UK State Pension to Overtake Personal Allowance: Healey's Tax Fix 2026

The UK state pension is set to overtake the personal allowance, and Chancellor John Healey is expected to shield low-income pensioners from income tax with a new personal allowance. The full details will be revealed in Wednesday's budget, but here is what we know so far.

State Pension Set to Overtake Personal Allowance

The state pension rises each April under the triple lock, which guarantees an increase by the highest of inflation, wage growth, or 2.5%. This year, wage growth was the highest of the three at 3.9% for the relevant month.

As a result, from April 2027, the full new state pension will be worth £13,036 a year. Meanwhile, the personal allowance—the amount anyone can earn before paying income tax—has been frozen at £12,570 since 2021.

This year, the full new state pension was just under that figure, at £12,547. But with the pension rising faster than the frozen allowance, the gap will soon close and then reverse.

Two Different State Pensions

There are two state pensions: the basic state pension, received by older retirees, and the new state pension, received by anyone who retired after 6 April 2016. The new state pension is the one set to exceed the personal allowance.

This distinction matters because the proposed protection is likely to target the new state pension, which is more generous and currently just below the tax threshold.

Protection for the Poorest Pensioners

Many pensioners receive income from private and workplace pensions, which already puts them over the personal allowance. In fact, 9.6 million pensioners are already taxpayers.

As the prospect of the state pension overtaking the allowance loomed last year, the then chancellor was reportedly considering measures to protect the poorest pensioners. The new personal allowance is expected to ensure that those who rely solely on the state pension do not have to hand any of it to HMRC.

How the New Personal Allowance Could Work

The exact mechanism is not yet confirmed, but the new allowance is likely to be set at a level that keeps the full new state pension tax-free. This could mean raising the personal allowance for pensioners only, or introducing a separate threshold for state pension income.

Such a move would come at a cost to the Treasury, but it would prevent millions of low-income pensioners from being dragged into the tax system for the first time. The background to this story is set out in Pension Triple Lock: Is It Time to Unpick the Policy. A related thread runs through UK Companies Cut Staff as Pay Growth Slows: State Pension Could Rise.

• State pension to hit £13,036 a year from April 2027, overtaking the frozen personal allowance of £12,570.
• Triple lock ensures pension rises by highest of inflation, wage growth, or 2.5%.
• 9.6 million pensioners already pay tax due to private and workplace pensions.
• New personal allowance expected to shield those relying solely on the state pension.
• Full details to be announced in Wednesday's budget by Chancellor John Healey.

Comparison of State Pension and Personal Allowance

What This Means for Pensioners

If the state pension overtakes the personal allowance without intervention, pensioners relying solely on the state pension would face income tax on the excess. For many, this would mean a reduced net income and the administrative burden of filing tax returns. Earlier coverage in £100k Income Cliff Edge: 60% Tax and Childcare Loss shows how the argument developed. A closer look at the same subject appears in Reform UK Thinktank Calls for State Pension Abolition.

The new personal allowance would prevent this, ensuring that the state pension remains tax-free for the poorest retirees. However, it remains to be seen whether the allowance will be means-tested or universal for pensioners. Anyone following the wider picture can start with Ed Davey Promises £17bn Income Tax Cut for Lib Dems.

FAQ

The budget comes amid a difficult fiscal backdrop, with the UK borrowing less than expected but still facing pressure on public finances. As Healey vows a fiscal buffer, the cost of shielding pensioners from tax will be weighed against other spending priorities. For a deeper look at the borrowing figures, see UK borrows less than expected as Healey vows fiscal buffer.

Analysts note that while borrowing has fallen, it has not fallen as much as some had hoped. This could limit the chancellor's room for manoeuvre on tax and spending. The decision on pensioner tax will be a key test of the government's priorities. More on this can be found in UK borrowing falls less than expected: Healey's buffer plan.

Meanwhile, the budget also comes as Meta strikes a deal to shield CEO Mark Zuckerberg from a California wealth tax, highlighting broader debates about taxation of the wealthy. The contrast with the treatment of low-income pensioners will not go unnoticed. For details, read Meta's deal to shield Zuckerberg from California wealth tax.