The new Pension Tax Allowance and terminal illness changes explained
What is the Pension Tax Allowance?
It is a small income tax reduction, worth up to £94 a year, for pensioners whose income is close to the full State Pension.
The full new State Pension rises to £13,036.40 a year from April 2027. The personal allowance stays frozen at £12,570. Without help, many pensioners would pay a small amount of income tax for the first time.
The Pension Tax Allowance stops that. Budget 2026 confirmed it will run for three tax years, from 2027/28 to 2029/30. It goes up each year in line with the State Pension.
Its aim is simple: pensioners whose income is no more than the full State Pension should not have to deal with a tax bill, or a letter from HMRC, for a few pounds of tax.
Who qualifies
It is based on your total income, not just your State Pension.
- You are over State Pension age, or reach it during the tax year.
- Your total income from all sources is close to £13,036.40. That includes private pensions, work, savings interest and rent.
- ISA income does not count.
- You do not need to be receiving the State Pension.
You do not need to claim. HMRC applies it automatically, using the information it already holds. Any tax still due is collected in the usual way, through your private pension, Self Assessment or a Simple Assessment letter.
It is worked out at the 20% basic rate in Scotland too. If you get means-tested benefits, check whether the extra income affects them.
How much it is worth
The allowance reduces by £1 for every £3 of income above £13,036.40, and stops at £13,319.
| Example for 2027/28 | Total income | Result |
|---|---|---|
| Anne | £12,970 | Saves £80, pays no tax |
| Steph | £13,036.40 | Saves about £93, pays no tax |
| Jonathan | £13,186.40 | Saves £44 |
| Nadia | £13,400 | No allowance, owes £166 |
Jonathan’s income is £150 above the full State Pension. £150 divided by 3 is £50, so his £94 allowance falls to £44.
Around 290,000 pensioners will pay no income tax because of it in 2027/28, and around 500,000 will get some reduction. It is a reduction in tax owed, not a payment, and it cannot be passed to a partner.
Easier pension access for terminal illness
The Budget also changed the test for taking a pension early as a serious ill-health lump sum.
- Before: a UK doctor had to confirm life expectancy of less than one year.
- After: the test matches the benefits system: a person can reasonably be expected to die within 12 months.
- Doctors abroad: evidence can come from a doctor overseas, if the person lives there or the scheme is based there.
It starts once the Finance Bill 2026-27 becomes law. The lump sum is usually tax-free under age 75.
Getting your affairs in order
A serious diagnosis is a reason to get your will and LPAs signed sooner rather than later.
To make a valid will or Lasting Power of Attorney, you must be able to make your own decisions. An illness or its treatment can affect that, so it is best not to wait.
It is also a good time to check who your pension provider has on file to receive your pension, and to tell your executors where your documents are kept. For questions about how your pension fits with your will and estate plan, speak to us.
How PJH Estate Planning can help
PJH Estate Planning can review your will, LPAs and tax plans against the latest rules. Start with our free Estate Health Check: 10 quick questions that show any gaps in your plans. You can visit our offices, or we can visit you at home.
Sources
- GOV.UK: Budget 2026 overview of tax legislation and rates
- GOV.UK: Pension Tax Allowance explainer
- GOV.UK: Definition of terminal illness for pensions access
General information as at October 2026. Not legal, financial or tax advice.