Business

PERSONAL FINANCE: How tax and pension planning can encourage retired workers back to work

There are significant tax benefits for over 55s returning to work
There are significant tax benefits for over 55s returning to work There are significant tax benefits for over 55s returning to work

QUESTION: In the recent Budget, the Chancellor indicated that he was keen to incentivise the over 50s back into work. I am 58 years old and I retired a few years ago. I am now thinking that I could take on a part time job and I was wondering what has changed following the Budget?

ANSWER: In his Budget speech, the Chancellor highlighted that there were over 7 million adults of working age who were not in work. This excludes students in education. The latest statistics show the problem is potentially getting worse as the numbers of individuals in payrolled employment (almost 30 million) are going backwards.

In the calendar year to date, only those aged 65 and over have seen significant increases in the numbers in payrolled employment. Whilst other age groups’ figures broadly flatline or go backwards, there has been over a 2 per cent increase in workers aged 65 or over since the turn of the year.

This is perhaps not be a surprise as many older workers have a lower effective tax rate than others on their earnings. Those over the state pension age do not suffer employee’s NICs, representing an effective tax cut of 12 per cent on earnings over £12,570.

A significant change announced by the Chancellor was an increase in the money purchase annual allowance for those who have already flexible accessed their pension benefits to allow them to pay in £10,000 a year into their pension as opposed to the previous limit of £4,000.

Some employers offer a salary sacrifice scheme in relation to pension contributions. This allows for some of an employee’s gross pay to be contributed to a pension scheme. Depending on the amounts, this contribution may be free from income tax and both employers’ and employees’ NIC. Some employers offer to top-up the pension contributed by the employee for the employer NIC saving ie the employer passes the NIC saving onto the employee.

If I take the example of an employee aged over 55 earning £20,000 who is not currently making any pension contributions, they would have net take-home pay of £17,622 assuming they have no other sources of taxable income.

Let’s compare that to a similar worker benefiting from a pension salary sacrifice scheme and assume that the employer is willing to top-up an employee’s pension pot by the employer’s NIC saved as a result of this arrangement. Such a worker could sacrifice £8,787 of salary and benefit from an employer pension top-up of £1,213.

The employee would therefore have £11,213 of taxable salary remaining and £10,000 added to their pension scheme. The remaining salary would be free from any income tax and NIC as it falls within the personal allowance.

However, as the individual is aged 55 or over, they could potentially access the funds paid into their pension as well. There are various options for accessing pension funds, but one is to take a payment as an uncrystallised funds pension lump sum.

An employee accessing £10,000 of their pension pot in this way would receive 25 per cent of this tax free if within the relevant limits. The end result is that the net take-home pay of the individual may be as high as £19,984, giving an effective tax rate of 0.08 per cent on their original £20,000 salary.

There are a number of related points to be aware of. For example, employers should be aware that they could inadvertently breach national living wage limits if they allow employees to sacrifice too much of their salary as pension contributions. In addition, once an individual starts to access their pension, tax relief can only be claimed on £10,000 per annum of any further contributions.

Each person’s personal financial position needs to be looked at individually and with the right fact pattern there are significant tax benefits for over 55s returning to work.

:: Malachy McLernon (m.mclernon@fpmaab.com) is partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies