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R04 > 02. HMRC tax regime: contributions & allowances > Flashcards

02. HMRC tax regime: contributions & allowances Flashcards

1
Q

Name 4 types of relevant UK earnings.

A
  • employment income
  • income from trade, profession or vocation
  • income from patent rights
  • earnings from overseas Crown employment
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2
Q

What is a relevant UK individual [5].

A
  • under age 75 AND
  • relevant UK earnings that year OR
  • resident in UK during that year OR
  • resident during prev 5 tax years and when they became member of pension scheme (£3,600 p.a. max) OR
  • earnings from overseas Crown employment (or their spouse)
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3
Q

The max individual contribution eligible for tax relief is the greater of what? [2]

A
  • 100% of relevant UK earnings OR
  • £3,600
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4
Q

If making a pension contribution on behalf of someone else, the eligibility to receive tax relief on the contribution is based on who?

A

The pension holder (member), not the one making the contributions.

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5
Q

What is the net pay method of awarding tax relief?

A

Employee contributions are taken from employee’s gross pay before income tax is deducted.

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6
Q

An employee’s what are not reduced as a result of their pension contributions?

A

Their NICs.

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7
Q

What is the relief at source method of awarding tax relief?

A

Contributions are paid net of basic rate tax then grossed up (provider reclaims 20% BRT relief from HMRC). HRT & ART relief from SA.

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8
Q

Additional tax relief from relief at source is what?

A

A tax band adjuster.
E.g. increases amount of tax charged at 20% rather than 40%

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9
Q

Adjusted net income is what?

A

Total income less certain deductions, including personal pension contributions (gross).

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10
Q

What is a problem of taking dividends instead of salary?

A

Divs are not included within the definition of relevant UK earnings so make restrict amount of tax relief available.

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11
Q

What is a salary sacrifice agreement?

A

Employee agrees to reduction in salary & in return employer pays a pension cont on employee’s behalf.

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12
Q

Why do salary sacrifice?

A

Because employer & employee will pay reduced NICs and larger cont possible at no extra cost to employee or employer.

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13
Q

Name conditions for salary sacrifice.

A
  • written agreement in place (before)
  • salary cannot reduce below NMW
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14
Q

Salary sacrifice arrangements usually irrevocable unless?

A

Lifestyle changes affecting employee circumstances e.g. marriage, kids

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15
Q

How does take-home pay compare to salary sacrifice pension contributions if:

  • already paying a pension cont
  • new pension
A
  • take-home pay usually same or slightly higher
  • reduction in take-home pay less than gross cont
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16
Q

Name 3 benefits of reducing salary.

A
  • employee’s entitlement to WTCs may increase
  • may reinstate some or all personal allowance
  • may reduce HICB tax charge payable
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17
Q

Name 3 cons of reducing salary.

A
  • may reduce death in service cover
  • may reduce borrowing capacity for mortgages & other loans
  • may cause a reduction or loss of other social security benefits e.g. maternity benefits
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18
Q

How would HMRC treat PCLS recycling if all conditions are met?

A

As an unauthorised payment.

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19
Q

Name 3 conditions required for HMRC to treat recycled PCLS as an unauthorised payment?

A
  • PCLS + any other PCLS in previous 12 months > £7,500
  • PCLS cont.s increase by > 30% vs expected and cumulative sum of extra cont.s > 30% of PCLS
  • recycling was pre-planned
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20
Q

Employer’s contributions are paid ~ and is allowable as a ~~.

A
  • gross
  • business expense
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21
Q

Employers contributions will receive tax relief against what if limited company and what if sole trader or partner?

A
  • corporation tax
  • income tax
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22
Q

What test must employer contributions pass?

A

The “wholly & exclusively” for the purposes of trade test.

