Budget 2026 and public sector pensions: what changed for scheme members, and what didn’t

Budget 2026, delivered on 28 October, had no single headline for public sector pensions. What it had was a set of smaller decisions that reach the same people from different directions: a new tax allowance for pensioners, a confirmed cut in what employers pay into the schemes, a change to how the State Pension rises from 2030, and a fix to an old trap in how death benefits are taxed.

This guide takes Budget 2026 and public sector pensions measure by measure, working from the Treasury’s Budget documents and the Office for Budget Responsibility’s forecast published that afternoon. It covers members of the NHS, Teachers’, Civil Service, Local Government, Police, Firefighters’ and Armed Forces schemes, whether you’re still paying in, have a deferred pension or have retired.

Some of what scheme members were waiting for wasn’t in the Budget at all. That gets its own section. An absence is information too.

In short

• A new Pension Tax Allowance from April 2027 means people over State Pension age with total income no higher than the full new State Pension, £13,036.40, pay no income tax. It tapers away completely at £13,319, and scheme pensions count towards that total, so most people with a public service pension as well as a full State Pension won’t receive it.
• Employer contribution rates for the unfunded public service schemes fall from 2027/28, after the 2024 valuations. The government has cut departmental budgets by about £16 billion a year to match. No new rates were published scheme by scheme.
• The triple lock continues up to and including April 2029. From April 2030 it is adjusted so the State Pension keeps its value relative to earnings rather than outpacing them.
• The two-year rule on death benefits is removed for payments made on or after 28 October 2026, so a late payment no longer makes a tax-free lump sum taxable for that reason alone.
• Unchanged: inheritance tax on unused pensions from 6 April 2027, the annual allowance, the lump sum allowances, the salary sacrifice cap from 2029, and income tax thresholds frozen until April 2031.
• Not in the Budget: McCloud, scheme-by-scheme valuation results, the cost control mechanism and public sector pay for 2027/28.

The Pension Tax Allowance: who it helps, and why most scheme pensioners are outside it

From April 2027 the full new State Pension rises above the £12,570 personal allowance for the first time. HM Treasury’s explainer puts its full annual value for 2027/28 at £13,036.40, which works out at about £250.70 a week. Without a change, someone living only on that pension would owe a small amount of income tax, £93.28 a year in the Treasury’s own example, and HMRC would have to collect it.

The Budget’s answer is the Pension Tax Allowance. It’s a tax reduction, not a change to the personal allowance, and it applies to people over State Pension age or reaching it during the tax year. HMRC applies it automatically. There is nothing to claim. How much you get depends on your total income for the year:

The detail that matters most for Pension Plain readers is what counts as total income. The explainer says the allowance “applies regardless of where your income comes from”, and its list of income that counts includes “Occupational or private pension”. Your NHS, Teachers’, Civil Service, LGPS, Police, Firefighters’ or Armed Forces pension is an occupational pension. It counts in full, alongside the State Pension.

Put the two together and the arithmetic is short. If you receive the full new State Pension, a scheme pension of about £283 a year or more takes your total to £13,319, and the allowance is gone. That is our own calculation from the Treasury’s figures (£13,319 less £13,036.40), not a number the Treasury publishes, but it follows directly from them. So with a full State Pension, the allowance only reaches you if your scheme pension is smaller than that.

Three examples

These use 2027/28 figures and assume no other income. The tax sums are our own, at the 20% basic rate on income above £12,570.

• A retired nurse with the full new State Pension and an NHS pension of £8,000 has total income of £21,036.40. That is well above £13,319, so the Pension Tax Allowance does not apply. She pays tax on everything above £12,570, as she would have without the Budget.
• A former school caretaker with a part State Pension of £10,500 and a small LGPS pension of £2,400 has total income of £12,900. Without the allowance he would owe £66. Because his total is below £13,037, the full allowance removes it.
• Someone with a deferred pension they haven’t drawn yet and only the full new State Pension, £13,036.40, gets the full allowance and pays no tax. Once the deferred pension is paid, it counts towards total income, and the allowance shrinks or disappears.

