2 : 6 - HMRC Tax Regime

Question 1

When was A-Day?

Answer 1

6 April 2006

Question 2

What was A-Day?

Answer 2

A momentous date in the history of pension regulation in the UK.

It marked the date when the many disparate rules that governed pensions were consolidated under one regime.

Question 3

What new rules did A-Day introduce?

Answer 3

That any amount could be contributed to a pension scheme, but a limit, known as the annual allowance, is now placed on the total amount of benefit that can build up from tax-relieved contributions into registered pension schemes each tax year without incurring a tax charge.

Any pension input above this will be subject to a tax charge on the excess payable by the member at their highest marginal rates.

Question 4

What is the limit on the amount of contributions that can be paid into a registered pension scheme?

Answer 4

There is no legislative limit

Question 4

What is the limit on the amount of contributions that can be paid into a registered pension scheme?

Answer 4

There is no legislative limit

Question 5

What is the limit on the amount of contributions paid by an individual that qualify for tax relief?

Answer 5

Currently: £40,000

This was £215k pa back in 2006/07

Question 5

What is the limit on the amount of contributions paid by an individual that qualify for tax relief?

Answer 5

Currently: £40,000

This was £215k pa back in 2006/07

Question 6

What is the charge on the excess contribution over the annual allowance?

Answer 6

The annual allowance charge is 40%

Question 6

What is the charge on the excess contribution over the annual allowance?

Answer 6

The annual allowance charge is 40%

Question 7

What is threshold income?

Answer 7

To ensure that the addition of pension savings doesn’t affect lower-paid individuals, there is another definition of income – threshold income.

Threshold income will normally be the individual’s net income for the year, less the amount of certain lump sum death benefits paid to the individual during that tax year and less gross pension contributions paid under the relief at source system.

Question 7

At what level does tax relief on pensions get tapered?

Answer 7

From £150,000 pa worth of income

Question 8

How is it tapered?

Answer 8

For every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.

Question 8

What happens this is exceeded?

Answer 8

The lifetime allowance charge will be applied.

Question 9

EG:

What effect does tapering have on income levels of:

< £150k pa

> £210k pa

Answer 9

This results in an annual allowance of £40,000 for those with an adjusted income of less than £150,000.

(A reducing annual allowance for those with adjusted incomes between £150,000 and £210,000)

And an annual allowance of £10,000 for those with an adjusted income over £210,000.

Question 10

When would a benefit crystallisation event (BCE) occur?

4

Answer 10

• takes a pension or a lump sum
• reaches age 75
• dies
• transfers to a qualifying recognised overseas pension scheme (QROP).

(It is quite conceivable for one individual to have several BCEs throughout their lifetime.)

Question 11

Following a BCE, what does the tax charge applicable to the exceeded LTA depends on?

Answer 11

• If they are all taken as income, the excess is taxed at 25%.
• If they are all taken as a lump sum, the excess is taxed at 55%.

Question 12

What is the LTA for 2018/19?

Answer 12

£1,030,000

Question 13

What happens this is exceeded?

Answer 13

The lifetime allowance charge will be applied.

Question 14

When will the pension scheme administrator check whether a member’s pension savings have exceeded the LTA?

Answer 14

Only when a benefit crystallisation event (BCE) occurs

Question 15

When would a benefit crystallisation event (BCE) occur?

4

Answer 15

• takes a pension or a lump sum
• reaches age 75
• dies
• transfers to a qualifying recognised overseas pension scheme (QROP).

Question 16

Following a BCE, what does the tax charge applicable to the exceeded LTA depends on?

Answer 16

• If they are all taken as income, the excess is taxed at 25%.
• If they are all taken as a lump sum, the excess is taxed at 55%.

Question 17

What 2 factors are considered for DB schemes when assessing LTA?

Answer 17

• If the pension is not yet in payment, it is the accrued pension amount x 20.
• If the pension was in payment before A-day (2006), it is the pension amount x 25. (The difference is to allow for the fact that a cash lump sum may have been taken.