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23
Q

An employer’s contribution will be spread over a period of years for tax relief purposes if: [2]

A
  • > 210% of cont. paid in prev year; and
  • amount of excess (over 110% of cont. paid in prev year > £500k.
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24
Q

Spreading employer cont. tax relief:

  • 2 accounting periods
  • 3
  • 4
A

Excess:

  • £500k - £1m
  • £1m - £2m
  • > £2m
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25
Q

Employer spread tax relief in current period =

A

Cont in prev period x 110% + excess / no. of periods to spread across

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26
Q

What is the annual allowance?

A

The total pension input that can be built up from contributions (or accrual of benefit) during each PIP without incurring a tax charge (£60k p.a.)

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27
Q

What is the MPAA designed to stop individuals doing and what does it do?

A
  • Abusing pension flexibilities
  • Reduces AA (£10k p.a.)
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28
Q

What is a PIP?

A

The period over which the amount of PI is measured for the purposes of an AA test.

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29
Q

For DC schemes when are cont.s not included in the total pension input?

A

When the individual is over 75.

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30
Q

In DB schemes, total pension input is defined as what?

A

The increase in the capital value of the individual’s rights over the PIP.

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31
Q

What are the 3 stages of calculating the total pension input under DBs?

A
  • Opening pension input value x 16 + any lump sum then revalued by increase in CPI for Sep before start of tax year
  • closing pension input value x 16 plus any lump sum
  • difference between two = total pension input & tested against AA
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32
Q

If an employer has contributed in excess of an employee’s AA, who is subject to the tax charge?

A

The employee.

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33
Q

Name 2 other exclusions from total pension input.

A

Cont.s & DB accrual in tax year:

  • member dies
  • benefits are taken due to serious ill-health (<12m life expectancy)
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34
Q

What are the 2 conditions when tapering the annual allowance?

A
  • threshold income > £200k
  • adjusted income > £260k
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35
Q

What is threshold income?

A

Gross taxable income +
salary sacrifice income given up -
personal pension cont.s -
any taxed LSDBs received

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36
Q

What is adjusted income?

A

Gross taxable income **+
employer cont.s -
any taxed LSDBs received

37
Q

How much is AA reduced by with tapering, and what is the maximum reduction?

A
  • £1 for every £2 of adjusted income over £260k
  • £50k so AA of at least £10k (equates to £360k AI)
38
Q

How are lump-sum death benefits received from a pension holder who died aged 75 or older taxed?

A

Taxed as pension income at recipient’s marginal rate income tax.

39
Q

When would lump-sum death benefits received from a pension holder who died before 75 be taxable?

A

Where uncrystallised funds or annuity protection LSDB etc. at date of death were valued in excess of member’s LSDBA.

40
Q

What is a necessary condition to carry forward unused AA from a previous year?

A

Must have been a member of a registered pension scheme at some point in the earlier tax year (no pension input required).

41
Q

When carrying forward unused AA, what is the order for years?

A

AA for current year must be used first then carry forward from earliest carry forward year first.

42
Q

Name 5 events that trigger the MPAA.

A
  • 1st draw funds from FAD
  • take UFPLS
  • convert capped DD to FAD
  • exceed permitted max for capped DD
  • receive payment from lifetime annuity where payment can be decreased (flexible annuity contract)
43
Q

MPAA only triggered where the ~ takes certain payments, not ~, ~ or ~.

A
  • member
  • dependant
  • nominee
  • successor
44
Q

What is not a trigger event for the MPAA? [4]

A
  • taking PCLS and only designating balance into FAD (not taken 1st payment yet)
  • small pots lump sum
  • trivial commutation lump sum
  • payments from dependant’s / nominee’s / successor’s FAD
45
Q

If MPAA is triggered and subsequent pension input into DC scheme is less than or equal to £10k [4]

  • AA x2
  • Carry fwd x2
A
  • total AA for year is max £60k
  • no need to test against MPAA
  • can carry fwd unused AA from prev 3 tax yrs (DB element only)
  • can’t carry fwd unused MPAA
46
Q

If MPAA is triggered and subsequent pension input into DC scheme is greater than £10k, has an ~ AA. What is this?

