Pension Tax Allowance: Why One Low-Earning Pensioner Will Pay Tax Next Year and Their Spouse Will Not

A married couple who both receive the full new state pension will face different income tax bills from April 2027 because only one of them has a small private annuity, according to a worked example from investment platform AJ Bell.

Under the new Pension Tax Allowance, the husband would pay no income tax, while his wife would owe an indicative £56 a year, according to AJ Bell pensions expert Rachel Vahey.

The measure, announced in the 2026 Budget, is due to take effect on 6 April 2027 and will apply to the 2027/28, 2028/29 and 2029/30 tax years, HM Revenue & Customs (HMRC) says.

How the New Pension Tax Allowance Works

Despite its name, the allowance is not an extra tax-free slice of income. HMRC describes it as a reduction in the income tax bill of eligible pensioners.

Its maximum value is 20 per cent of the gap between the full new state pension figure of £13,037 and the standard personal allowance of £12,570. That gap is £467, so the maximum reduction is £93.40.

Eligibility depends on having reached state pension age and on total income, rather than on actually receiving the state pension. Private pension income, earnings and other taxable income all count towards the limit.

HMRC says the reduction will be applied automatically each year, so eligible pensioners will not need to make a claim or contact the department. It should appear in tax codes or end-of-year tax calculations.

The benefit is tapered. It falls by £1 for every £3 of income above £13,037 and is withdrawn completely once income reaches £13,319. Pensioners above that level keep only the standard £12,570 personal allowance and receive no extra reduction.

Same State Pension, Different Tax Bills

The couple both turned 66 and began receiving the full new state pension in 2023. They asked how the next increase in their pension income would affect their tax once the new allowance is in force.

The husband's only income is the state pension of £13,037. That leaves £467 above the personal allowance, which would normally generate £93.40 in tax. The Pension Tax Allowance cancels that amount in full, so he pays nothing.

His wife also receives £105 a year from an annuity, taking her total income to £13,142. That is £572 above the personal allowance, which would normally produce a bill of £114.40 at the basic rate.

Because her income is £105 above the £13,037 threshold, her reduction is cut by £35. That leaves a reduction of £58.40 rather than £93.40, and an indicative tax bill of £56.

The calculation assumes the annuity is fully taxable and that she has no other income, allowances or reliefs. Individual circumstances, such as other pensions or earnings, could change the final figure.

Why Small Extra Income Can Change Tax

Ms Vahey described the calculation as 'quite complicated'. The taper means a small amount of extra income can have an outsized effect on the final bill, which could make the position harder for pensioners to follow.

The reduction shrinks as income rises, so two people on similar incomes can end up with noticeably different bills, as the couple's example shows in practice.

Pensioners are advised to check their tax calculations once the measure takes effect and to contact HMRC if they believe an error has been made or if their circumstances change during the tax year.