What Are the Budget 2026 Pension Changes?

Key takeaways

• The two-year rule on pension death benefits ends for payments made on or after 28 October 2026, removing an income tax charge that reached £135,000 on a £300,000 pot at the 45% rate.
• Tax-free cash wasn't touched. HMRC's rates annex holds the lump sum allowance at £268,275 and the annual allowance at £60,000 for 2027 to 2028.
• The Pension Tax Allowance removes up to £93.28 of income tax from 6 April 2027, and £283 of private pension income on top of the State Pension removes all of it.
• A £40,000 earner sacrificing 8% of pay faces £276 of National Insurance a year from 2029 to 2030, split £96 on the employee and £180 on the employer.
• Per £1,000 sacrificed above the £2,000 cap, a basic rate payer's own bill is £80 and a £90,000 earner's is £20, because employee National Insurance drops to 2%.

Every confirmed pension measure, and the date each one starts

You want to know what the Budget did to your pension. The short answer is that one measure started today and three start on 6 April 2027. One reaches back to April 2024, one waits on Royal Assent, one starts in 2029 to 2030, and the biggest doesn't bite until the next Parliament. Nothing in it changed the 25% you can normally take tax free. Taken together, the Budget 2026 pension changes are narrower than the noise around them.

The Chancellor delivered the Budget on 28 October 2026. That was the date the Office for Budget Responsibility had been commissioned to forecast for: "The Chancellor has commissioned the OBR to produce our next forecast on Wednesday 28 October 2026." Here are the eight measures this piece covers, with the date each has effect. Six come from HMRC's Budget 2026 Overview of Tax Legislation and Rates, the salary sacrifice cap is already on the statute book, and the Triple Lock adjustment is in the Budget document itself. A seventh item in the Overview, on consolidating defined contribution pensions, is left to a future Finance Bill and carries no date.

Three of those eight are pension changes for 2027, starting on 6 April that year. Four of them are worth arithmetic rather than description, and that's what the rest of this piece does. Four profiles: a £40,000 earner on auto-enrolment contributions, a £90,000 earner using salary sacrifice, a retiree with a £400,000 pot, and a death leaving a £300,000 pot after April 2027.

The Budget 2026 pension changes left tax-free cash and the annual allowance alone

This is the part worth saying plainly, because a lot of people spent the autumn expecting otherwise. Annex A of the rates document lists the pension allowances for 2027 to 2028, and every one of them is unchanged: lump sum allowance £268,275, lump sum and death benefit allowance £1,073,100, annual allowance £60,000, money purchase annual allowance £10,000, tapered annual allowance threshold £260,000.

The rate of relief is unchanged too. GOV.UK still describes relief at the "basic 20% rate" on contributions, with a further "20% up to the amount of any income you have paid 40% tax on" and "25% up to the amount of any income you have paid 45% tax on". If you were weighing up whether to act before Budget day, the answer turned out to be that nothing in the Budget moved it. We wrote about that choice before the event in should I take my tax free lump sum before the budget, and the mechanics in pension tax relief are the same today as they were yesterday.

What did change is the National Insurance treatment of how you pay the contribution, not the income tax relief you get on it. Those are separate systems, and only one of them moved.

A £40,000 earner sacrificing 8% of pay faces £276 a year from 2029

The salary sacrifice cap isn't new to this Budget. It's already law: the National Insurance Contributions (Employer Pensions Contributions) Act 2026 requires the first regulations to set the contributions limit at "£2,000 for a tax year", and the amendments apply from 2029 to 2030 onwards. What the Budget did was restate it, as "capping the amount of pension contributions that can be salary sacrificed".

Take the £40,000 earner. Sacrificing 8% of pay is £3,200 a year, so £1,200 of it sits above the £2,000 limit. Employee National Insurance on earnings between £242 and £967 a week runs at 8%, which on £1,200 is £96. The employer rate above the £96 a week secondary threshold is 15%, so the employer pays £180. Combined, that's £276 a year on a £3,200 contribution.

The income tax relief on the same £3,200 is 20%, or £640, and it doesn't change. So the cap doesn't reverse the deal. It takes £96 out of a £640 saving for the employee, and leaves the employer carrying £180 it didn't carry before.

At £90,000 the same cap costs the employee £140 and the employer £1,050

Now the higher earner. Sacrifice £9,000, which is 10% of £90,000, and £7,000 of it sits above the limit. Pay of £90,000 is about £1,730 a week, and £81,000 after the sacrifice is still about £1,557 a week, so the whole £7,000 falls in the band above £967 a week where employee National Insurance is 2%. That's £140. The employer pays 15% of £7,000, which is £1,050. Combined, £1,190.

The income tax relief on £9,000 at the 40% rate is £3,600, unchanged. For a fuller table of the cap by salary, we ran the numbers in salary sacrifice cap 2029.

Per £1,000 sacrificed, the basic rate payer's own bill is four times the higher earner's

Put the two profiles side by side and something awkward falls out. The £40,000 earner pays £96 on £1,200 of excess sacrifice, which is £80 per £1,000. The £90,000 earner pays £140 on £7,000, which is £20 per £1,000. Four times as much, per pound sacrificed, for the person earning less than half as much.

That isn't a quirk of the cap. It's the shape of employee National Insurance, which charges 8% up to £967 a week and 2% above it. The cap simply exposes the kink to a group of people who had been sitting on the other side of it. Note what this does and doesn't say: the employer's 15% is flat, so the total cost is still far higher on the big sacrifice. It's the employee's own share that inverts.

The Pension Tax Allowance removes £93.28, and £283 of private pension takes it back

From 6 April 2027 a new Pension Tax Allowance applies for 2027 to 2028, 2028 to 2029 and 2029 to 2030. HMRC describes its purpose as making sure "pensioners whose total income is up to the value of the full new State Pension do not have the administrative burden of paying small amounts of income tax via Simple Assessment".

The arithmetic is narrow. The Treasury's explainer says the full annual value of the new State Pension rises to £13,036.40 from 6 April 2027, which is above the £12,570 Personal Allowance. The explainer works an example at exactly that income, with the allowance "removing her £93.28 income tax liability". Then it tapers: "For every £3 of income above the full level of the new State Pension, your Pension Tax Allowance will reduce by £1."

So the whole thing lives inside a band about £283 wide. The explainer gives £13,037 as the income up to which the full allowance applies, and says that at "£13,319 or more, you will not receive any Pension Tax Allowance". Those two published figures are the rounded State Pension of £13,037 plus three times a rounded £94 allowance, which is why they sit a few pounds above what the unrounded £93.28 would give. The chart below shows the allowance collapsing across that band. At £13,100 of total income the tax due is £106 and the allowance removes £72.08, leaving £33.92.

The Treasury expects around 290,000 pensioners to pay no tax because of it in 2027 to 2028, with around 500,000 getting some reduction, rising to around 1 million by the end of this Parliament. For the interaction with the State Pension rise itself, see state pension increase april 2027.

A retiree with a £400,000 pot sees none of the new allowance

Here's where the band matters. A £400,000 pot gives a tax-free lump sum of 25%, or £100,000, well inside the £268,275 limit, and that's unchanged. But any drawdown income on top of the State Pension eats the new allowance almost immediately. Take £283 a year from the pot and the allowance is gone. Draw 4% of it, which is £16,000, and total income is roughly £29,036, which is nowhere near the £13,319 cut-off.

That's not a criticism of the measure. It was designed for people whose only income is the State Pension, and it does that. It's a correction to the idea that this Budget gave pensioners with private provision anything. For a given pot, the sequencing question is unchanged, and will i pay tax on my state pension in 2027 works through the bills at several income levels.

A £300,000 unused pot adds £120,000 of inheritance tax from April 2027

This is the measure with the largest numbers attached, and Budget 2026 amended it rather than announced it. HMRC's section 1.27 is headed "Inheritance Tax: Minor technical amendments to extension of Inheritance Tax to pensions from April 2027". HMRC confirms the start date again: "most unused pension funds and death benefits into scope of Inheritance Tax" from 6 April 2027. Budget 2026 adds technical plumbing, including letting "a prospective personal representative to direct pension scheme administrators to pay the inheritance tax due to HMRC".

Say an estate of £400,000 plus an unused £300,000 pot. Before 6 April 2027 the pot sits outside the estate, so inheritance tax is 40% of the £400,000 above the £325,000 nil rate band, which is £30,000. From 6 April 2027 the estate is £700,000, so the tax is 40% of £375,000, which is £150,000. The pot added £120,000, exactly 40% of itself, because the nil rate band was already spent.

Four details are worth knowing. "All death in service benefits payable from a registered pension scheme will be excluded" from 6 April 2027. Funds under £1,000 are out of scope. And personal representatives, who are the ones liable, can direct a scheme to "withhold 50% of the taxable benefits for up to 15 months from the date of death". Leave it to a spouse or civil partner and the estate pays nothing on it. The combined take once a beneficiary's income tax is added is worked through in pension inheritance tax 2027.

