Around 200,000 pensioners in the UK will face an effective income tax rate of 53% under a new allowance announced in the Autumn Budget. The measure, due to take effect in April 2027, is designed to protect pensioners on modest incomes from paying tax on their state pension.
The Government’s new Pension Tax Allowance will prevent people whose total income does not exceed the full new state pension from facing small income tax bills. Yet the way this relief is withdrawn means some pensioners earning slightly above that threshold will face a higher marginal tax rate than many wealthier taxpayers.
The measure was announced by Chancellor John Healey on 28 October 2026. While pension specialists welcomed the protection offered to those on the lowest incomes, they also questioned the complexity of the new system and its implications for people receiving small private pensions.
How the New Allowance Creates an Effective 53% Tax Rate
From April 2027, the full new state pension will increase by 3.9% to £13,036 a year, exceeding the existing personal income tax allowance of £12,570.
To address this difference, the Government will introduce a Pension Tax Allowance for people over state pension age whose total income, regardless of its source, does not exceed the full new state pension.
According to pension consultancy LCP, the maximum tax saving will be approximately £94 during the 2027-28 financial year.
For pensioners earning above £13,037, however, the benefit will gradually disappear. The allowance will be reduced by £1 for every additional £3 of income, until it is completely withdrawn for those receiving £13,319 or more.
This creates an unusual outcome for pensioners earning between £13,037 and £13,319 annually.
They will pay the standard 20% income tax rate on additional taxable income while simultaneously losing relief at an effective rate of approximately 33%.
Together, these deductions produce an effective marginal tax rate of 53%.
Steve Webb, a former pensions minister and now a partner at LCP, described the arrangement as a “bizarre” tax rate affecting approximately 200,000 pensioners on relatively modest incomes.
He explained that every additional £100 in annual private pension income above the full new state pension level would increase their tax bill by £53.
Why Pension Experts Question the New Tax Arrangements
The new allowance is intended to prevent pensioners with limited incomes from being drawn into the income tax system simply because annual state pension payments have increased.
According to This is Money, approximately one million pensioners earning no more than the full new state pension could benefit from the protection.
Not everyone receiving a state pension will qualify for the full relief.
Some pensioners covered by the pre-2016 system receive additional payments through the State Second Pension or the State Earnings Related Pension Scheme, potentially taking their total income above the threshold.
Those receiving higher state pension payments after delaying retirement may also miss out.
Jon Greer, head of retirement policy at Quilter, welcomed the decision to base eligibility on total income rather than state pension payments alone.
He nevertheless described the policy as another temporary response to the effects of frozen income tax thresholds.
The Government has confirmed that the new allowance will increase alongside the full new state pension until at least April 2030. Meanwhile, the additional calculations introduced by its gradual withdrawal remain a concern for pension specialists.