A few more points from the explainer. Income from an ISA doesn’t count towards total income; savings interest outside an ISA does, even if no tax is due on it. Scottish taxpayers get the allowance worked out at the 20% basic rate, not the 19% starter rate. It cannot be transferred to a partner, it never produces a refund, and if you receive a means-tested benefit it may affect your entitlement. The allowance is set for three tax years, 2027/28 to 2029/30, and the government says it “will consider any arrangements beyond April 2030 in the usual way.”

We explained in September how your State Pension and your scheme pension are taxed as one, usually through the tax code on your scheme pension. That still holds for almost everyone with a scheme pension: the Pension Tax Allowance is aimed at people with little or no income beyond the State Pension.

Employer contributions: the fall from 2027/28 is confirmed

We reported in July that employer contributions to the public service schemes were set to fall in 2027, following the 2024 valuations and a change to the discount rate used to set them. The Budget confirms it. The OBR’s forecast says: “Employer pension contribution rates are reduced from 2027-28, providing savings to departments, and the government has correspondingly reduced RDEL by £16 billion a year.”

RDEL is the money government departments have for day-to-day spending. So the saving does not stay with the employers: the Treasury has taken back from departments roughly what they save on pension contributions, “with a view to ensuring that departments are no worse or better off”, in the Budget’s words. The OBR adds that the lower contributions raise spending on the pensions side of the accounts “by a similar amount”, which makes the change “broadly neutral for overall spending.” It also gives the discount rate behind it: the Treasury raised it “from CPI+1.7% per year to CPI+2.0% per year in May 2026.”

There is one group the OBR singles out. Some employers in the public service schemes are not funded through departmental budgets, “for example, teachers at independent schools or at some universities which use the public service Teachers’ Pension Scheme”. Their lower contributions are not clawed back, which the OBR estimates adds an average of £1.1 billion a year to spending between 2027/28 and 2031/32.

What the Budget doesn’t give is the new rate for each scheme. Those come from the schemes and their departments. None of this changes what you pay in or what you build up, either: member contribution rates and the benefits you earn are set separately, in each scheme’s own rules.

The State Pension: April 2027, and the change from 2030

Most public service pensioners draw the State Pension as well, so how it rises matters alongside the April 2027 increase to public service pensions. The Budget says the State Pension “will continue to rise by the highest of 2.5%, inflation or earnings growth each year through to April 2029”, the triple lock as it stands. That takes the full new State Pension to £13,036.40 a year from April 2027.

From April 2030 the government is “adjusting the Triple Lock from April 2030 so that the State Pension rises each year by the highest of 2.5%, inflation, or the amount required to maintain its value relative to earnings as reached in April 2029.” So the earnings link stops pushing the State Pension ahead of wages and only stops it falling behind them. The Treasury expects this to save £15 billion a year by the late 2030s, money it says will help fund a National Care Service in England. Our guide to the triple lock explains how the adjusted version works, with a worked example.

Separately, State Pension age is already rising from 66 to 67. Our guide to State Pension age and public sector pension members covers how that interacts with your scheme’s normal pension age.

Death benefits: the two-year rule goes

When a member dies, the public service schemes can pay a lump sum death grant. Under the current rules, a lump sum paid outside a two-year window can be taxed even though it would otherwise have been tax-free. Scheme paperwork usually measures that window from when the scheme is told of the death, as our guide to Civil Service bereavement claims explains.

The Budget removes that rule. In the Red Book’s words, beneficiaries “will no longer be taxable solely because tax-free pension and lump sum death benefits are paid more than two years after the member’s death.” It applies to any payment made on or after 28 October 2026, and it will be legislated in the next Finance Bill. That matters most for families caught in long administrative delays. A separate change, also through the Finance Bill, alters how tax is assessed and collected when a lump sum death benefit goes over the lump sum and death benefit allowance.

