AFTER summarising the recent changes to personal tax allowances for the 2015-16 tax year, and showing how these have changed from the previous tax year, I shall outline the steps required to increase one’s State pension provision through use of the Government’s new savings scheme.
Our clients often ask us about this, as they want to make sure they benefit from the full state pension in retirement and fill in any gaps that may be present in their national insurance contribution record.
Personal tax allowances
The personal allowance increases to £10,600 for 2015/16. The only people who will continue to receive “age allowance” will be those born before 6th April 1938 and their personal allowance is now only £60 above the standard personal allowance.
From 6th April up to £1,060 (10% of personal allowance) can be transferred to a spouse/civil partner as long as neither partner is a higher-rate taxpayer. This is not likely to affect too many individuals as it will require one spouse to be earning less than £9,500 and the other under £42,385.
The basic-rate income tax band will be £31,785, so the higher rate threshold above which 40% income tax is payable will be increased to £42,385 for 2015/16.
The starting rate band for savings income increases to £5,000 from 6th April 2015 and the rate reduces from 10% to zero. This is welcome news.
An individual with non-savings income (earnings, pension, etc.) totalling below £15,600 (i.e. the personal allowance plus the starting rate band) will be able to take advantage of the 0% starting rate band for savings income (interest on deposits, offshore bond gains, etc.).
It has been confirmed that the starting rate band will remain at this level in 2016/17.
From April 2016 a tax-free personal savings allowance of £1,000 (or £500 for higher rate taxpayers) will apply to savings interest.
This is also welcome and means that, from April 2016, tax won’t be payable on interest if taxable income is less than £16,800. The personal savings allowance will not be available for additional rate taxpayers.
Buying extra State pension
The government has introduced a scheme enabling certain individuals to top-up their additional state pension (i.e. the State Second Pension or S2P) by making a payment under a new class of voluntary national insurance contribution.
The scheme will be available from October 2015 to April 2017 and will enable additional state pension to be increased by up to a maximum of £25 per week.
The scheme is only available to those reaching State pension age before 6th April 2016 (i.e. men born before 6th April 1951 and women born before 6th April 1953) and who will be entitled to the basic state pension or additional state pension.
The additional state pension top-up has been set at a rate that is deemed fair both to the individual and the taxpayer.
As an example, the contribution needed for an extra £1 pension per week for a person aged 65 is £890. For a 70-year-old the rate reduces to £779 and at age 75 the rate is £674. What makes this more attractive is that the pensions will increase in line with prices and includes a minimum 50% spouse’s pension, inheritable on death.
There is a government calculator available which shows the contribution needed to increase state pension by a given weekly amount (between £1 and £25) depending on your date of birth and the date the contribution will be made – this can be accessed at www.gov.uk/state-pension-topup.
To register an interest in the scheme and receive updates, you can e-mail email@example.com.
It is also worthwhile looking at whether you are due to receive the full basic State pension before making Class 3A contributions. If the basic state pension entitlement falls short of the maximum it is possible to top-up NI contributions (class 3).
This applies to anyone reaching state pension age both before and after 6th April 2016 although it is still not entirely clear how the single tier state pension will be affected for those reaching state pension age from 6th April 2016 onwards.
The government has said that such individuals won’t lose out by toppingup but firm details of the transition arrangements are not yet available.
People for whom buying additional NI years may not be advisable are married women who elected to pay reduced NI (they can’t replace any missing years where they paid reduced NI for the whole year) and those who are able to claim via their partner’s contributions.
In addition, those likely to be on a relatively low income in retirement need to consider whether they are likely to qualify for pension credit because, even if they have shortfalls in basic state pension, their income may be boosted beyond the level of the basic state pension if they are eligible for pension credit.
As every individual’s circumstances are different, it will be necessary to have a clear picture of both your expected and required income in retirement to assess whether it makes sense to pay voluntary NI contributions to top-up state pension income.