What Is the Personal Allowance?
The Personal Allowance is the amount of income you can receive each tax year before you start paying income tax. For the 2026/27 tax year, the Personal Allowance remains frozen at £12,570. This freeze has been in place since 2021/22 and is scheduled to continue until at least April 2028.
The Personal Allowance applies to your total taxable income from all sources, including the State Pension, workplace pensions, private pensions, employment earnings, rental income, and savings interest above your Personal Savings Allowance. It is not a separate allowance for each income stream – your total income is aggregated and the Personal Allowance is applied against all of it.
For higher earners, the Personal Allowance begins to taper once your adjusted net income exceeds £100,000. It reduces by £1 for every £2 over this threshold, meaning it disappears entirely at £125,140. This tapering is relevant for pensioners who have substantial private pension income, rental income, or continued employment earnings alongside their State Pension.
How the State Pension Uses Your Personal Allowance
The State Pension is classified as taxable income by HMRC, even though no tax is deducted at source. When calculating your tax liability, HMRC counts the State Pension as the first slice of your income against the Personal Allowance.
For the 2026/27 tax year, the full new State Pension is £230.25 per week, which amounts to £11,973 per year. This leaves just £597 of your £12,570 Personal Allowance for other income before you start paying tax at the basic rate of 20%.
If you receive the full State Pension and have any other taxable income above £597, you will owe income tax on that additional amount. This includes workplace pension payments, private pension drawdown, part-time earnings, rental income, or interest above the Personal Savings Allowance.
State Pension vs Personal Allowance: The Numbers
The table below shows how the State Pension has been rising towards the Personal Allowance over recent years, and what it means for the remaining tax-free income you can receive from other sources.
| Tax Year | Full New State Pension | Personal Allowance | Remaining Allowance |
|---|---|---|---|
| 2022/23 | £9,628 | £12,570 | £2,942 |
| 2023/24 | £10,600 | £12,570 | £1,970 |
| 2024/25 | £11,502 | £12,570 | £1,068 |
| 2025/26 | £11,502 | £12,570 | £1,068 |
| 2026/27 | £11,973 | £12,570 | £597 |
As you can see, the remaining Personal Allowance after the State Pension has shrunk dramatically. In 2022/23, you could receive nearly £3,000 of other income tax-free. By 2026/27, that figure is just £597 – barely enough to cover a modest amount of savings interest or a small private pension payment.
How HMRC Collects Tax on Your State Pension
Unlike a workplace salary, the State Pension is always paid gross – there is no PAYE tax deducted before it reaches your bank account. HMRC uses other methods to collect any tax that is owed.
Tax Code Adjustment (PAYE)
If you have another source of PAYE income, such as a workplace pension or employment earnings, HMRC will adjust your tax code to collect the tax owed on your State Pension through that income stream. Your tax code will be reduced to account for the State Pension, meaning more tax is taken from your other pension or wages.
For example, if your State Pension is £11,973 per year, HMRC would reduce your tax code from 1257L to approximately 119L. This means only £1,197 of your other income would be treated as tax-free at source, rather than the full £12,570. The effect is that tax on your State Pension is collected automatically through your other income.
Simple Assessment
If you do not have any other PAYE income for HMRC to adjust, they may send you a Simple Assessment after the end of the tax year. This is a letter (or online notification) telling you exactly how much tax you owe and when you need to pay it. You do not need to file a Self Assessment tax return unless HMRC asks you to or you have complex income sources.
Self Assessment Tax Return
You will need to file a Self Assessment tax return if you have taxable income from self-employment, rental property, foreign pensions, or if your total income exceeds £150,000. In this case, your State Pension must be declared on the return alongside all other income, and any tax owed is calculated through the self-assessment process.
What If the State Pension Is Your Only Income?
In 2026/27, if the full new State Pension of £11,973 is your only taxable income, you will not owe any income tax because it falls below the £12,570 Personal Allowance. You do not need to do anything – no tax return is required and HMRC should not contact you about tax.
However, be aware that any additional taxable income – even small amounts – could push you over the threshold. Common sources that might tip you into tax include:
- Savings interest above the £1,000 Personal Savings Allowance (basic rate) or £500 (higher rate)
- A small workplace or private pension in payment
- Part-time or casual employment earnings
- Rental income from letting a room (above the £7,500 Rent a Room relief)
- Dividend income above the £500 dividend allowance
Tax-Free Income Sources That Do Not Affect Your Personal Allowance
Certain types of income do not count towards your taxable income and therefore do not reduce your Personal Allowance or create a tax liability. Understanding which income streams are tax-free is crucial for retirement planning.
