Pensions

Changes to pensions in 2021

The new tax year brings with it some significant changes to finances. One area affected is pensions. 

It’s important to keep in the loop about pension changes because it can mean that either your finances take a hit or you potentially see a boost!

At The Salary Calculator, we’ll make sure you’re up to date with all the latest information. In this article we’ll explore:

  • What annual allowance is
  • Whether any changes have been made to pension tax relief
  • What changes have been made to lifetime allowance (LTA)
  • Whether state pensions have been boosted
  • How employer contributions work

What is Annual Allowance?

Annual allowance refers to the total amount of pension contributions an individual can make each year while receiving tax relief. This includes contributions made by the individual, employer, and any other third party.

The annual allowance is capped at £40,000. If you exceed this amount, you will be taxed at the highest rate of income tax that you pay.

The Tapered Annual Allowance (TAA) was introduced back in 2016 and applies to high earners. For the tax year 2021/2022, the limit for threshold income and adjusted income is being increased to £200,000 and £240,000, respectively.

Are there any changes to pension tax relief?

Pension tax relief is applied to any governmental top-up contributions made to your pension.

If you are eligible for pension tax relief, the amount of relief you will receive is determined by the highest rate of income tax that you pay. So:

  • Those who are basic-rate taxpayers receive 20% pension tax relief
  • Those who are higher-rate taxpayers receive 40% pension tax relief
  • Those who are additional-rate taxpayers receive 45% pension tax relief

Those who earn under the Personal Tax Allowance (£12,570) are not eligible for pension tax relief.

No changes have been made to pension tax relief.

What are the changes to Lifetime Allowance (LTA)?

When it comes to pensions, the good news is that you can save as much as you want for your golden days. 

The amount of money you accumulate from all pension schemes in a lifetime before taxation is called your pension lifetime allowance (LTA). This was introduced back in 2006, and from 2021 through 2022, the LTA is £1,073,100.

In March, it was announced that LTA would be frozen at this limit until 2026, and it is estimated that the Treasury will generate £990m from this freeze.

Of course, LTA does not apply to everyone. An individual can work out whether or not it is relevant to them by calculating the expected value of their pension payout. To make this calculation, head over here.

If your pension pot exceeds the LTA, you will be charged 25% if it’s withdrawn as income. Alternatively, if it is withdrawn as a cash lump sum, it will be taxed at 55%.

Have state pensions been boosted?

In line with the triple lock ruling, state pensions have been boosted. On 6 April 2021, the state pension increased by 2.5%. That’s an increase of £4.40, bringing the weekly total to £179.60. Annually this works out as £9,339.20.

That said, you will only receive the full state pension amount if you have 35 years of National Insurance (NI) contributions.

Those who reached the state pension age before 2016 will receive the basic state pension, which is slightly less and boosted from £134.25 a week to £137.60.

How do employer pension contributions work?

In line with the Pensions Act 2008, an employer must offer a pension scheme to eligible employees and automatically enroll them once they have commenced employment. Employers must also make contributions to their employees’ pension scheme.

Currently, the minimum amount that an employer must contribute is 3%, and this has remained unchanged.

 

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Monday, May 10th, 2021 Pensions No Comments

None of the content on this website, including blog posts, comments, or responses to user comments, is offered as financial advice. Figures used are for illustrative purposes only.

Updated for April 2021

The Salary Calculator has been updated with the tax rates which take effect from 6th April 2021. Some of these rates are still subject to confirmation by the relevant governments, but the calculator will be updated if any of them change.

The biggest change is the introduction of “Plan 4” student loan repayments, for Scottish students. If your undergraduate loan is administered in Scotland and due for repayment you will start repaying under Plan 4 from April 2021, even if you have been previously repaying under Plan 1. Those already repaying their loans will switch from Plan 1 to Plan 4 repayments in April. This change does not affect students in England, Wales or Northern Ireland, and nor does it affect repayment of postgraduate loans.

If you would like to see the effects of this change, and any others from April 2021, try out The 2021 Salary Calculator by choosing the “2021/22” tax year from the drop-down box.

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The salary calculator you need for Australia

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The idea of working in Australia is a dream for many Britons and a reality for many more. Naturally though, the employment system – and more importantly, the wage payment system – is not always the same as that in the UK. In some cases, it’s just a matter of terminology, but in other areas it is more substantial.

However, thanks to one of the most popular and trusted finance organisations in Australia, figuring out what you can expect in your pay packet when you work Down Under, has been made a whole lot easier.

The Industry Super group (more about them later) recently added a simple, reliable salary calculator to their website. Its simplicity reflects the streamlined wage system in Australia and takes into account current tax rates – including whether you’re a resident or a visitor – and the Medicare Levy, as well as providing an estimate of the minimum superannuation (pension) payment from an employer. Let’s look at this one first.

