New Tax Year Brings Saving And Pension Changes
The new tax year begins today and with it come numerous changes to the ways we earn, save and pay our taxes.
Several new policies took effect at midnight, including:
- A new State Pension system
- A higher personal tax threshold
- A reduction in the amount of tax you must pay on your savings
- A change in the way income tax is calculated in Scotland
Perhaps the most significant and immediate change will be to pensions.
The new ‘single-tier’ pension will affect millions across the country as the Government scraps the old Basic and Additional pension systems, which have been in place for decades.
Intended to be simpler than the previous system of a multi-tiered Basic State Pension, which could then be boosted by additional pension schemes such as the Second State Pension, the new scheme introduces a flat rate for everyone who is fully eligible.
Those who have paid National Insurance contributions for at least 35 years at the time they retire will receive the flat rate of £155.65 a week, while anyone who has contributed for a total of less than 35 years but more than 10 years of their working life will be paid a lesser amount.
A Handy Guide To The New Tax Year
According to the Treasury, over 75% of women and over 70% of men will gain in the first 15 years of the new State Pension, and by 2030 over three million women stand to gain an average of £550 extra per year as a result of the new system.
Commenting on the changes, Chancellor George Osborne said: “Today’s reform of the State Pension is the most significant since its inception.
“The new system means that at last, people will have certainty in what they can expect from the state in old age – and for many women and the self-employed, it will be more generous.
“People will know that the full amount when they reach state pension age will be over £8,000 a year in today’s money, so they can plan other retirement saving they may want on top.”
But concerns have been raised that the new system unfairly penalises those who took part in workplace pensions in the past.
Many company pensions allowed their employees to ‘contract out’ – that is, pay a lesser rate of National Insurance on their monthly wages in lieu of paying into additional State pension schemes, as they felt their workplace pension would be enough to supplement their basic retirement income.
Under the new ‘single-tier’ scheme, anyone who was ‘contracted out’ will not be eligible for the full flat rate of £155.65, and will instead be paid based on the total amount of National Insurance they have contributed over the years.
The changes to savings have been much more universally welcomed.
Whereas previously any interest earned on savings was taxed at the same rate as income tax, individuals can now accrue up to £1,000 worth of interest without paying a penny – provided they don’t earn over £150,000 a year.
The amount of savings this interest represents depends on the interest rate offered by your bank or building society, but some sources say it could be as much as £76,000.
And income tax is seeing some changes too.
The Scottish government has now been given the power to alter income tax rates for those living in the country by setting their own rates, which will apply on top of a reduced base rate still determined by the levels set by UK government in Westminster.
This means those in Scotland could pay as much as 10% less income tax than earners in the rest of Britain – although Holyrood has chosen to maintain taxes at the UK rate for this year at least.
And the amount you can earn without having to pay any tax at all has also increased, rising from £10,600 in the tax year 2015/16 to £11,000 for the coming year.
However if you’re a high earner with over £100,000 worth of income annually you won’t benefit from this.
The £11,000 allowance begins to gradually reduce once you hit the £100,000 mark, until it ceases to apply at all if you earn over £122,000 a year.