- ISA withdrawals – All income and withdrawals from Individual Savings Accounts (Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs) are completely tax-free and do not count as taxable income
- Pension Commencement Lump Sum – The 25% tax-free cash you can take from your pension is not taxable. See our guide on 25% tax-free pension cash
- Premium Bonds prizes – All prizes from NS&I Premium Bonds are tax-free
- Pension Credit – This means-tested benefit is not taxable. See our guide on Pension Credit explained
- Attendance Allowance – This disability benefit for over-65s is tax-free
- Winter Fuel Payment – This seasonal payment is not taxable income
Marriage Allowance: Transfer Unused Personal Allowance
If one spouse or civil partner does not use all of their Personal Allowance, they can transfer up to £1,260 (10% of the Personal Allowance) to their partner through the Marriage Allowance. This can save the receiving partner up to £252 per year in income tax.
To be eligible, the transferring partner must have taxable income below £12,570, and the receiving partner must be a basic rate taxpayer (income between £12,571 and £50,270). This is particularly useful for couples where one partner has only the State Pension as income and is not using their full allowance.
You can apply for Marriage Allowance online through GOV.UK, and it can be backdated for up to four previous tax years. For more details on how pensions work for couples, see our guide on State Pension for married couples.
Strategies to Minimise Tax in Retirement
While you cannot avoid tax on the State Pension itself (if your total income exceeds the Personal Allowance), there are several legitimate strategies to keep your overall tax bill as low as possible in retirement.
1. Draw from ISAs First
If you have built up ISA savings alongside your pension, consider drawing from ISAs before or alongside your pension drawdown. ISA withdrawals are completely tax-free and do not count towards your taxable income. This means you can preserve more of your Personal Allowance for pension income. See our comparison guide on pension vs Stocks & Shares ISA.
2. Spread Pension Withdrawals Across Tax Years
If you are in flexible drawdown, plan your withdrawals carefully so you do not push yourself into a higher tax bracket in any single year. Taking smaller, regular withdrawals can be more tax-efficient than large lump sums. Read more in our guide on sustainable withdrawal rates.
3. Use Your Tax-Free Cash Wisely
You can take up to 25% of your pension pot as a tax-free lump sum. You do not have to take it all at once – phased withdrawals (known as Uncrystallised Funds Pension Lump Sums or UFPLS) allow you to take 25% tax-free from each withdrawal, with the remaining 75% taxed as income. See our guide on 25% tax-free pension cash.
4. Consider Pension Deferral
If you have enough other income to live on, deferring your State Pension increases it by approximately 5.8% for every full year you defer. While this does not reduce your overall tax liability, it can help you manage your taxable income in the years leading up to claiming. See our guide on State Pension deferral.
5. Use the Savings Allowances
Basic rate taxpayers receive a £1,000 Personal Savings Allowance, meaning the first £1,000 of savings interest is tax-free. Higher rate taxpayers receive £500. Additionally, the starting rate for savings income provides up to £5,000 of savings interest tax-free if your non-savings income is below £17,570. This can be particularly valuable for pensioners with minimal income above the Personal Allowance.
Scottish Income Tax and the State Pension
If you are a Scottish taxpayer, you pay income tax at rates set by the Scottish Parliament, which differ from the rest of the UK. However, the Personal Allowance of £12,570 still applies in Scotland. The Scottish starter rate of 19% applies to income between £12,571 and £14,876, meaning Scottish pensioners with modest income above the Personal Allowance pay slightly less tax than their English or Welsh counterparts on the first tranche of taxable income.
The interaction between Scottish tax rates and the State Pension is the same in principle: the State Pension uses up most of your Personal Allowance, and any other taxable income is then subject to Scottish income tax rates.
What Happens When the State Pension Exceeds the Personal Allowance
If the Personal Allowance remains frozen and the triple lock continues to push the State Pension upwards, there will come a point where the full State Pension exceeds £12,570. Based on current trends, this could happen around 2028/29 or 2029/30.
At that point, even pensioners with no other income would owe income tax on the amount above the Personal Allowance. HMRC would likely collect this through Simple Assessment, sending annual tax bills to millions of pensioners who have never previously paid tax in retirement.
The government could respond by unfreezing the Personal Allowance, adjusting the triple lock, or creating a specific exemption for the State Pension. However, no such changes have been announced for the current Parliament, and the freeze is expected to generate significant additional tax revenue. For the latest on pension rates, see our guide on the State Pension triple lock.