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.

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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Receiving a pension AND employment income

The Salary Calculator has had the Two Jobs calculator for a little over a year now. I have had a couple of people contact me and say that they haven’t been able to use it for their situation, which is that they are receiving one income as a pension but they have a second income from a job. The pension doesn’t have National Insurance deducted from it but the job does, and it wasn’t possible to reflect this in the calculator. However, this oversight has now been fixed!

On the Two Jobs calculator, the Additional Options tab now has two extra tick-boxes which you can use to indicate that either the first or second job is a pension (or indeed that they are both pensions). The calculator will then not deduct NI from the job that you say is actually a pension. On all other calculators, where you are only dealing with one income, you can just tick the “I do not pay National Insurance” box if this actually a pension.

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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

New tool – Sick Pay Calculator

With many people having to take time off work due to the current situation with COVID-19, I thought I would try to create a sick pay calculator. If you will be taking time off, and your employer’s policy states that you will receive reduced (or no) pay for your time off, the Sick Pay Calculator will try to estimate the effect on your take-home pay.

You can enter the number of days on a percentage of your normal pay (e.g. 50% for half pay), the number of days on Statutory Sick Pay (n.b. the calculator is not able to tell whether or not you are eligible for SSP, learn more from Citizens Advice), and the number of unpaid days. The calculator will use this information to estimate how your payslip will change.

Please note that different employers calculate things like unpaid leave in different ways, so the calculator’s results may differ from those on your payslip. Also, how much you will get paid for time off depends primarily on what your employer’s relevant policies state – you will need to know what you are entitled to before using the calculator.

Please let me know if you have any trouble using the calculator – I’ve tried to reduce the number of unexpected results, but it is possible with a lot of time off and with many options such as pensions and student loans applied that the answers given might be a bit unusual!

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