The £94 pension tax fix: What pensioners need to know before April

IN SUMMARY: A new government tax allowance will protect many pensioners from an unexpected tax bill. But savings interest and pension withdrawals could still catch people out.

What’s happening

From April 2027, the full new State Pension will rise to £13,036.40 a year, taking it above the frozen Personal Allowance of £12,570 for the first time.

Ordinarily, that would leave pensioners facing an income tax bill of around £93. However, the government has introduced a new Pension Tax Allowance worth up to £94 to prevent eligible people paying tax simply because their State Pension has increased.

If you’re of State Pension age and your total annual income is £13,037 or less, the allowance will cover the tax automatically.

The catch: A little extra income changes things

The protection isn’t unlimited. Once your total income exceeds £13,037, the allowance reduces by £1 for every £3 of additional income. By £13,319, it disappears completely.

Crucially, total income includes savings interest, even when that interest is covered by other tax-free savings allowances.

For example, someone receiving the full new State Pension could lose their entire £94 protection with just over £280 of additional savings interest.

Three ways to protect your position

1. Make use of ISAs

Interest earned inside a Cash ISA doesn’t count towards the Pension Tax Allowance calculation, making ISAs particularly valuable for pensioners who want to protect their £94 tax saving.

And now the Chancellor has now reversed the planned cut to the cash ISA allowance, you can continue to save up to £20,000 a year into Cash ISAs.

2. Understand your savings allowances

All basic-rate taxpayers have a Personal Savings Allowance of up to £1,000, which means you can earn up to £1,000 in savings interest without having to pay any tax on the income.

However, tax-free doesn’t necessarily mean invisible to HMRC. This savings interest can still count towards your total income and result in an income tax bill. Remember, this doesn’t happen if you earn interest within a Cash ISA.

3. Plan pension withdrawals

Your 25% tax-free pension lump sum is excluded from this income calculation. But outside of that, taking a large pension withdrawal in one tax year could push your income into a higher tax bracket or reduce your Pension Tax Allowance. Spreading withdrawals across tax years may help.

And my final tip… don’t leave it until April to think about this.

The new Pension Tax Allowance offers welcome protection, particularly for people whose only income is the State Pension. But it doesn’t mean every pensioner will automatically avoid an income tax bill.

If you have savings, a private pension or other sources of income, it’s worth reviewing your arrangements before the new rules take effect.

Check where your savings are held, consider the timing of any pension withdrawals and, if you’re unsure how the changes affect you, consider speaking to a regulated financial adviser.

Review where your savings are held, consider the timing of pension withdrawals and seek regulated financial advice if you’re unsure how the changes affect you.