Increase in age for accessing pensions
The government will legislate in Finance Bill 2021-22 to increase the earliest age at which most pension savers can access their pensions without incurring an unauthorised payments tax charge, the normal minimum pension age, from 55 to 57. This increase will have effect from 6 April 2028.
This measure will affect individuals born after 5 April 1973 whose earliest date to access their pension benefits will see a two-year delay to those born on or before that date.
Amendments to Net Pay Schemes
The Autumn Budget documents include provisions to make top ups to pension schemes for non-taxpayers in net pay schemes, with effect from contributions made in the 2024-25 tax year onwards.
There are two methods of providing tax relief for employee contributions: Relief at Source (more common) and Net Pay.
Under relief at source, tax relief is given by a top up paid by HMRC into the pension scheme. So, if an employee wants to pay £100 into their pension, £80 is deducted from their after-tax income, and HMRC adds the extra £20 directly to the scheme.
Net pay schemes are those where the tax relief on employee contributions is given through the payroll. So, if an employee pays £100 into the pension as an employee contribution, £100 is deducted from their pay before tax (but not NI) is calculated, so that, if they are a basic rate tax payer, it still costs them £80.
The advantage of net pay schemes is that, for a 40% tax payer, relief is given automatically, whereas for relief at source, it has to be claimed.
The big disadvantage currently is that, if an employee does not pay tax, they get no tax relief. So, the £100 contribution costs them £100, whereas under relief at source, they still get the £20 rebate added to their scheme.
The Government announced prior to the Budget that they would temporarily suspend the earnings element of the ‘Triple Lock’ used to uprate the State Pension and Pension Credit due to distortions caused by Covid. Instead, for 2022-23 the new and basic State Pension, Pension Credit and survivors’ benefits in industrial death benefit will increase by the higher of CPI or 2.5%
Since CPI in September (the relevant month) was 3.1%, the increase will be 3.1%.
This means that the full single tier state pension (for those qualifying after April 2016) will increase from £179.60 per week to £185.15 per week. The basic state pension (for those reaching pension age before April 2016) will increase from £137.60 to £141.85.
The lifetime allowance increased in line with the Consumer Prices index to £1,073,100 for 2020-21.
The Chancellor announced in the Spring Budget that this allowance will be frozen until 5 April 2026.
The annual allowance remains at £40,000. This currently tapers to £4,000 for those earning over £240,000, reducing by £1 for every £2 that income exceeds £240,000.
There is a reduced annual allowance for those who have started to draw from a pension. This remains at £4,000 for 2022-23.