The Salary Calculator

Changes to pensions in 2021

by Madaline Dunn

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.

 

Tags: April 2021, Pensions, personal allowance, tax rates, The Salary Calculator

The IR35 changes: Who will be impacted by the reforms?

by Madaline Dunn

The off-payroll working (IR35) rules for the private sector have changed. These delayed reforms came into effect from 6 April 2021 and could significantly impact some contractors.

That said, according to research from EY TaxChat, very few contractors know what the changes actually mean for them. Of the 500 self-employed workers surveyed, only 14% claimed to be up-to-date.

At The Salary Calculator, we’ll have you clued up in no time at all. This article will explain:

• How the IR35 rules have changed
• Why the changes have been introduced, and
• What determines IR35 status

How have the IR35 rules changed?

The IR35 rules exist to ensure that contractors and those who hire them pay the correct amount of tax. It targets those who provide their services via an intermediary, such as a Personal Services Company (PSC).

The rules on who is classified as employed have not changed. However, the burden of responsibility for who determines this status has changed. 

It is now the responsibility of medium-sized and large businesses to determine the employment status of a contractor. 

These businesses must outline the reasons behind the contractor’s employment status in a Status Determination Statement. A contractor has the power to dispute this.

The changes do not apply to small businesses. To be classified as a small business, a business must have:

• A maximum annual turnover of £10.2 million 
• A balance sheet total of £5.1 million or less, and
• 50 employees or less

IR35 does not apply to sole traders. 

Why have the IR35 changes been introduced?

According to the HMRC, those who are “genuinely” self-employed should not be concerned by the changes. The new rules were introduced to ensure that more businesses are compliant with the law. 

Specifically, the reforms seek to crack down on companies who hire contractors through “disguised employment” for tax purposes, which, according to HMRC, is rife. Data shows that only around 10% of Personal Service Company (PSC) owners have assessed their status as employed.

What determines IR35 status?

IR35 status is largely determined by the level of supervision, direction and control a contractor has. 

So, if a contractor has the power to determine their working hours, with little or no oversight and only provides work outlined within the contract, they are likely to fall outside of IR35.

Other factors include whether or not the contractor provides their own equipment, if they are paid on a project-by-project basis, their level of exclusivity and mutuality of obligation (MOO).

It can be a bit of a minefield figuring out where you stand when it comes to IR35. But, don’t worry, there are resources out there to help.

HMRC has a tool called CEST which can help you work out whether or not IR35 applies. That said, it’s important to note that CEST should only be used as a guideline and does not provide a definitive answer on your IR35 status.

For more information about where you stand, head over to Employed and Self Employed to learn about the tax implications of different employment statuses.

 

Tags: April 2021, HMRC, income tax, IR35, national insurance, self employed

What you need to know about the new 1257L tax code

by Madaline Dunn

The world of tax can sometimes feel confusing. That said, it’s essential to stay informed and up-to-date with the latest tax changes. 

At The Salary Calculator, we’re here to help you every step of the way. So, there’s no need to worry.

One of the recent tax changes is the introduction of the new 1257L tax code. In this article, we’ll explain:

• What the 1257L tax code is
• What the numbers and letters mean
• Who the tax code applies to 
• The amount of tax you must pay under the 1257L tax code
• What to do if you think you have the wrong tax code

What is the 1257L tax code?

The 1257L tax code informs employers or pension providers how much tax you owe the government each month. It’s the most common tax code for 2021/22 and can be found on your payslip.

In line with finance minister Rishi Sunak’s announcement in March 2021, this tax code is expected to stay the same until 2026.

The tax code for the previous year was 1250L.

What do the numbers and letters mean?

Understanding the numbers and letters within the tax code is pretty straightforward. They indicate:

• The amount of tax-free income you are entitled to
• The amount of tax you must pay above the personal allowance
• Whether other circumstances must be considered

The number 1257 refers to the £12,570 personal allowance, and the letter L entitles you to a standard tax-exempt personal allowance.

An emergency tax code is indicated by the letters “W1”, “M1”, or “X” and is used in a number of situations. 

If an individual begins a new job, starts receiving a state pension, or begins working for an employer after a stint of self-employment, these letters will be attached to their tax code.

Who does the tax code apply to?

The 1257L tax code is typically used for individuals who have one registered employment, with no unpaid tax, tax-exempt income or taxable benefits.

How much tax must I pay under the 1257L tax code?

If an individual has the 1257L tax code, they can earn £12,570 before they are taxed. Per month this allowance works out as £1,047.

Above this threshold, individuals will be taxed on income earned. So, if you earn between £12,571 and £50,270, you will be taxed at the basic rate of 20%. 

Meanwhile, earnings within the bracket of £50,271 and £150,000 are taxed at the higher rate of 40%.  If you earn over £150,000, you’ll be taxed the additional rate of 45%.

What if I think I have the wrong tax code?

There are a number of legitimate reasons why your tax code may not be 1257L. That said, sometimes mix-ups happen, and you can end up with the wrong tax code. This can happen if you’ve recently changed jobs or if you’ve started a new job while receiving your pension.

Whatever the reason, if you think your tax code is wrong, it’s easy to fix. All you need to do is reach out to HMRC and tell them as soon as you spot the mistake. 

Contact HMRC either by phone on 0300 200 3300 or speak to an adviser via the HMRC Webchat.

Tags: April 2021, HMRC, income tax, personal allowance, Tax code

Updated for April 2021

by Admin

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.

Tags: April 2021, budget, income tax, national insurance, Pay As You Earn, student loan company, student loans, tax rates, The Salary Calculator