A simple guide to tax and pension changes for the 2021-22 tax year
There’s a lot to keep track of when it comes to tax and pensions.
This year, tax-free allowances for your pension and savings, income tax bands and the State Pension all changed from the new tax year on 6 April.
Some of the changes were announced in advance and others were revealed in March’s Budget. Our simple guide covers what you need to look out for.
The tax-free personal allowance is rising
The good news for this year is that the standard personal allowance – how much you can earn before paying income tax – increased to £12,570 for the 2021-22 tax year, up from £12,500. This means a slightly bigger slice of your income is free of tax, resulting in a small cut in how much tax most people will pay.
In his March Budget, Chancellor Rishi Sunak also announced that the personal allowance will be frozen at this level until April 2026.
Bear in mind that laws and tax rules may change in the future, and your own circumstances and where you live in the UK will have an impact on tax treatment.
New personal income tax bands
The basic rate income tax band rose to £37,700 in April, which means that most people pay higher rate tax when they have an income of £50,270 or more. This higher rate income tax threshold will be frozen at £50,270 until 2026.
This means some people will pay less tax and fewer people will need to pay the higher rate. But with the threshold frozen, pay increases will move some people into this band in the coming years.
If you live in Scotland, the bands and rates of tax you’ll pay will be different. The different bands and rates of income only apply to non-savings income such as earnings from a job, pension income or rental income. Tax on savings income follows the rest of the UK.
Income tax at a glance
|Rate||Scotland||Rest of UK|
|19% (starter rate Scotland)||£12,571 - £14,667||n/a|
|20% (basic rate UK)||£14,668 - £25,296||£12,571 - £50,270|
|21% (intermediate rate Scotland)||£25,297 - £43,662||n/a|
|40% (higher rate UK)||n/a||£50,271 - £150,000|
|41% (higher rate Scotland)||£43,663 - £150,000||n/a|
|45% (additional rate UK)||n/a||Over £150,000|
|46% (top rate Scotland)||Over £150,000||n/a|
Your tax-free pension allowances
Your pension plan’s tax benefits can play an important part in helping boost your pot – and that can potentially give you more money when you’re retired. Not all pension schemes provide tax relief in the same way, but most UK taxpayers get tax relief on their pension payments based on the rate of income tax they pay. And this is what makes pension plans a tax-efficient way to save for the future. A pension plan is a long-term investment though, so remember that its value can go down as well as up and could be worth less than what was paid in.
You can find out much more about how tax relief works for different types of pension plans in our pensions guide.
Your pension Annual Allowance stays the same for 2021-22
You’ll normally benefit from tax relief when contributing to your pension plan, up to as much as you earn annually, or up to your Annual Allowance – whichever is lowest. This allowance remains at £40,000 for the 2021-22 tax year.
If you haven’t used all your allowance in the last three tax years, it might be possible to pay more into your pension plan by ‘carrying forward’ whatever allowance is left to make the most of the tax relief on offer, though bear in mind the amount is still capped at 100% of your earnings.
However, different rules apply if you’ve already started to take money out of your pension plan and you’re affected by the Money Purchase Annual Allowance, or if your income when added to your employer’s payments are more than £240,000. You can find out more on the MoneyHelper website, or there’s more in the Government’s guide to the pension Annual Allowance.
The pension Lifetime Allowance has been frozen until 2026
The Lifetime Allowance is the total amount of pension benefits you can build up during your lifetime across all pension schemes before an additional tax charge applies. For 2021-22 this has been set at £1,073,100. In the March Budget it was announced that it will remain at this level until 2026.
While many people won’t be affected by this, you should consider taking action if the value of your pension benefits is approaching, or above this level. You can find out more about steps you could take on the MoneyHelper website.
What does my employer have to contribute to my workplace pension plan?
If you’re a member of a qualifying workplace pension scheme, the minimum contribution from your employer remains at 3% of your qualifying earnings. A total minimum of 8% needs to be made up with payments from you, your employer, or a mix of both.
Why not review what you’re paying in and speaking to your employer or pension provider to check what’s on offer? It could be more than the minimum and some workplaces offer matching schemes.
While it’s been a tough year for many businesses, some employers may still offer a bonus. If you’re one of the lucky ones and are wondering what to do with the extra money, there can be benefits to paying it into your pension plan. You can find out more about salary sacrifice and how it works from MoneyHelper.
The State Pension rises by 2.5%
In April the full new State Pension rose by £4.40 to £179.60 a week – that’s £228.80 extra a year. This is based on you having paid or been credited with 35 years of National Insurance (NI) contributions, so not everyone will receive the full amount.
If you get the older basic State Pension (visit the government website to see who this applies to), the full amount increased to £137.60 and is based on 30 years of NI contributions.
If you have fewer than the required number of qualifying years, your State Pension will be less but you might be able to top up by paying voluntary NI contributions.
If you’re not sure what you can expect to get or when you can claim it, it’s easy to check your NI record or your State Pension forecast with the government’s State Pension checker.
Tax-efficient saving: the ISA allowance stays at £20,000
You can save up to £20,000 in the 2021-22 tax year, whether that’s in a Cash or Stocks & Shares ISA, or a combination of both.
Inheritance tax and capital gains tax frozen
In his recent Budget the Chancellor also announced that the limits on the nil and residential rate bands for inheritance tax will be frozen until April 2026. The capital gains tax allowances will also be frozen until the same date.
Get the information you need to make the most of your money
There’s a lot to think about when it comes to tax, your pension and other investments. So it’s important to get as much information as you can before making any decisions. Speak to your pension provider or your employer if you have a workplace pension plan. If you’re a Standard Life customer, you can review and manage your plans online.
It may also be worth getting some professional advice, for which there’s likely to be a cost. If you don’t have a financial adviser already, you can find one near you at unbiased.co.uk.
The information here is based on our understanding in May 2021 and shouldn’t be regarded as financial advice.
Tax and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.
The value of investments can go down as well as up and may be worth less than what was paid in.
Standard Life accepts no responsibility for information contained on external websites. This is for general information only.