This piece first appeared in Saga Magazine in January 2009
The text here may not be identical to the published text

 

SOME YOU WIN, SOME YOU LOSE

Benefits up, taxes down – well mainly.

Pensions
The state pension will rise from the week of 6 April 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 it goes up by £9.10 to £198.45 for a couple. Normally pension credit is increased in line with earnings. But they rose by only 3.5% and the Government decided to add another £1.60 a week.

By now anyone who receives a state pension should have had a £60 bonus credited to their bank account. It was part of the giveaway pre-Budget at the end of November. In effect it brought forward the 5% rise in the state pension due from April. It is being paid as an addition to the £10 Christmas Bonus. It was originally introduced in 1972 when Edward Heath was Prime Minister. Then it was almost one and a half weeks’ pension. So the new total bonus of £70 is still well short of that. To get the bonus you had to be receiving one of the qualifying benefits in the week of 22 December. They include state pension, pension credit, disability living allowance, attendance allowance, incapacity benefit and carer’s allowance. The bonus is tax-free and does not affect entitlement to means-tested benefits. But people who are entitled to a state pension but who have deferred receiving it do not get the bonus at all.

Income tax
The income you can have without any tax being paid – called 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 as part of compensating people 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 people under 65 will be £6475 for the tax year 2009/10 which begins on 6 April. That is over £1000 more than the amount originally fixed for this year.

Allowances for those over 65 are rising with inflation – using that helpfully high September rate. They will go up by £460 to ££9490 for people aged 65-74 and to £9640 for those who are 75 or more. Remember that your 65th or 75th birthday can be as late as 5 April 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 limit. That limit is rising to £22,900. If your income is above that level then the age allowance is progressively reduced at the rate of £1 off the allowance for every £2 above the limit. So the age allowance will be reduced to the standard amount for younger people as your income reaches about £29,000 a year. Income £22,900 and about £29,000 is effectively taxed at 30%. Each extra two pounds of income is taxed at 20% and brings another pound into tax. So for an extra two pounds of income you are taxed on £3 which is 60p so the effective rate on the £2 is 30p in the pound. The income used is ‘total income’ and anything you contribute to a pension scheme or to charity under gift aid is deducted before that total is calculated.

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 £3000. That increase means a saving for those on higher rate tax of just over £600 a year.

That good news is tempered for those 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 £106,604 and the rest will begin to go as income rises above £140,000. It will all be gone as income hits £146,606. 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. These two changes will raise about £2 billion a year from those with very high incomes.

National Insurance
Everyone who pays National Insurance contributions will face higher tax on their income 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 that is exempt from NI will rise to be the same as the tax personal allowance. People earning more than about £24,000 will pay higher National Insurance contributions and these changes will raise £3.8 billion. 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 National Insurance will affect people who have reached pension age or expect to do so soon. The cost of voluntary National Insurance contributions is going up by nearly 50%. The rate will rise from £8.10 a week to £12.05. These contributions are bought by people – mainly married women – who want to boost their pension by filling gaps in their National Insurance record. At the moment you can buy six years’ contributions back to 2002/03 and under a special rule another six years back to 1996/97. From 6 April 2009 that special rule ends for everyone who reached pension age on 24 October 2004 or later. People born before that can continue to buy those six early years until 5 April 2010. Those six years are charged at a special rate between £309 and £351 for each year bought. From 6 April 2009 a new rule will let people buy any six years from 1975/76 onwards. But that concession is restricted to people who reach pension age from 6 April 2008 to 5 April 2015. So anyone who reached pension age between 24 October 2004 and 5 April 2008 and needs to buy contributions for 1996/97 to 2001/02 should act before 5 April 2009 or they will lose the chance forever.

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 6 April 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 a week if you buy them before 6 April 2009. And if you reach pension age on 6 April 2010 or later you can still buy contributions for 2005/06 at the rate of £7.35 a week as you long as you do it before 6 April 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.

There will be more details of buying back contributions and when it is – and is not – worth doing in the April Saga magazine.

 


All material on these pages is © Paul Lewis 2009