Category Archives: Pensions

Opinion, Pensions, Personal Allowance News, Tax Allowances, UK Budget

New Pension Tax Allowance in 2027

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Pensioners who are on a low income can expect a small tax break next year

John Healey announced in his recent budget that there would be an additional allowance for pensioners whose income was up to the level of the basic state pension but higher than the personal allowance of £12,570.

This additional personal allowance had been mooted since the increase in the basic state pension for 2027 had been confirmed to be over the level of the personal allowance. Andy Burnham had said that pensioners who purely relied on the basic state pension would not have to pay tax, but it was just the mechanism of how this would be done that was confirmed in the budget.

The allowance has actually been extended to include any income, as long as it is under the new basic state pension of £13,036.40. So, for example, if you have a state pension of £10,000 pa but a private pension of £3,000 pa then you would still get the extra allowance.

If your income is slightly higher than £13,037 then there will be some taper relief so that you will not be suddenly dropped back to £12,570 and then be worse off than if you earned less. So if your income is between £13,037 and £13,319 then you will receive some pension tax allowance.

For every £3 of income above the level of the basic state pension (i.e. £13,037 for 2027/28), your pension tax allowance will reduce by £1, so by the time you earn £13,319 you will not get any additional allowance and your personal allowance will be £12,570.

Tax v Pension/Earnings with and without the Pension Tax Allowance

This calculation is confusing in my mind and does not match up with the way taper relief works for those earning over £100,000. In the case of the Pension Tax Allowance, the reduction only matches up to the amount of tax saved and not the actual tax allowance as I would describe it.

Although the amount of earnings that you can now have without paying tax has been increased by £467, they have not called this the pension tax allowance. Instead, they have called the PTA £94, which is the amount of tax saved (467 x 20%). So you only get taper relief if your earnings are 3 x the amount of tax saved (3 x 94 = 282 plus the £13,037 = £13,319).

Contrast this to the taper relief on earnings over £100k which reduces the personal allowance by £1 for every £2 earned over that, so when you get to £125,140 (2 x 12,570 +100,000) you lose the personal allowance.

So why is the taper relief threshold not 3 x 467 + 13,037 = £14,438? I would love an explanation to this so if you know please comment as this is an opinion piece.

The value of the pension tax allowance will increase in line with the basic state pension each year.

The fact that the pension tax allowance has been introduced does imply that the government is not planning on increasing the personal allowance at any time soon. It is currently set to remain at £12,570 until the end of the 2030/31 tax year so I think we shouldn’t expect any changes until after that date.

Pensions

State Pension Age to Rise to 70

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The chancellor George Osborne confirmed in his autumn statement that the state pension age will rise to 70 for the under 30’s. The SPA has already been slowly rising for those over 30 to increase it from the old standard of 60 for women and 65 for men which went by the board when the pension ages were equalised for men and women. There are now stepped pension ages for those coming up to retirement in the next few decades.

Although this may strike some as a hard blow that they have to wait much longer in order to claim their state pension, in our view it is an inevitable progression and will likely rise even higher as time goes on. It seems impossible that pension ages will not increase further due to factors such as:

  • the increase in life expectancy
  • the cost of providing ever larger numbers of pensioners with this state benefit
  • the demographics of the population making the number of pensioners in relation to those under the state pension age much higher

The increase in state pension age will mean that most people will have to work longer before receiving the benefit. However, for a lot of people these days, working past 65 is not so much of a chore as people live longer lives, are healthier and don’t actually want to stop working at that age as they are fully capable of carrying on for much longer.

65 today is possibly considered similar to 55 a few decades ago both in terms of health and life expectancy. Not only that but people are also needing to work longer due to financial reasons and so cannot actually afford to retire.

One good thing about working for longer is that people are able to build up a bigger pension pot for themselves to give them a better retirement income. The key is to start building up this fund as soon as possible so that the benefit of compound interest can be gained over a longer period. Also annuity rates at an older age will be better so that more income can be gained from the same pot of pension funds (although it is debatable that in a few decades time due to increased life expectancy annuity rates will decrease to similar levels that you might find for younger ages now).

If you want to find out when your state pension age is then the Government provide an online calculator that can tell you either the age that you will be able to take your state pension and/or the amount that you can expect to receive.

State Pension Age Calculator

Just enter your date of birth and gender and it will tell you your State Pension Age.