Pension Rules and Rates Explained

Individuals can obtain tax relief on pension premiums paid in any one tax year up to the lesser of their relevant income (that’s earnings from employment or self-employment after deductions, e.g. expenses in employment but before any reliefs, e.g. personal allowances) and the annual allowance (£50,000 for 2011/12, 2012/13 and 2013/14, and £40,000 for 2014/15 onwards). But basic rate tax relief is allowed on premiums of up to £3,600 (that’s £2,880 net of basic rate tax relief) even where the individual has no relevant earnings.

Any annual allowance (but not the money purchase annual allowance – see below) unused in a year can be used in any of the following three years.

For 2015/16 and later years a new annual allowance, the money purchase annual allowance (MPAA) of £10,000 (£4,000 for 2017/18 and later years) applies to money purchase (defined contribution) pension schemes if money has been taken after 5 April 2015 under flexi-access. Unused MPAA cannot be used in later years.

Basic rate tax relief is given in the form of a credit paid by HMRC directly to the individual’s pension account, e.g. if an individual pays £80 into their pension fund, HMRC will add another £20.

Contributions aren’t allowed if the fund exceeds the lifetime allowance (£1 million from 6 April 2016) in the year of contribution. The Autumn Budget 2017 proposes that the lifetime allowance be increased to £1.03 million on 6 April 2018.

Tax relief is withdrawn for contributions in excess of the annual allowance or MPAA. This is achieved through a special tax charge called the annual allowance charge.

Single tier state pension from 6 April 2016

The new state pension rules changed significantly with effect from 6 April 2016 for:

  • men born on or after 6 April 1951
  • women born on or after 6 April 1953.

Anyone who reached state pension age before 6 April 2016 is assessed for eligibility under the old pension rules.

The table below summarises the single tier state pension rules and rates.
Minimum number of years’ NI contributions or credits required to qualify for a state pension
Number of years’ NI contributions or credits required to qualify for the maximum state pension (men and women)
Maximum weekly amount of pension
Amount of pension earned for each full year of NI contributions or NI credits (e.g. while unemployed)
Increase if an individual opts to defer taking the state pension
1% of their pension amount for each nine weeks of deferral
1% of their pension amount for each nine weeks of deferral
* The pension may be less than the full amount after 35 years of contributions, for example, because the individual was contracted out of the state additional pension, e.g. SERPS, for some years. In that situation an individual can continue to increase their state pension by continuing to pay or receive NI contributions until the maximum is reached.

The rules in more detail

NI credits

Where an individual is not paying NI credits through earnings etc. they are automatically given, or in some cases can be claimed, in several situations. Essentially these are where the individual:

  • can’t work because of illness or disability
  • is claiming Child Benefit for a child under twelve (or under 16 for periods before 2010)
  • is receiving Jobseeker’s Allowance or Employment and Support Allowance
  • is a career and qualify for Carer’s Allowance
  • is in a government-approved training course (this doesn’t usually include further education at a university etc.)
Qualifying NI contributions and credits before 6 April 2016

NI contributions paid and credits granted to individuals before 6 April 2016 count towards their entitlement to the single tier state pension. Their NI record was used to work out the so-called “starting amount” of pension as at 6 April 2016, based on the contributions and credits up to that date.

The starting amount is the greater of:

  • the amount of pension an individual would have qualified for had he or she started to receive a pension in April 2016 under the old state pension rules. This amount includes the basic state pension and any additional amounts which were earnings related, e.g. SERPS and state second pension (S2P) contributions; and
  • amount of pension had the new state pension rules been in place all the time.

NI contributions paid and credits received increase the state pension (at the rate of £4.55 per year for 2017/18) until the maximum (£159.55 for 2017/18) is reached. That is, if the starting amount is less than the full new state pension it will increase for each full year’s NI contributions or credits added to an individual’s NI record.

Note. If the starting amount is greater than the maximum new state pension the excess is called the “protected payment”. A protected payment is paid on top of the full new state pension and is increased each year in line with inflation. However, qualifying years after 5 April 2016 won’t increase the state pension (normal annual increases to the state pension will, of course, be added).

State pension that started before 6 April 2016
Basic retirement pension (maximum*)
Single person
increase for dependant adult

* The maximum basic state pension is payable where the claimant has accrued 30 complete years of National Insurance contributions. The rate is reduced by 1/30 for each year for which full NI is not paid. Starting from April 2016 the fraction is 1/35.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

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