The Money Saving Expert founder broke down the complicated rules on The Martin Lewis Money Show, explaining how the Government’s new pension tax allowance is designed to stop people whose only income is the full new State Pension from paying Income Tax.
However, there is a catch for those with additional income from private pensions, savings or other sources.
Under the changes, people of State Pension age will be able to receive up to £13,037 a year in total income without paying Income Tax.
The measure is intended to protect pensioners from being dragged into paying tax as the State Pension rises under the triple lock while the standard Personal Allowance remains frozen at £12,570.
Martin Lewis explains the new £13,037 pension tax allowance
Explaining the changes on his ITV programme, Martin said the standard Personal Allowance remains frozen at £12,570, while the State Pension increases each year under the triple lock.
The full new State Pension is therefore now slightly above the standard tax-free threshold.
Without the new measure, someone receiving only the full new State Pension would normally face an Income Tax bill on the amount above £12,570.
Martin explained that the difference would be £466, resulting in around £94 in tax at the basic rate of 20%.
However, the new pension tax allowance is designed to prevent this.
He said: “If you have total income up to £13,037 a year, note the full new state pension is £13,036.40, so it’s slightly higher.”
He stressed that the protection applies to people of State Pension age regardless of whether they receive the new State Pension, the old basic State Pension or another combination of income.
The additional allowance is worth up to £94 a year.
Martin also explained that the new allowance is based on a pensioner’s total income rather than simply the amount of State Pension they receive.
With the full new State Pension rising above the tax-free Personal Allowance from April, there’s a new ‘Pension Tax Allowance’ here’s how it works… For more incl students, ISAs, energy bills, and fiscal drag see the Martin Lewis Money Show Budget Special on https://t.co/9AOoZMIgkj
— Martin Lewis (@MartinSLewis) November 2, 2026
The £99 extra income that could trigger £52 more tax
The more complicated part of the new rules comes when pensioners have income above £13,037.
Martin explained that a tapering system will gradually remove the additional pension tax allowance.
For every £3 a pensioner earns above £13,037, they lose £1 of the extra allowance.
He used an example of someone earning an additional £99 to demonstrate how the calculation works.
Someone earning £99 above the £13,037 threshold would have total income of £13,136.
Under the normal tax rules, they would have £566 of income above the standard £12,570 Personal Allowance.
That would normally mean an Income Tax bill of around £113.
However, because their income is £99 above the new pension threshold, they lose £33 of their additional £94 allowance.
This leaves them with £61 of extra tax-free allowance.
After taking that into account, their tax bill would be around £52.
Martin highlighted the difference between earning £99 more and the amount of additional tax payable.
He said: “99 quid income more, 52 pounds of tax more. That is quite a high marginal rate, isn’t it?”
The example illustrates why pensioners with even relatively small amounts of additional income need to understand how the new rules work.
Pensioners earning £13,319 will lose the extra tax allowance
Martin went on to explain what happens when someone earns more than £13,037.
The additional allowance reduces by £1 for every £3 earned above the threshold until it disappears completely.
By the time a pensioner’s annual income reaches £13,319, the extra allowance will have been used up.
At that point, they will be back under the standard Income Tax rules.
Martin used the example of someone earning £13,319 a year.
They would have £749 above the standard £12,570 Personal Allowance, resulting in an Income Tax bill of around £150.
Once the additional allowance has disappeared, any further income will be taxed in the same way as income received by someone below State Pension age.
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What does the new pension tax allowance mean for people with private pensions?
The changes are particularly relevant to pensioners who receive more than just their State Pension.
Someone might receive the full new State Pension alongside a small private pension, savings interest or income from another source.
Under the new arrangements, their combined income will determine whether they remain within the £13,037 threshold or begin losing the additional allowance.