Question 18

EG:

Returning to the situation of Julian, a member of the AUK ltd pension scheme, he is in a 1/60th scheme, earning £39,000 pa with 26 years’ service.

Answer 18

His deemed ‘fund’ to set against the LTA will be:

26/60 x £39,000 = £16,900

£16,900 x 20 = £338,000

Question 24

EG:

Jane is 63 years old. She retired from her job as a company director in 2005, and enjoys a pension of £50,000 pa from this employment. She started to do some consultancy work a couple of years ago, and is considering starting a new pension plan based on the earnings she receives. She would like to know what scope she has for pension planning within her LTA.

Answer 24

£50,000 x 25 = £1,250,000 (ignore the lump sum as the pension was in payment before A-day).

Based on the current LTA of £1,030,000 she has no scope within the LTA.

Question 25

Why is Transitional Protection necessary?

Answer 25

It was possible for an individual to fund close to, or even exceed, the LTA when it was introduced in April 2006; since then the value of the LTA has increased and decreased over time.

The post A-day limits were therefore perceived as unfair to those who had always stayed within the old limits under the previous regime(s), but were subsequently exceeding the new limits.

Question 26

What protections and enhancements are available as higher allowances?

(9)

Answer 26

• primary protection
• enhanced protection
• fixed protection
• fixed protection (2014)
• individual protection (2014)
• fixed protection (2016)
• individual protection (2016)
• pension credits and debits on divorce
• non-UK residents or international transfers.

Question 27

What is Primary Protection

Answer 27

Primary protection is only available if the individual’s pension rights were valued at more than £1.5 million on 5 April 2006

Question 28

How is Primary Protection calculated?

Answer 28

(Total value of benefits at 5 April 2006 - £1.5m)

/

£1.5m

The result is rounded to two decimal places and can then be added to ‘1’ to be applied to any existing LTA amount. This will increase the LTA for that particular individual.

Question 29

EG - Primary Protection:

Karen had combined pension funds totalling £1.8 million in 2006. Her Primary Protection Additional Factor is calculated as follows:

Answer 29

(£1.8m – £1.5m) / £1.5m

The additional factor is 0.2. To maintain the value of her primary protection at 2011–12 levels, the additional factor is applied to the current standard LTA figure or rather in this case, £1.8 million where this is greater than the current standard LTA at the time of the BCE. So, Karen’s LTA will be £1.8 million plus 0.2 x £1.8 million (£360,000). So, although the current LTA is £1 million, Karen’s LTA will be £2.16 million.

Question 30

What is Enhanced Protection?

Answer 30

As its name suggests, does provide full protection for the value of the whole of an individual’s pension rights.

Question 31

What is Fixed Protection?

Answer 31

This relates to the reduction of LTA from £1.8 million.

This could be retained at £1.8 million if the individual applied before 6 April 2014 and requires that no further benefit accruals are made in future.

*An individual can’t have fixed protection if they have either primary or enhanced protection.

Question 32

How did Fixed Protection change in 2014 (FP14)?

Answer 32

In the same way, this relates to the reduction of LTA from £1.5 million.

This could be retained at £1.5 million if the individual applied before 6 April 2012.

Question 33

What is Individual protection 2014 (IP14)?

Answer 33

This allows individuals to retain an LTA based on the value of their pension savings at 5 April 2014 up to a maximum of £1.5 million, subject to the total value of all pensions at 5 April 2014 being at least £1.25 million.

Question 34

How did Fixed Protection change in 2016?

Answer 34

This relates to the reduction of LTA to £1 million on 6 April 2016. The allowance could be retained at £1.25 million.

Question 35

What is Individual protection 2016?

Answer 35

This relates to the reduction in LTA to £1 million from April 2016. An individual’s personal LTA can be fixed to the value of the fund at 5 April 2016 or £1.25 million, whichever is lower.