Inheritance tax on unused pensions: still April 2027

The Budget does not change the plan to bring “Most unused pension funds and pension death benefits” into the value of an estate for inheritance tax “from 6 April 2027”. That was legislated in Finance Act 2026. The Budget adds two technical changes for whoever administers the estate: a prospective personal representative will be able to direct a pension scheme to pay the inheritance tax due to HMRC when certain conditions are met, and there is a choice in how pension amounts are treated when part of an estate is left to charity. Our executor’s guide to pension inheritance tax sets out how the rules apply to public sector families.

What stayed the same

• Pension tax allowances. For 2027/28 the annual allowance stays at £60,000 and the money purchase annual allowance at £10,000. The lump sum allowance stays at £268,275 and the lump sum and death benefit allowance at £1,073,100. There is nothing on tax-free lump sums.
• Salary sacrifice. The cap announced at the 2025 Budget is unchanged: from 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance.
• Income tax thresholds. The personal allowance stays at £12,570 and the higher-rate threshold at £50,270, held until April 2031. Pensions in payment rise with inflation each April while the thresholds stay put, so more of each pension is taxed over time.
• Headline tax rates. There is no increase to the main rates of income tax, National Insurance or VAT.

For the Local Government Pension Scheme: a stamp duty relief for pooling

The LGPS is the only funded public service scheme, so it holds real investments. The Budget introduces a Stamp Duty Land Tax relief “for the pooling of Local Government Pension Scheme (LGPS) debt assets, situated in England and Northern Ireland, to support LGPS reforms”. It applies to transactions from 28 October 2026 and before 1 April 2032. It concerns how funds move investments into the shared asset pools; it does not change members’ benefits. For how the funds stand, see our piece on LGPS funding levels after the 2025 valuations.

Budget 2026 and public sector pensions: what wasn’t there

We searched the Red Book, the OBR’s forecast, the policy costings and HMRC’s overview of tax changes for the things public sector members ask us about most often. None of these appear:

• McCloud. No mention of the remedy, its deadlines or its administration. Our McCloud remedy explainer is unchanged.
• Scheme valuations and the cost control mechanism. The 2024 valuation appears only through its effect on employer contributions; no scheme-by-scheme results and nothing on the cost cap.
• Public sector pay for 2027/28. No pay settlements. The one pay item is £150 million of savings “repurposed to support the costs of the 2026 police pay award in England and Wales”.

Frequently asked questions

Pension Plain’s take

The Pension Tax Allowance will be reported as tax relief for pensioners, and for a small group it is. But it’s built for people whose income is the State Pension and very little else, and that is rarely a public service pensioner. For most of our readers, the real news in Budget 2026 for public sector pensions is quieter: the employer contribution cut is now certain, the two-year trap on death grants is gone, and the State Pension’s rise after 2029 will track earnings rather than beat them. The things members most wanted to hear about, McCloud above all, did not come up.

Where to get help

Pension Plain explains how the rules work. It does not give financial advice, and nothing here is a recommendation about any pension decision.

• Your scheme administrator holds your record and can confirm your pension and how your scheme applies these rules.
• HMRC deals with your tax code and income tax: gov.uk/contact-hmrc
• MoneyHelper offers free, impartial, government-backed guidance on pensions: moneyhelper.org.uk
• For regulated advice on your own position, an FCA-authorised adviser is the route. The register is at register.fca.org.uk

Pension Plain is not authorised or regulated by the Financial Conduct Authority. This is information, not advice.

Sources

• HM Treasury, “Budget 2026 document”, 28 October 2026
• HM Treasury, “Pension Tax Allowance Explainer”, 28 October 2026
• Office for Budget Responsibility, “October 2026 Economic and fiscal outlook”
• HM Treasury and HMRC, “Budget 2026: Overview of tax legislation and rates (OOTLAR)”
• HM Treasury, “Supporting documents for Budget 2026”

Fact-checked: 28 October 2026