There was a flurry of pension rumours in the lead up to this year’s Budget and there was also a surprise in store on the day.
In the Budget, Rachel Reeves announced that tax free cash from a pension would be untouched, which was greeted with a sigh of relief. Though announced changes to salary sacrifice will add an extra layer of complexity and could disincentivise people from increasing their pension contributions above auto-enrolment minimums.
The real surprise was left for the State Pension, with the news that pensioners that have the State Pension as their sole source of income won’t be taxed on it – though only for the remainder of this Parliament.
This article isn’t personal advice. The government’s Pension Wise service can help if you’re over 50 and need guidance. Pension and tax rules can change, and any benefits depend on your circumstances. Remember, you can't usually access money in a pension until you're 55 (rising to 57 in 2028). If you’re not sure if an action is right for you, ask for financial advice.
Salary sacrifice cap introduced
From April 2029, a new limit on how much you can contribute to a pension under salary sacrifice and benefit from National Insurance (NI) savings will be introduced.
Employee contributions of more than £2,000 per year will keep income tax savings but will be subject to NI for both employers and employees.
The rationale behind the change is that benefits of salary sacrifice were overwhelmingly enjoyed by higher earners. The Budget documents said that the limit would shield 74% of basic rate taxpayers.
The challenge is while the limit might offer protection for many workers contributing at auto-enrolment minimums, it could disincentivise them from boosting their contributions beyond that level – especially if it means they breach the £2,000 limit and start to miss out on NI savings. Higher earners will also see an impact as their contributions will breach £2,000 per year.
Longer term there could be wider impacts.
Employers will need to pay 15% of NI on employee contributions over £2,000. It’s a further squeeze in costs that could lead them to restrict wage increases in future which will impact people’s resilience both in the present and the future.
However, the changes aren’t due to come in until 2029, so there’s time to prepare.
If you’ve got the spare cash, then it’s well worth making the most of the system as it currently stands and boost your contribution, so you can take advantage of those savings.
State pension income to be untaxed
The news that pensioners surviving solely on the State Pension won’t pay tax on it was the surprise of the Budget. This followed concerns that the level of the full new State Pension was creeping ever closer to the threshold for paying basic rate tax.
The comments have already drawn criticism from those who argue it is unfair on pensioners who already pay tax – some who might only be just over the threshold as they have a small workplace pension.
However, the tax reprieve only looks like a short-term thing with the Chancellor committing to the policy just for this Parliament. So, we can expect to see options for how the tax can be collected outlined next year.
You can find out how much you’re on track to receive by getting a State Pension forecast.
What can you do if you have gaps in your National Insurance?
It's important to make sure that you’re getting the most from the State Pension.
As it currently stands, you need at least ten qualifying years of NI contributions to receive any State Pension and 35 years’ worth to get the full amount. However, many people have gaps in their NI record due to time spent out of the workforce that prevent them from getting the whole amount.
You can check your NI record online and if you do have gaps, you can check if you can plug them for free by putting in a claim for a benefit that comes with an NI credit.
An example could be someone who was out of the workforce caring for a child but didn’t claim Child Benefit. If this is the case, you can see if you can backdate the claim and fill those gaps for free.
You also have the potential to pay for NI credits.
This can be a very efficient way of boosting your retirement income and you can plug gaps going back six years. However, before you hand over any money it’s important to check with the Future Pension Centre to make sure that you will really benefit from making these extra contributions. If you were contracted out at any point in your career you might find that those extra contributions wouldn’t make a difference to your state pension.
To supplement your State Pension, it could be worth thinking about using a private pension too, like the HL Self-Invested Personal Pension (SIPP).
Small actions like upping your pension contributions when you get a pay rise or new job is one way to boost your contributions.
The HL SIPP can help.
You’ll get access to a wide range of investments to pick from, including the HL Ready-Made Pension Plan, and a full range of retirement options.
And as well as getting tax relief, your pension can also grow free from UK income and capital gains tax.