A

alternative annual allowance
- AA for DB savings to max £50k

47
Q

Where MPAA exceeded for DC schemes, AA tax charge to pay on the chargeable amount which is there higher of:

A

default chargeable amount &
alternative chargeable amount

48
Q

Default chargeable amount is?

A

Total pension input in DB & DC schemes -
AA for current tax yr +
any carry fwd available

49
Q

Alternative chargeable amount is?

A

Input into DB scheme -
AAA +
any carry fwd available +
input into DC schemes -
MPAA available

50
Q

It is only DC contributions that have been made ~ the date of the trigger events that are measured against the MPAA, therefore pension input amounts will be ~ depending on when they took place

A
  • after
  • apportioned
51
Q

MPAA pension input: for DC schemes, apportionment is based on contributions paid in each period. For DBs, based on what?

A

A time apportionment basis e.g. if trigger event occurred on day 265 of PIP, proportion of pension input tested against MPAA is 100/365 times pension input amount.

52
Q

If a member exceeds the MPAA but doesn’t exceed the AAA, what will they have and what will they be able to do with it?

A
  • unused AA
  • can carry that fwd to set against any DB accruals in a future tax year
53
Q

AA charge is normally paid via SA but member may have right to elect for scheme administrator to pay some or all of AA charge on their behalf (“scheme pays”) if the AA charge exceeds what value?

A

£2,000

54
Q

If an AA charge is paid by the scheme, what happens?

A

An appropriate reduction is made to the member’s pension benefits.

55
Q

Any AA excess ~~~ all other income sources e.g. dividends.

However, any AA tax charge is always subject to ~ tax rates, i.e. ___.

A
  • ‘sits on top’
  • income
  • 20% / 40% / 45%
56
Q

What was the original purpose of the LTA which was introduced on 6 Apr 2006?

A

To limit the amount of savings that could be built up in a tax advantaged environment.

57
Q

Before 2023/24, what was the LTA charge if the LTA was breached?

  • Lump sum
  • Taken as income
A
  • 55% where excess above LTA was taken as lump sum
  • 25% where excess was taken as income
58
Q

on 6 Apr 2023 the LTA charge was ___, and on 6 Apr 2024 the LTA regime ~.

A
  • reduced to 0%
  • ended.
59
Q

Since the LTA was abolished, there are still limits that apply to what?

A

The level of tax-free lump sum benefits that can be paid both during lifetime and on death.

60
Q

Prior to 6 Apr 2024, what was a benefit crystallisation event (BCE)?

A

Any event that triggered a test against the member’s lifetime allowance.

61
Q

BCE 2: Entitlement to a pension scheme. How is it valued?

A

Scheme pension x 20
(equates to a 5% annuity rate)

[Nb. same for BCE 3: Excessive increase to scheme pension in payment]

62
Q

BCE 5: Defined benefit test at age 75. How is it valued?

A

Scheme pension x 20 + lump sum amount

63
Q

What is a nominee?

A

Any individual nominated by the member, other than a dependant, who is nominated to receive the benefits from the member’s pension plan upon the member’s death.

64
Q

What is the 2 year window?

A

The timeframe within which death benefits must be ‘designated’ to an income producing contract, or paid out as a lump sum in the case of a lump-sum death benefit.

65
Q

When does the 2 year window start?
Earlier of: [2]

A
  • Date the scheme administrator is notified of the death
  • Date the scheme administrator could reasonably be expected to know of the death.
66
Q

What will the LSA & LSDBA put a limit on?

A

The level of tax-free lump sum benefits that can be paid from a member’s pension benefits both during the member’s lifetime and following their death.

67
Q

When calculating the % of lifetime allowance utilised on each previous BCE, % should be to ~ decimal places and rounded ~.

A
  • 2
  • down.
68
Q

If benefits were already in payment before A-Day, what valuation factor is used to determine the amount of unused LTA available?

A

25:1

(higher factor justified by HMRC on grounds no account was taken of any PCLS drawn before A-Day).

