2026 Budget: What Pensioners Need to Know About Tax, State Pension and Benefits

The 2026 Budget makes several changes that could affect pensioners’ income, even though it contains few broad changes to retirement planning. The biggest near term pressure falls on people who earn interest on cash savings or rental income: both will face higher tax rates from April 2027. There are also changes to the tax allowance for people on low incomes, future state pension increases and access to certain pension benefits.

For many households, the practical question is how these measures interact with existing income and savings. A new allowance may shelter some pensioners from a small tax bill, while the higher tax on interest and property income could reduce the amount left over for spending. The rules and thresholds below apply in the UK.

A new allowance for some pensioners

A pension tax allowance will be set at £13,037 a year, matching the full new state pension rate for 2027/28. It is intended to prevent pensioners from paying income tax solely because the state pension rises by 3.9% next April under the triple lock, while the personal allowance remains frozen at £12,570.

The new allowance tapers as income rises. For each £3 above £13,037, it falls by £1, and it disappears once total income exceeds £13,319. That means a pensioner with a modest private pension or savings interest could lose the benefit, even if their income is only slightly above the full new state pension.

The allowance is estimated to be worth around £93 in its first year. It may spare some pensioners the burden of small tax bills, but its gradual withdrawal means the extra income that triggers tax can also reduce the allowance. People with multiple income sources will need to consider their combined total.

Higher tax on savings interest

From April 2027, savings income tax rates will rise by two percentage points beyond the increase already planned. Basic rate taxpayers who earn more than £1,000 in savings interest will pay 24% on interest above their personal savings allowance, up from 20%. For higher rate taxpayers, the rate on interest above their £500 allowance will rise from 40% to 44%. Additional rate taxpayers, who have no personal savings allowance, will pay 49% rather than 45% on savings interest.

This could matter to pensioners who keep sizeable cash balances to cover everyday costs or unexpected bills. Keeping accessible cash can be useful, but it may mean more of the interest is taxed. One option to review is the £20,000 annual ISA allowance, which can shelter eligible savings from tax. Other approaches mentioned include transferring savings to a spouse, considering Premium Bonds, or looking at low-coupon short-dated gilts.

Each option has different features and may not suit every household. Before moving money, consider how much needs to remain readily available and whether its value is keeping pace with inflation. Investing may offer the potential for higher returns, but those returns are not guaranteed.

State pension increases after 2030

From 2030, the approach to the triple lock will change. Instead of applying the highest of CPI inflation, average weekly earnings growth or 2.5% each year, increases will be reviewed over time to keep the state pension on track overall.

The stated aim is to smooth increases and address the cumulative effect of unusually sharp rises, including the jump in earnings growth during Covid. For pensioners, the level of an increase may vary from year to year under this approach, so the annual rise will be less directly tied to the three existing measures.

Rental income will also face higher rates

From April 2027, tax on property income will increase by two percentage points in each marginal band: to 24% for basic rate taxpayers, 44% for higher rate taxpayers and 49% for additional rate taxpayers. Pensioners who rely on buy-to-let income will need to account for the change alongside higher tax on savings interest.

Reviewing how savings and property income fit into retirement plans may help households understand the effect before the change takes effect. Available ISA and pension allowances are among the factors to consider, along with the costs and access needs tied to each asset.

More flexibility for serious ill-health payments

The rules for serious ill-health pension lump sums will allow more flexible medical evidence. A lump sum may be paid when a scheme member can reasonably be expected to die within 12 months. Supporting evidence may also come from the member’s medical practitioner outside the UK.

The revised definition is intended to make pension savings easier to access in these circumstances. The precise wording of the new test has not yet been set out, so its eventual detail will determine how it works for members, practitioners and pension providers.

More time for some death benefit payments

The two-year rule for certain pension death benefits will be removed. At present, administrators must pay tax-free death benefits to beneficiaries within two years of learning that a member under 75 has died. Under the change, a lump sum paid more than two years after the scheme learns of the death will no longer face an income tax charge for being late.

The time limit will also be removed for beneficiary annuities paid from the deceased member’s drawdown funds and for funds designated for a UK resident under a pension scheme outside the UK. This may reduce the chance that beneficiaries face an unexpected tax charge because probate or paperwork delayed payment. The change to the timing rule sits alongside greater certainty about tax collection when the lump sum death benefit allowance is exceeded.

For pensioners and their families, the next step is to identify which income sources and pension arrangements are affected, then check the relevant dates and thresholds. The April 2027 tax changes make it useful to review cash savings and rental income before they take effect; the pension access and death benefit changes will depend on the final rules.