 Superannuation

In Australia, the two main sources of income an employee can expect in retirement are the government age pension (much like the UK State Pension) and payments from their ‘superannuation’ (similar to our occupational or personal pensions).

By law, all businesses must make contributions to their employees’ superannuation (pension) account. This is called the Superannuation Guarantee, and currently, employers must contribute at least 9.5% of an employee’s wage on top of their salary. It is compulsory and cannot be bargained out of.

The theory is that businesses make regular payments into the fund, and when it comes time to retire, the worker has a healthy nest egg waiting for them, since super can’t be touched early and all funds try and achieve a good return on investment for their account-holders.

Every full-time and part-time employee is eligible for super, as are casual workers who are 18 years or over and earning more than $450 in a single calendar month. (The same rules apply for casuals under 18 who work more than 30 hours per week). This means that even those on a working holiday can be entitled to super.

There are two main types of super fund in Australia.

‘Retail’ funds are those owned and managed by banks and other financial services companies.

‘Industry’ funds are member-owned super funds with profits going to members, and for the past decade have tended to outperform their retail counterparts (source: Money Management Australia). As the name implies, industry super funds were originally set up for workers in specific industries, however nowadays, almost all of them are open to anyone.  Industry Super is the peak body for industry funds in Australia.

Tax rates and brackets

Australia’s tax system is managed by the Australian Taxation Office, usually just called the ATO. It looks after all aspects of national tax and also manages employers’ Superannuation Guarantee compliance.

Tax rates vary as a person earns more. There are also different tax rates depending on whether you are an Australian resident, a foreign resident or there on a working holiday. Thankfully, the Industry Super salary calculator can be customised to take your specific circumstance into account by clicking the ‘Adjust your situation’ button.

Medicare

An amount under ‘Medicare Levy’ is included in calculations.

Like the NHS, Australia has a modern, reliable and highly-regarded public health system through its universal health care insurance scheme called ‘Medicare’ (not to be confused with the US ‘Medicare’)

Instead of being funded through regular taxation however, it is primarily subsidised through the Medicare Levy, which is added to a person’s annual tax bill each year, based on their income.

Non-residents and those on a working holiday are generally exempt from paying the Medicare Levy, and again, this is recognised by the customisable calculator, and shown when you choose the ‘View tax breakdown’ option.

Other factors

The calculator also takes into account certain tax offsets that the Australian Government offers to low and middle income-earners once they submit their annual tax return, and also offers suggestions on reducing annual tax by making voluntary contributions to superannuation.

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Monday, July 20th, 2020 Foreign Currency, Income Tax, Jobs, Pensions No Comments

New tool for those thinking of retiring

If you are thinking of retiring soon, you might be wondering what kind of effect taking your pension would have on your take-home pay. This is not quite as simple as it might sound at first – the deductions from your pension income will not be the same as those on your salary. For example, you might be paying into a pension with some of your salary, which of course you would not do with income from a pension. And National Insurance is not deducted from pension income, whereas it is deducted from your salary if you are below state pension age.

With this in mind, I have combined a few options from the Two Jobs calculator (which shows you the take-home pay if you have two income at once) and put them in the Two Salaries Comparison Calculator (which compares two incomes side-by-side). Now, you can enter different options for the two different incomes you are comparing (e.g. different bonuses or overtime) – and you can also tick a box on the “Additional Options” tab to indicate that one or other of the incomes is a pension. This income will then not have National Insurance deducted from it – so you can enter the details of your employment for the first income and the details of your pension in the second income, tick the box to say the second job is actually a pension, and the calculator will deduct NI only from the first income.

If you are thinking of retiring, or just investigating a new job which would have a different salary and different deductions, try out the Two Salaries Comparison Calculator.

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New pension options

A while ago, I considered adding an option to the calculator allowing you to enter the amount in £ that you contribute each month, rather than the percentage. I thought this would be useful for people whose employers didn’t use their salary as the basis for the pension contributions but instead “pensionable pay” or something similar. I never got round to it because I thought it was too much of a niche and would make the calculator too confusing. However, the current Coronavirus situation with people being put on furlough made me realise that more people would be affected by this than usual, so I have added this option.

I had an email from a visitor to the site who said that his pension contributions in furlough were based on his full salary, not his reduced, furlough pay. As such, the percentage he was entering was giving the wrong deduction when applied to the reduced pay. To combat this, I have now added the option to switch from a percentage input to a £ input. Enter the amount you contribute, choose the pay period, select what kind of pension you have, and then the calculator will use this amount as your pension contribution. To make this even easier, on the Furlough Calculator you can enter the percentage as usual but tick the “Don’t reduce pension” option, in which case the calculator will automatically apply the pension contributions from your full salary to your reduced salary.

People who contribute to a personal pension (i.e., not through their employer) might also find it easier to use the £ amount option, as it may be easier than calculating the percentage.

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Wednesday, May 20th, 2020 About The Salary Calculator, Pensions No Comments

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