69
Q

Name 3 scenarios where individuals may have had a higher LTA (other than if they had applied for one of the transitional protections).

A
  • were not UK residents
  • had transferred benefits from ROPS
  • had received pension credit through a sharing order after A-Day
70
Q

A RBCE occurs when an individual becomes entitled to what 2 things?

A
  • a relevant lump sum (payments made in member’s lifetime)
  • a relevant lump-sum death benefit (payments made after member dies).
71
Q

What relevant lump sum payment is not tested against the LSA (but is tested against the LSDBA)?

A

SIHLS

72
Q

Name 3 lump sum payments not tested against the LSA/LSDBA.

A
  • Small pots payments
  • Trivial commutation lump sums
  • Winding up lump sums
73
Q

What 2 relevant lump-sum death benefits are not tested against the LSDBA.

A
  • Trivial commutation lump-sum death benefit
  • Charity lump-sum death benefit
74
Q

Name 3 lump-sum death benefits not tested against the LSDBA.

A
  • those paid after member is 75
  • those paid before member is 75 but after 2 year window
  • those paid from funds that crystallised before 6 Apr 2024
75
Q

What does the LSA do?

A

Limits the amount of tax-free lump sums a member can receive during their lifetime.

76
Q

What happens where the member’s remaining LSA is insufficient to cover the tax-free element of any RBCE?

A

The excess over their available LSA can be paid as a pension commencement excess lump sum (PCELS) if scheme rules permit.

77
Q

Prior to 6 April 2006 certain occupations had a normal minimum pension age below the age of 55. Where such a member takes their benefits before this then their LSA will be reduced by ~% for each year they take their benefits early.

A

2.5%

78
Q

What are the 3 ways of calculating LSA where member has taken benefits prior to 6 Apr 2024?

A
  • standard transitional basis
  • pre-commencement basis
  • transitional tax-free amount basis
79
Q

When was the standard traditional basis used to calculate LSA?

[2 conditions], and how does it work?

A
  • Where members had benefits tested under previous LTA regime and
  • do not hold a TTFAC
  • deduction applied to their LSA is 25% of their LTA used at 5 Apr 2024
80
Q

When was the pre-commencement basis used to calculate LSA?

[2 conditions], and how does it work?

A
  • Where members first took benefits prior to 6 Apr 2006 (i.e. before introduction of LTA regime) and
  • did not have a BCE under the LTA regime (i.e. between 6 Apr 2006 and 5 Apr 2024)
  • Where a RBCE then occurs after 6 Apr 2024, LSA reduced by 25% of total value of pension in payment when that RBCE occurs.
81
Q

Under the pre-commencement-basis, how are scheme pensions / lifetime annuities valued?

A

25 x annual rate of scheme pension / lifetime annuity payable prior to first post 6 Apr 2024 RBCE

82
Q

Under the pre-commencement-basis, how are capped drawdowns valued?

A

80% x 25 x max GAD rate

83
Q

What is the LSDBA?

A

The overall limit on the lump sums that can be paid tax free in respect of an individual each time there is a RBCE.

84
Q

Where a relevant lump-sum death benefit is paid it triggers a test against a member’sLSDBAif:

[2 conditions]

A
  • the member was under age 75 when they died; and
  • payment is made within two years of the scheme administrator becoming aware of the death
85
Q

What is a disqualifying pension credit?

A

Any part of a pension credit that came from a pension already in payment.

86
Q

What is a pre-commencement pension credit factor?

A

Where the pension credit rights were acquired before 6 April 2006, it was possible to claim an increase to the LTA based on a pension sharing order made before 6 April 2006.

87
Q

How is a pre-commencement pension credit factor calculated?

A

By dividing the value of the pension credit (indexed by RPI to 5 April 2006) by the standard LTA for the tax year 2006/07 (£1.5 million).

88
Q

How is a pension credit factor calculated?

A

By dividing the value of the pension credit by the standard LTA for the tax year at the time.

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