Pension & Tax Changes
- National Insurance Contributions Increase for Pension Members and FAQ (State Pension)
- Annual and Lifetime Allowance Reduction (Tax Limits for Pension Savings)
- USS Pension Reform
Disclaimer about the information on this web page.
Increase in NI contributions & Single-tier state pension
The Government has changed the State Pension (see the bottom of this section for details) meaning that employers and employees in TPS, LGPS and USS pay more National Insurance (NI) from April 2016.
- If you are a member of TPS, LGPS or USS, your NI rebate (of 1.4% on a proportion of your earnings) ends from April 2016 onwards.
- This means that more NI contributions are deducted from your gross pay each month.
- This means your net 'take-home' pay is lower.
- Members of the NEST pension scheme are not affected (you already pay the full NI rate.)
- If you are NOT currently in a workplace pension scheme you won’t see any difference (you already pay the full NI rate.)
How much are NI Contributions going up?
Employee contributions increase by 1.4% of earnings in a certain “band” (earnings between the Lower Earnings Limit and the Upper Accrual Point – in 2015/16 this is earnings between £112 and £770 per week).
Below are some examples of extra NI contributions payable from 6 April 2016 for employees in one of our Defined Benefit pension schemes.
|Top of:||Gross Annual Salary from Pay Scales
||Gross Monthly Salary||Monthly NI before April 2016*||Monthly NI from April 2016*||Approximate Monthly NI increase||Approximate Annual NI increase|
* Calculated using the HMRC NI calculator (see below). Examples assume the individual is over 21 years old, full-time, with no deductions before tax, and are based on current NI thresholds (2015/16).
Estimate the impact on your NI contributions
You can use the HMRC's NI contributions calculator http://nicecalculator.hmrc.gov.uk/Class1NICs1.aspx to estimate the impact on you personally. Enter the following:
- Period of Pay: Monthly
- Gross Pay This Period: your monthly "Gross Pay" from your payslip.
- NI Category Letter: select Category D (with the rebate) to see your OLD "Employee's contributions due" up to and including March 2016
- Then Back, select Category A (without the rebate) to see your NEW "Employee's contributions due" from April 2016
- Your estimated NI increase is the difference between the two figures.
How much more NI does the University pay?
For each member of the relevant pension scheme employer contributions increase by 3.4% of earnings in a particular band. We estimate that this will cost the University more than £900,000 per year. See this NI Increase - UCEA infographic .
Why is NI changing?
Before April 2016, if you were a member of one of the University's "contracted out" pension schemes (like the LGPS, TPS, or USS) you have been paying lower NI contributions and have not been building up any Additional State Pension. Instead you have been building up benefits in the LGPS, TPS, or USS. The University has also been paying lower NI, but making substantial employer pension contributions on your behalf.
From 6 April 2016 the Basic and Additional State Pensions will be replaced with a flat rate State Pension (subject to qualifying criteria). This will end contracting-out: the rebate on scheme members’ and employers’ NI will cease and from 6 April 2016 all employees will pay the standard rate of NI, regardless of whether they are in a pension scheme or not (Government fact sheet). The Government’s aim is to introduce a simpler, fairer system, making it easier to plan their retirement savings.
The Government has said that the increase in NI that you pay will be offset by the additional state pension you are likely to receive: "...around 90 per cent of those reaching State Pension age in the first two decades after implementation will gain enough extra state pension over retirement to offset both the increased National Insurance contributions they will pay over the rest of their working lives and any potential adjustments to their occupational pension."
- Government Website for current staff: Your State Pension
- Government Website for people who start receiving the state pension before April 2016: My State Pension
See our Frequently Asked Questions below for more information.
Frequently Asked Questions on the single-tier state pension and NI increase
Please note that the University cannot provide financial advice. You may need to seek independent financial advice.
Q. What was the State Pension before the change?
A. Prior to April 2016 State Pension is made up of two parts:
- Basic State Pension. This is received by all workers who have paid or been credited with National Insurance contributions. It is a fixed amount.
- Additional State Pension (sometimes called State Second Pension, State Earnings-Related Pension Scheme or SERPS). How much you get depends on your earnings and whether you’ve claimed certain benefits.
