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Paul Lewis - how changes to pensions, income tax and National Insurance could affect you
Many of the changes announced in the Chancellor's 2008 Autumn Statement came into effect in April 2009. For most of us, they mean increased benefits and lower taxes – but there are exceptions. Here's what to expect:
PENSIONS
The state pension will rise from the week of April 6 by 5%. This record increase is due to the high rate of inflation last September. The basic pension of £90.70 a week will go up by £4.55 to £95.25. Most people get more or less than the basic, but whatever your state pension is, the 5% rise will be applied. Pension credit will go up by 4.8%, that means a rise of £5.95 to £130 a week for a single person and £9.10 to £198.45 for a couple.
Anyone who receives a state pension should have had a £60 bonus as part of the giveaway pre-Budget at the end of November. In effect, it brought forward the 5% rise in the pension due from April and is being paid as an addition to the £10 Christmas Bonus. To get the bonus, you had to be receiving one of the qualifying benefits in the week of December 22. They include state pension; pension credit; disability living, attendance or carer's allowances; and incapacity benefit. It's tax-free and does not count as income or capital for means-tested benefits. People who have deferred their pension do not get the bonus.
INCOME TAX
The income you can have without any tax being paid — the 'personal allowance' — is rising ahead of inflation for people under 65. The £600 boost to the personal allowance given in May for 2008/09 (compensation for the 10p tax fiasco) is being maintained, and the allowance is being increased by a further £310 to account for inflation and another £130 on top of that. The result is that the personal allowance for the under-65s will be £6,475 from April, more than £1,000 above the level originally fixed.
Allowances for people over 65 are rising with inflation — using that helpfully high September rate. They will go up by £460 to £9,490 for people aged 65-74 and to £9,640 for those who are 75 or over. Remember that your 65th or 75th birthday can be as late as April 5, 2010 to qualify for these higher allowances. In the year you first qualify, the Revenue will not apply the new level automatically unless you ask it to.
These higher allowances are phased out for people with incomes above a certain level. That limit is rising to £22,900. For incomes above that level, the age allowance is progressively reduced at the rate of £1 off the allowance for every £2 above the limit. Income between £22,900 and £29,000 is effectively taxed at 30%. The allowance for those with an income of about £29,000 or more is the standard single person's allowance. The 'total income' figure is reduced to take account of pension contributions and Gift Aid donations to charity.
If your income is higher than that there is some good news. The limit at which 40% higher-rate tax is paid is going up by far more than the rate of inflation. It is rising to £37,400 a year on top of the personal allowance, which means that higher-rate tax does not begin until your income exceeds £43,875 a year, a rise of slightly more than £3,000. That increase means a saving for those on higher-rate tax of just over £600 a year. That good news is tempered for people under pension age who are in work. The upper limit for paying full National Insurance contributions is also being raised to the same amount, costing them up to £420 a year.
From 2010, very high earners will face further tax rises. Anyone with an income over £100,000 will lose half their personal allowance using the same mechanism that reduces the age allowance. Half the personal allowance will disappear as income rises above about £106,500 and the rest will begin to go as income rises above £140,000. It will all be gone as income hits about £146,500. The effect of that is to tax income between £100,000 and £150,000 at an average rate of 45%. And from 2011 all income above £150,000 will be taxed at that level.
NATIONAL INSURANCE
Everyone who pays National Insurance contributions will face higher tax on their incomes from April 2011. The main rate of contributions will rise from 11% to 11.5% and the rate paid above the upper limit will rise from 1% to 1.5%. The rates for self-employed people and for employers will also rise by 0.5%. At the same time, the amount of earnings exempt from NI will rise to equal the personal tax allowance. Overall, people earning more than about £24,000 will pay higher NI contributions. National Insurance contributions do not have to be paid once you reach pension age, but self-employed people pay class 4 contributions for the whole year in which they reach it.
Another rise in NI will affect people who have reached pension age or expect to do so soon. The cost of voluntary NI contributions is going up by nearly 50% from £8.10 a week to £12.05. These are bought by people — mainly married women — who want to increase their pensions by filling gaps in their NI records. At present you can buy six years' contributions back to 2002/03 and, under a special rule, another six years' back to 1996/97. From April 6, 2009 that special rule ends for everyone who reached pension age on October 24, 2004 or later. People born before that can continue to buy those six early years until April 5, 2010. Those six years are charged at a special annual rate of between £309 and £351.
From April 6, 2009 a new rule will allow people to buy any six years from 1975/76 onwards, but that concession is restricted to people who reach pension age from April 6, 2008 to April 5, 2015. So anyone who reached pension age between October 24, 2004 and April 5, 2008 and needs to buy contributions for 1996/97 to 2001/02 should act before April 5, 2009 or they will lose the chance for ever.
Contributions for the years 2002/03 to date normally cost £8.10 a week, or £421 a year. But if you delay buying them until April 6, 2009 or later that cost will normally rocket to £12.05 a week or £627 a year. So if you can buy them before April it is best to do so.
There are exceptions to this rule. Contributions for 2006/07 will be £7.55 a week, not £8.10, if you buy them before April 6, 2009.
And if you reach pension age on April 6, 2010 or later you can still buy contributions for 2005/06 at the rate of £7.35 a week as long as you do so before April 6, 2012.
A married woman cannot buy contributions for any week in which she was entitled to pay the reduced married woman’s contribution. That right ends after two whole tax years when she did not actually pay reduced rate contributions.
Written by Paul Lewis. Paul is the editor of Saga Magazine's Money News section. Paul's opinions are his own and for general information only. Always seek independent financial advice. This article was first published in the February 2009 edition of Saga Magazine.
