Page 11 - Budget Newsletter 2021

Pension Changes

There have been many important pension changes in recent years, with one major measure announced in last year’s
Budget:

• In 2020/21, there was a £90,000 increase to both of the annual allowance tapering trigger points, lifting them to
£200,000 (threshold income) and £240,000 (adjusted income). On the downside, the minimum tapered annual
allowance was cut from £10,000 to £4,000 (for adjusted incomes of £312,000 and over). The changes mean some
higher earners have become able to make larger contributions to their pension than they could before 2020/21,
although at the highest level the opposite is true.

• In April 2018, the lifetime allowance started to rise in line with inflation, after a series of cuts that reduced the
allowance from £1.8m to £1.0m. Indexation stopped again with the Spring 2021 Budget, meaning that the
allowance will stay at £1,073,100 until 5 April 2026. At current annuity rates, that allowance will buy a 65-year old
an inflation-linked income of about £30,350 a year before tax.

• Auto-enrolment minimum contributions into pension arrangements increased in April 2018 and again in April
2019. No further rises are currently scheduled, although it is widely accepted that today’s 8% minimum total
contribution rate is inadequate.

• The earnings threshold for auto-enrolment in 2022/23 is expected to remain at £10,000, with the upper limit held
at £50,270, in line with the higher rate tax threshold (outside Scotland). The lower earnings limit, which sets the
floor for the contribution earnings band, rises to £6,396.

• Changes to the SPA have finished for the time being with men and women currently sharing the same SPA of 66.
The next move to an SPA of 67 is due to be phased in over two years from April 2026.

• From 6 April 2028, the normal minimum pension age for drawing private pension benefits will rise from 55 to 57.
This is a step change – there is no phasing in.

Employer’s National Insurance Contributions

In September 2021, the Chancellor announced 1.25 percentage points would be added to the employer’s Class 1 NICs
rate in 2022/23, taking it up to 15.05%. In 2023/24, the Class 1 rate will drop back to its current 13.8%, but the
additional 1.25% will reappear as a separate Health and Social Care Levy (HSCL).

Self-employed NICs

The same 1.25 percentage points increase will apply to all Class 4 NIC rates for the self-employed in 2022/23, taking
the rates up to 10.25% on earnings between £9,880 and £50,270 and 3.25% above that level. Again, from 2023/24
there will be a reversion to the old NIC rates, with the 1.25% addition rebranded as the HSCL. However, there is
another revision to note: if you continue your self-employment beyond SPA (currently 66), then from 2023/24 you will
have to pay the new levy on your earnings, even though you are not liable to pay NICs.

The self-employed suffer a potentially smaller hit from the NIC rises than the shareholder director of a company who
will see two increases of 1.25 percentage points on salary – one at the employer level and the other as an employee.
Drawing income by way of dividends will avoid NICs, but dividend tax rates increase by 1.25 percentage points from
April 2022, and, for all but the smallest companies, a higher corporation tax arrives a year later.

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