This measure is not expected to have any significant macroeconomic impacts. 

Impact on individuals, households and families 

In 2027 to 2028, this measure is expected to take around 2990,000 pensioners out of paying tax, with around 500,000 pensioners benefitting from a tax reduction from the PTA overall. By 2029 to 2030, this measure is expected to take almost 600,000 pensioners out of paying tax, with around 1 million pensioners benefitting from a tax reduction from the PTA overall. These individuals will be eligible if their total income is equal to or below the full new State Pension, or within the taper. The PTA means that pensioners with income at or up to the value of the full new State Pension will not be brought into paying tax because of State Pension uprating in this Parliament.  

This measure is expected to impact eligible individuals’ experience of dealing with HMRC as it will ease the burden associated with paying tax through Simple Assessment for those whose total income is up to and including the value of the full new State Pension. It is estimated that, in 2027 to 2028, the PTA will mean that over 200,000 pensioners will not receive a Simple Assessment bill that they would otherwise have received. It does not otherwise change any tax administration processes or obligations, and the tax reduction does not need to be claimed. For individuals receiving income through PAYE, the tax reduction will be applied automatically through coding changes. Individuals who file tax Self-Assessments will continue to do so if they are already required to for other purposes, with the tax reduction applied as part of their usual return where they are eligible and still have tax to pay.  

This measure may impact carers for individuals above State Pension age where they assist in managing finances, as they may have to read and understand the detail of this change. This will remove the need for some carers to support with the understanding and paying of Simple Assessments. 

This measure is expected to have no impact on family formation, stability or breakdown.

Equalities impact

This measure affects individuals over State Pension age with total income equal to or below the full new State Pension plus those within the taper.  Where a protected group is overrepresented in the population impacted by this measure, there may be a disproportionate impact. 

Individuals aged between the State Pension Age and 74 (65%) are overrepresented in this population compared to the UK population aged over State Pension Age (45%). 

While HMRC does not hold data on the disability status of those impacted by this measure, higher likelihood of having a disability is correlated with increasing age. Therefore, there is also likely to be an overrepresentation of disabled individuals in the affected population.  

Where data were available there were no other protected groups overrepresented. 

Administrative impact on business including civil society organisations 

This measure is expected to have a negligible impact on employers, pension providers and civil society organisations who work with people over State Pension age, by reducing the Income Tax liability of people over State Pension age whose total income does not exceed the value of new State Pension, plus the taper.  

One-off costs will include familiarisation with the change. Employers and pension providers will need to update systems so that the change is reflected in payslips or statements where necessary, but the Pension Tax Allowance will be applied automatically through existing HMRC coding processes. 

Civil society organisations who work with people over State Pension age will need to update their advice and materials. There are not expected to be any ongoing costs. 

This measure is expected overall to have no impact on businesses’ experience of dealing with HMRC as it does not change any tax administration processes or obligations for them. 

Operational impact (£ million) (HMRC or other) 

HMRC will need to make IT changes to support safe implementation of the policy change. These changes are currently expected to cost in the region of £3.5 million. 

Whilst HMRC expects a degree of initial contact from customers seeking support with this policy change, this contact is currently expected to be managed within business as usual processes. 

Other impacts 

Other impacts have been considered and none have been identified. 

Monitoring and evaluation 

Consideration will be given to monitoring and evaluating the operation of the Pension Tax Allowance, including the number of individuals estimated to be receiving the tax reduction and the cost of this. 

The Government will consider any arrangements beyond April 2030 in the usual way.

Further advice 

If you have any questions about this change, email incometaxstructuremailbox@hmrc.gov.uk.