Q. Who qualifies for the new flat rate State Pension?
A. The earliest you can get the new State Pension is your State Pension Age: www.gov.uk/calculate-state-pension. If you reach State Pension age before 6 April 2016 you will get a State Pension under the current two-tier system. You can claim the new State Pension if you’re:
- a man born on or after 6 April 1951
- a woman born on or after 6 April 1953
You also need:
- At least 10 qualifying years on your National Insurance record to get any State Pension. They don’t have to be 10 qualifying years in a row.
Not everyone can get the full amount (see below).
Q. Who will get the full amount of the new State Pension?
A. The new flat rate State Pension is based on your NI contributions record and a minimum qualifying period. The full amount is £155.65 a week, increased under the “triple lock” guarantee. See www.gov.uk/new-state-pension/overview
- If you have no NI contributions record before 6 April 2016 you need 35 qualifying years to get the full amount of new State Pension.
- If you paid into a contracted-out pension scheme between 6 April 1978 and 5 April 2016 and reach your State Pension age on or after 6 April 2016, the amount of new flat rate State Pension you receive will be reduced because you and your employer have paid a lower rate of NI. In this case you are less likely to receive the full State Pension, but this will depend on your NI record and your qualifying years after April 2016. You would be able to build up further qualifying years towards the full flat rate State Pension if you continue working and paying NI after April 2016.
- Further examples here that might help.
- Information on State Pension reforms: www.gov.uk/new-state-pension/overview
- Individuals over age 55 can request an estimate of the new State Pension: www.gov.uk/state-pension-statement.
- Video explaining the new State Pension: www.youtube.com/user/PensionTube.
Q. Which pension schemes are affected by the NI increase?
A. At the University the affected schemes are: Teachers' Pensions Scheme (TPS), Local Government Pension Scheme (LGPS) - also known as the Tyne & Wear Superannuation Fund (TWPF) - and the Universities Superannuation Scheme (USS). Members of NEST are not affected (they already pay the full NI rate.). See our workplace pensions.
Q. I'm in one of the affected pension schemes. Is there anything I can do to avoid this NI increase?
A. No. This is a national change enacted by the UK Government, and there is no way to continue receiving the National Insurance rebate after April 2016. It applies to all pension scheme members in TPS, LGPS or USS. However you need to be aware of the increase so that you can plan for the financial impact.
Q. Is there an option to pay lower pension contributions to help me afford to stay in the pension scheme?
- Members paying Additional Voluntary Contributions (AVCs) could choose to stop or reduce their additional contributions.
- In the LGPS members have the option to pay half their normal contributions and build up half their normal pension (with full life cover and ill health cover). This is known as the 50/50 section and is designed to help members stay in the scheme during times of financial hardship. Further information is available at www.lgps2014.org. This is designed to be a short-term option and we are required to re-enrol you back into the main section of the scheme every three years in line with our automatic re-enrolment date. See our workplace pensions for details of how to contact your pension provider.
Q. Can I avoid the NI increase by leaving the pension scheme before April 2016?
A. No. Leaving the pension scheme before April 2016 would mean that you start paying more NI immediately, since the rebate only applies to pension scheme members. You should also seriously consider the benefits of pension membership.
Q. Can you change the pension scheme rules?
A. No. We are required by law to offer the statutory public sector schemes and it is not possible for us to amend these national schemes.
Q. Is being in a workplace pension scheme still beneficial?
A. Yes. The State Pension is intended to be only a part of retirement income and will provide a very basic standard of living. Most people aim for between half and two thirds of their pre-retirement salary when they retire. The State Pension is currently only around £7,000 per year for a single person (£12,000 for a couple). For many people this will not be enough to maintain their standard of living in retirement, taking into account that:
- people are generally living longer so are likely to spend more time in retirement,
- employees may want to retire before their State Pension age,
- members of contracted-out pension schemes prior to 6 April 2016 may not qualify for the full amount of the new State Pension.
In addition, pension schemes offer other benefits such as life cover, spouse, child or dependants’ pensions and ill health pensions. These are costly to provide outside of an occupational pension scheme. Some pension scheme factsheets:
- For USS click here
- For LGPS go to www.yourpension.org.uk/LPFA/In-The-Scheme/Benefits-of-LGPS.aspx
Members who continue to pay into a pension scheme currently receive tax relief on their pension contributions, as contributions are deducted from pay before tax is calculated.
- The Which? website provides general comments on pension saving issues www.which.co.uk/money/retirement/guides/company-pensions-explained/should-i-join-my-company-pension-scheme/
For more information see benefits of a pension.
Q. I'm not in a workplace pension scheme - does this mean I shouldn't start a pension?
A. If you're not already in a scheme you didn't get the NI rebate before April 2016, so joining the scheme will make no difference to how much NI you pay. We still strongly encourage staff to pay into a workplace pension to ensure that they have a financially secure retirement. For more information see above.
Annual Allowance for Pension Savings
What is it?
If you pay Income Tax, members of pension schemes in the UK enjoy tax relief on contributions paid in. Tax relief means some of your money that would have gone to the government as tax goes into your pension instead. Members are also usually able to draw part of their retirement benefits as a tax-free lump sum on retirement. (Pension incomes are however taxed as earned income.)
You can save as much as you like towards your pension, but there are however limits to the maximum benefit you can build up in any one year (your "pensions input amount") and still enjoy beneficial tax treatment.
- In a 'Defined Benefit' Scheme such as TPS, LGPS or USS*: your Annual Allowance (AA) is the amount by which the value of your pension benefits may increase in tax year (1 April to 31 March) without you having to pay a tax charge i.e. the difference between the value of your benefits at the start of the period, adjusted for inflation (the opening value) and the value of your benefits at the end of the period (the closing value).
- In a 'Defined Contribution' Scheme such as NEST*: your Annual Allowance (AA) is the total amount of combined employee and employer contributions that can be paid into your pension during the tax year.
- It is not an absolute limit, but an allowance. If you exceed the annual allowance in a year, you won't receive tax relief on any contributions you paid that exceed the limit, and you will have to pay with a tax penalty (see below).
* From October 2016 USS will include an element of Defined Contribution scheme on top of the main Defined Benefit scheme.
If you exceed the Annual Allowance
There is a potential risk of exceeding the allowance if you have a promotion (whether internally or because you have just joined the University) or a large pensionable allowance during the tax year. The increase in your pensionable pay will affect the calculation of how much pension you will receive. Certain other events can change the closing value, such as starting to take some or all of your pension. If you exceed the annual allowance:
- You are liable to pay a tax charge on the excess
- Up to £2,000 charge – you pay, and submit Self Assessment tax return.
- More than £2,000 – can choose ‘scheme pays’ from your benefits.
How much is the limit?
In the 2015/16 tax year the Annual Allowance is £40,000 per tax year, across all your pensions savings both at the University and elsewhere.
In the 2016/17 tax year, for high earners the Annual allowance may reduce from £40,000 per year to as low as £10,000 per year from 6 April 2016; this is known as the Tapered Annual Allowance (TAA). The Pensions Input Period (PIP) over which pensions savings are measured will be the same as the tax year from 6 April 2016.
- If you earn a "threshold income" (your net income NOT including pension contributions) of no more than £110,000 in 2016/17 then you will not be affected.
- Othwerise, for every £2 of "adjusted income" (your taxable salary, plus the employer pension contributions that the University pays on your behalf) over £150,000, your annual allowance will be reduced by £1 to a minimum of £10,000 (for those earning £210,000 or more adjusted income).
- A fuller explanation including definitions of adjusted income and threshhold income can be found on the HMRC website.
- Annual & Lifetime Allowance 2016 - Mercer Q&A
- There are transitional provisions already in force in the 2015/16 tax year. You may be able to contribute more than usual (potentially up to £80,000) during this transitional year.
- You can offset any unused allowance from up to three previous scheme years against your excess pension savings.
What should you do?
- Familiarise yourself with the information on your pension scheme and HMRC websites.
- Your Pension Fund should also notify you if you will exceed the annual allowance (by 6 October each year), but they will not be aware if you have pension accrued elsewhere. It is ultimately your responsibility.
