Dignity in retirement?

New State Pension for millions of new pensioners

The ‘biggest reform of the State Pension since it was created more than a century ago’ is at the heart of a major package of reforms to tax, pensions and savings to help workers which is coming into effect today.

Chancellor George Osborne and Work and Pensions Secretary Stephen Crabb said the new State Pension for millions of new pensioners will help deliver ‘dignity in retirement’. People will know from an earlier age that the State will provide over £8,000 a year or £155.65 a week – when they reach their State Pension age after 35 years paying in or getting credits, for instance for caring for a family.

The new State Pension particularly benefits women reaching pension age over the next decade, the ministers added. In the past, many were unable to build much of the previous earnings-related additional State Pension – from now on, everyone will build up the new State Pension in the same way.

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 3 million women stand to gain an average of £550 extra per year as a result of these changes.

The new pension is among a number of reforms to taxes, National Insurance allowances and savings coming into effect today to back hard work, support savers and ensure economic security at every stage of life.

Over 18 million people will benefit from a tax cut today as a new personal savings allowance comes into force which takes 92% of savers – nearly 17 million people – out of savings tax altogether.

In the biggest savings shake-up for a generation, from today most UK adults will be able to earn up to £1,000 interest a year on their savings without paying tax on it.

Currently for every £100 interest earned, basic rate taxpayers lose £20 in tax, and higher rate taxpayers £40. Yet from today the new personal savings allowance means every basic rate taxpayer can earn £1,000 interest a year without paying tax on it, delivering a maximum tax saving of £200, and higher rate taxpayers £500 interest tax free, meaning the same maximum tax saving of £200.

The income tax-free personal allowance increases from £10,600 to £11,000, giving an £80 tax cut to a typical taxpayer, cutting income tax for over 30 million taxpayers and taking 680,000 out of paying income tax altogether.

The introduction of the new personal savings allowance and the increase to the personal allowance will mean a pensioner with £18,500 in pension income, and £1,000 savings income (outside of any ISAs), will pay £1,105 less tax than if the income tax system of 2010-11 applied today.

The changes to the personal allowance and higher rate threshold mean a typical basic rate taxpayer will pay £905 less tax in April 2016 compared to 2010, and a typical higher rate taxpayer will pay £818 less. Savers will also benefit from new ISA flexibilities.

Drivers will gain from the Chancellor’s decision to extend the freeze in fuel duty, while people renting out a room in their house will gain from the increase of the tax-free rent-a-room relief to £7,500 a year, and married couples will benefit from an increase to the marriage allowance.

The increases to the personal allowance and marriage allowance will mean that a married couple where one individual earns £35,000, and their spouse does not have any income, will pay £1,125 less tax than if the income tax system of 2010-11 applied today.

Chancellor of the Exchequer 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.

“These changes will benefit women in particular, with three million significantly better off by 2030.

“At the same time, with our new National Living Wage lifting pay, we’re taking steps to make sure people keep more of what they earn. Today’s income tax changes mean that basic rate taxpayers are paying more than £900 less than they were in 2010. There’s also action today to boost saving – with our new personal savings allowance lifting 17 million people out of paying any tax at all on money they’re putting away for their futures.

“Because we are determined to back the next generation, from today the jobs tax on young apprentices will be abolished altogether. When a business is giving a young person an opportunity in life we will support them, not tax them.

“These changes you see today are what a modern, compassionate government is all about. We’re backing hard work and aspiration, allowing people to keep more of their own money, supporting savers and giving the next generation a step up.”

Secretary of State for Work and Pensions, Stephen Crabb said:

“This ambitious new reform will transform the State Pension for future generations. Millions stand to gain from the simpler system, including women and the self-employed, who so often lost out in the past.

“Combined with solid private pensions savings which are being expanded through automatic enrolment, it will help ensure that people have much needed financial security in their later years.”

Today’s income tax personal allowance increase builds on the National Living Wage introduced on Friday 1 April. It means a typical individual aged 25 or over who is working 30 hours a week on the National Minimum Wage will see their take-home pay increase by £730 as a result of the combined effects of the introduction of the National Living Wage and increase to the income tax Personal Allowance.

The new State Pension will replace a system that was confusing as it had multiple different sources contributing to individual state pensions.

In a significant boost for women and families, the years spent raising a family will be recognised and counted in full towards the new State Pension.

The reforms mean 3 million women who reach pension age in the first 15 years after the new pension is introduced will on average get an extra £11 a week.

Other changes coming into force today will mean that will mean individuals can benefit from:

• an increase in the higher rate threshold from £42,385 to £43,000. The changes to the personal allowance and higher rate threshold mean a typical basic rate taxpayer will pay £905 less tax in April 2016 as a result of changes made since 2010, and a typical higher rate taxpayer will pay £818 less
• an increase in the marriage allowance, allowing an individual to transfer up to £1,100 of their personal allowance to their spouse, cutting their tax bill by £220
• new ISA flexibilities – including allowing individuals to withdraw and replace money from their ISA without that replacement counting towards their annual subscription limit for that year (£15,240 in 2016-17)
• more tax relief if you rent out a room in your house. Rent a Room relief increase from £4250 to £7500
• the sixth successive year of frozen fuel duty. This means the average car driver is paying £450 less on fuel compared to what they were paying in 2011, of which £80 relates to fuel duty

Examples of people benefiting from the combined effects of the introduction of a new personal savings allowance, and increase to the personal allowance and marriage allowance:

• the increase to the personal allowance coming into force today will mean that a family with two people earning £20,000 a year each will pay £1,810 less tax than if the income tax system of 2010-11 applied today
• the increases to the personal allowance and marriage allowance that are coming into force today will mean that a married couple where one individual earns £35,000, and their spouse does not have any income, will pay £1,125 less tax than if the income tax system of 2010-11 applied today
• the increase to the personal allowance, and introduction of a new personal savings allowance, both coming into force today, will mean that a pensioner with £18,500 in pension income, and £1,000 savings income (outside of any ISAs), will pay £1,105 less tax than if the income tax system of 2010-11 applied today

Number of people benefiting from paying less income tax and average gain in each region as a result of today’s personal allowance and higher rate threshold increase:

• North East – over 1.1 million people benefit. £83 average gain
• North West and Merseyside – over 3.2 million people benefit. £84 average gain
• Yorkshire and Humber – over 2.3 million people benefit. £83 average gain
• East Midlands – over 2.1 million people benefit. £85 average gain
• West Midlands – over 2.5 million people benefit. £84 average gain
• East of England – over 2.9 million people benefit. £88 average gain
• London – over 3.8 million people benefit. £91 average gain
• South East – over 4.4 million people benefit. £89 average gain
• South West – over 2.6 million people benefit. £85 average gain
• Wales – over 1.3 million people benefit. £83 average gain
• Scotland – over 2.5 million people benefit. £86 average gain
• Northern Ireland – over 730,000 people benefit. £83 average gain

Number of people taken out of income tax as a result of today’s increase in the personal allowance:

• North East – 28,000 people
• North West and Merseyside – 82,000 people
• Yorkshire and Humber – 56,000 people
• East Midlands – 53,000 people
• West Midlands – 65,000 people
• East of England – 59,000 people
• London – 71,000 people
• South East – 89,000 people
• South West – 59,000 people
• Wales – 30,000 people
• Scotland – 60,000 people
• Northern Ireland – 20,000 people