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As I begin to receive my state pension, specifically the new one, I’ve found it challenging to make ends meet, even with rental assistance. I’ve been presented with an opportunity to work part-time for £12.40 an hour for approximately 24 hours a week.
I’m trying to understand how my taxes would work in this situation. Would I only be taxed on my job income if it surpasses the minimum threshold, or do I need to combine my pension and wages and pay tax on the total amount?
Ultimately, I’m trying to determine whether it’s financially sensible to work 24 hours a week at this rate, considering I might lose council support for rent and have to pay the full council tax.
Financial expert Steve Webb weighs in: For working-age individuals, the benefits system has been adjusted to ensure that employment generally provides a financial advantage, even if it’s modest.
However, in your case, as someone receiving benefits beyond pension age, it’s important to acknowledge that taking such a job might not be significantly financially beneficial.
Let’s break this down into three elements – the amount of extra tax you would pay if you took the job, the reduction in help with your rent and the reduction in help with your council tax.
Income tax bill
Starting with tax, from April this year the standard rate of the new state pension will be £12,547 per year, just a whisker below the (frozen) tax threshold of £12,570.
Broadly speaking, you can think of the state pension as ‘mopping up’ all of your tax free allowance.
This means that more or less all of your wage will be subject to income tax at the basic rate.
If you do 24 hours at £12.40 per hour, this will give you £297.60 per week.
To keep the maths simple, let’s round that up to £300 per week. On this figure you would pay £60 in tax, leaving you take-home pay of £240 per week.
(The one bit of good news is that you no longer pay National Insurance Contributions now that you are over pension age.)
Help with rent
The next question is what impact an extra £240 per week will have on the help you get with rent.
In your situation, your housing benefit will fall by 65 per cent of any extra take-home pay, aside from a very small ‘disregarded’ amount of £5 per week. In this case, this would reduce your help with rent by up to £156 per week.
Help with council tax
Prior to 2013, there was a national system of help with council tax which was closely linked to the housing benefit rules. For each extra £1 of take-home pay you would lose 20p in help with council tax.
So, if those rules still applied today, your extra £240 per week would cost you £48 per week in council tax help. I strongly suspect that this would wipe out your help with council tax completely, especially if you already qualify for a 25 per cent discount for living alone.
In practice, the impact of having higher income on council tax help might be even more severe than this.
Each local authority in England is now free to design its own local council tax system and many have used this freedom to make the system even less generous than the 20p in the pound rule that used to apply.
As a result, it is even more likely that taking a job of the sort you describe would indeed wipe out any help you get with council tax.
Will taking a job improve your income?
Going back to the assumption of losing 20p in the pound of council tax help, out of your gross pay of £300 you would lose £60 in tax, up to £156 in help with rent and up to £48 in help with council tax.
At worst, this would add up to £264 in deductions, leaving you just £36 better off per week for your 24 hours of work, and this is before factoring in any travel-to-work costs which you might face.
I should add that in doing these calculations I have assumed that you have literally no other income aside from your state pension and that you are therefore getting most of your rent and most of your council tax covered in full.
If this is not the case and you also have, for example, a modest private pension, this will already have reduced the amount of help you are currently getting with rent and council tax.
This means that taking a job will potentially wipe out a smaller amount of housing benefit and council tax help, and so the financial uplift from working will be slightly greater.
Naturally, there could be other reasons for wanting to work, such as the social contact, and your employer can still be required to put you into a workplace pension and make a contribution, which could help marginally when you finally stop work.
But I’m afraid that the bottom line is that if you reach retirement with a very modest income and rely on benefits to cover major outgoings like rent and council tax, there is very limited financial advantage to you from taking a part-time job.
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