- Check an annual allowance calculator to see if there is the possibility that you may have exceeded the Annual Allowance.
- HMRC calculator
- Teachers Pensions calculator
- TPS, LGPS and USS will normally write to you to tell you how much your pension has grown (your "pensions input amount" and warn you if you are likely to exceed the Annual Allowance. Check your Annual Benefits Statement for this information, or contact your scheme to check. (Your scheme will not be able to factor in any pensions savings you may have elsewhere, so it is your responsibility to identify if your total pensions growth is higher.) LGPS Example Benefits Statement
- USS guidance and modellers, including options to help members mitigate the impact of tax changes. For more information see our USS page here.
More about the Annual Allowance
- HMRC guidance: Tapered Annual Allowance
- HMRC guidance: Understanding the annual allowance for pension schemes
- Teachers Pensions FAQ on Annual and Lifetime Allowances
- Tax Controls and Your LGPS Benefits (LGPS leaflet)
- LGPS Annual Alllowance web page
Lifetime Allowance for Pension Savings
What is it?
You can save as much as you like towards your pension, but there are however limits to beneficial tax treatment.
- HMRC Guidance: Tax on Your Private Pension Contributions
- Lifetime Allowance is the maximum amount of pension saving you can build up over your life and draw at retirement that benefits from tax relief.
- In a 'Defined Benefit' Scheme such as TPS, LGPS or USS*: the calculation depends on how much your provider promises to give you per year when you retire. This amount, multiplied by 20, plus the amount of any lump sum is the amount that will count towards your Lifetime Allowance.
- In a 'Defined Contribution' Scheme such as NEST*: it will be the value of your pension pot that will count towards your Lifetime Allowance.
- The lifetime allowance is currently £1.25 million.
* From April 2016 USS will include an element of Defined Contribution scheme on top of the main Defined Benefit scheme.
If you exceed the Lifetime Allowance:
- If you build up pension savings worth more than the allowance you'll pay a tax charge on the excess. The tax rate varies depending on whether the excess is in the form of Pension or Lump Sum.
- Scheme administrator should deduct the charge due from your pension pot before paying your pension.
- You will need to complete a Self Assessment Tax Return.
- The Lifetime Allowance will reduce to £1 million from 6 April 2016. It will increase by CPI from 2018-19 onwards.
- If you are in a defined benefit scheme (e.g. LGPS, TPS or USS) and take pension after 6 April 2016, your pension benefits will be tested against the lifetime allowance of £1 million.
- Annual & Lifetime Allowance 2016 - Mercer Q&A
What should you do?
- Check if you are likely to be affected by asking your pension provider how much your unused pot is worth and how much of your Lifetime Allowance you’ve already used up. You can also get this information from your most recent pension statement. If you are in more than one pension scheme, add up your pension savings across all your schemes. The total amount is the amount that would count towards the Lifetime Allowance if you took your pension today.
- Check if transitional protection applies to you (see below).
- Where transitional protection applies, any pension savings you have on the 5 April 2016, up to the value of the current Lifetime Allowance of £1.25 million, will be protected from the Lifetime Allowance charge.
- If you think you may be affected, you do not need to do anything now but you can prepare for April 2016 by checking the value of your existing savings.
- Some individuals will already have transitional protection, either from when the Lifetime Allowance was first introduced, or from previous reductions. Primary & enhanced protection may exist from 2006, and fixed protection may exist from 2012. New fixed and individual protections were introduced from April 2014 (you were required to apply for these). If you hold one of these protections, then as long as you continue to hold this, you will not be affected by the reduction of the Lifetime Allowance to £1 million.
More about the Lifetime Allowance
DisclaimerPensions and tax rules are by their nature complex and hard to understand. We've done our best to summarise these simply on this website but we have not captured the full definitions or complexity of tax and pension rules. We are not able to provide financial advice or help you with tax planning, and you should not rely solely on the information on our website to make financial decisions; please seek independent financial advice (for example via www.moneyadviceservice.org.uk/en/articles/choosing-a-financial-adviser or www.unbiased.co.uk/).
This page was published on 22 August 2016