The two-year rule ended today, and it mattered more than its billing

This is the only measure that took effect on Budget day itself, and it's the one most likely to have been missed. Until today, GOV.UK's rule on inherited pots was blunt: if you're "paid a lump sum more than 2 years after the provider is told of the death" you "pay Income Tax on the whole lump sum". That applied even where the member died under 75 and the money would otherwise have been tax free.

HMRC is removing it. The Overview of Tax Legislation and Rates says the government will legislate in Finance Bill 2026-27 "to remove the two-year rule for pension and lump sum death benefits", and the measure applies to payments made on or after 28 October 2026. On a £300,000 pot that charge was large. Applied at the 20%, 40% and 45% rates in Annex A for 2027 to 2028, the whole-lump-sum charge came to £60,000, £120,000 or £135,000. Those are rate-by-rate figures rather than one bill, because a £300,000 lump sum received in a single year crosses several bands at once.

The reason it bit at all was administrative delay, not planning. Probate, a missing beneficiary, a scheme waiting on a death certificate: none of that is the beneficiary's choice, and the charge landed anyway.

Three smaller measures that got no coverage

The first is retrospective. Where a member died under 75 and the lump sum exceeded their available allowance, the excess will no longer be treated as the beneficiary's pension income. Instead HMRC gets "a practical, standalone process", charging the beneficiary at their marginal rate, with effect for lump sums paid on or after 6 April 2024. That reaches back more than two years.

The second changes who can get money out early. A serious ill-health lump sum becomes payable "where the pension scheme member can be reasonably expected to live for less than a year". It applies to uncrystallised rights regardless of age 75. A medical practitioner based outside the UK can provide the evidence where the member lives in that country.

The third opens a door that has been shut. From 6 April 2027, defined benefit schemes can "make direct payments of surplus assets to members, where permitted by scheme rules and subject to trustee discretion", taxed as pension income. It needs the scheme's funding conditions met and the member at Normal Minimum Pension Age. For someone in a well-funded final salary scheme, that's the measure with the most in it.

The Triple Lock change is the biggest number, and the objection to it is real

Most of the Autumn Budget 2026 pensions coverage led on the Triple Lock, and it was right to. Everything above is small against this. The Budget document commits to "Adjust the Triple Lock from the next Parliament", after which "the State Pension will track earnings over time". The stated saving is "£15 billion a year by the late 2030s, and by £50 billion a year by the late 2040s".

The Treasury's case is that it "removes the 'ratchet' effect, whereby the State Pension rises ever higher relative to earnings". The objection is straightforward and the document doesn't hide from it, since the saving is the whole point: a pension that tracks earnings grows more slowly than one that takes the highest of earnings, inflation or a fixed floor. Over two decades that compounds. The objection a critic can put is that the measure is announced by one Parliament and paid for by the next, which is the part a voter can dispute and a forecast cannot settle. The full new State Pension is £241.30 a week today, and what it becomes in the 2040s is the figure this measure moves.

What these figures cannot tell you

Three limits, stated plainly. The salary sacrifice arithmetic assumes your employer keeps its contribution unchanged after 2029; the Act caps the National Insurance relief, it doesn't say what employers do next, and there's no data on that yet because the change hasn't happened. The inheritance tax example assumes the nil rate band is already used by other assets, which is what makes the pot cost a flat 40%. On a smaller estate part of the pot falls inside the band and the figure drops. And the Pension Tax Allowance figures are for 2027 to 2028 only. It's legislated for three years, and the band it operates in moves every time the State Pension or the Personal Allowance moves.

One more, on the measures themselves: the Budget 2026 pension changes set out here are what HMRC published on 28 October 2026. A Finance Bill can change between publication and Royal Assent, and five of these eight are clauses in Finance Bill 2026-27 rather than law, with a sixth a technical amendment to legislation already passed.

What would change these numbers

The Personal Allowance is the hinge under the Pension Tax Allowance. It's £12,570 for 2027 to 2028, and the whole allowance exists only because the State Pension passed it. Unfreeze the Personal Allowance and the measure becomes unnecessary; hold it while earnings grow and the £283 band widens into something that matters.

For the salary sacrifice cap, the thing to watch isn't the £2,000 figure but the regulations, which the Act lets the government change, with parliamentary control required to reduce the limit. And for the inheritance tax measure, the number that moves is the nil rate band at £325,000, or £500,000 where a home passes to children or grandchildren. Both have been frozen long enough that the pot's effective rate depends more on them than on anything announced today. The pot and the estate move together, which is why those two thresholds now do more work in this measure than the pension rules do.