Question 36

For an individual to be eligible for tax relief on their pension contributions they must be:

(5)

Answer 36

• be under 75

• have relevant UK earnings (ie, earned income) AND
• be resident in the UK during the tax year

OR

• have been resident in the UK at some time in the last five tax years and paid contributions into a pension scheme

OR

• be an individual (or spouse or civil partner of that individual) with earnings from overseas Crown employment that is subject to UK tax.

Question 37

What is the maximum amount which a member of a scheme can have relieved?

Answer 37

The greater of:

• the ‘basic amount’, currently £3,600

AND

• the amount of the individual’s relevant UK earnings that are chargeable to income tax for the tax
year.

Question 38

What’re the 3 methods for tax relief to be received by individuals?

Answer 38

1. tax ‘relief at source (RAS)’
2. the net pay method of providing tax relief
3. make gross contributions and claim the tax relief through self-assessment.

Question 39

What is tax ‘relief at source (RAS)’?

Answer 39

This is the method used for most personal plans, such as PPPs and stakeholder pension plans.

The RAS mentioned in the name is immediate tax relief at the basic rate applied in that tax year.

Question 40

What rate is RAS given at?

Answer 40

Aways given at basic rate

This is currently 20%.

Very simply, this means that an individual only needs to contribute £800 to have £1,000 invested on their behalf.

Question 41

How does the effect an individual paying:

1. As a non-taxpayer
2. As a basic-rate taxpayer
3. As a higher-rate taxpayer.

Answer 41

• A non-taxpayer can pay up to £3,600 (gross), £2,880 net, and still receive RAS on the contribution.
• Basic-rate taxpayers receive their correct amount of tax relief immediately.
• Higher-rate taxpayers are eligible to claim back an additional 20% of tax relief. They will have to do this via their self-assessment tax return.

Question 42

What is the net pay method of providing tax relief?

Answer 42

This is the method used by workplace pension schemes. Here, the pension contribution is paid gross and deducted from earnings before being liable for income tax.

As a result, an individual will immediately receive full tax relief at the relevant rate.

Question 43

What is an additional method used particularly by self-employed clients or those with family businesses

Answer 43

By employing spouses or taking them into partnership in the business, each spouse is able to gain the benefit of tax relief on pension contributions and has the benefit of a tax-free Earnings Allowance.

(In such circumstances the individual being employed must actually be paid the remuneration for the role undertaken – which must be a real job, otherwise the pension arrangements and tax relief on them may be challenged by the tax authorities)

Question 44

What is the total number of Benefit Crystallisation Events (BCEs)?

Answer 44

13

Question 45

How are these categorised?

Answer 45

• Taking Pensions (x4)
• Unused funds at age 75 or on earlier death
• Lump Sums (x2)
• QROPS
• Other

(go into these in more detail in the textbook if necessary later)

Question 46

What are Employer-Financed Retirement Benefit Schemes (EFRBSs)?

Answer 46

It is an unregistered scheme set up by an employer to provide retirement or death benefits to employees and their families.

An EFRBS is structured as a discretionary trust and the trustees are independent of the employer.

Question 47

What is the benefit of an EFRBS?

Answer 47

They offer more flexibility than other traditional pension schemes as the contribution the employer can make to the scheme and the benefit the employee may receive are not restricted.

Funds held within the EFRBS do not count towards the employee’s lifetime allowance (LTA) or money purchase annual allowance (MPAA)

Question 48

Who might an EFRBS be suitable for?

Answer 48

• non-UK residents
• UK residents who plan to leave the country at retirement
• UK residents who are planning on staying in the country but who are able to make significant pension contributions.

Question 49

How is an EFRBS taxed?

Answer 49

An EFRBS is not a tax-exempt structure, and monies held within the EFRBS are taxed as though they are held in a general discretionary trust (income taxed at 45% and gains taxed at 28%).

If the EFRBS is set up offshore, there will be no UK tax payable on income and gains.

Question 50

What does QROPS stand for?

Answer 50

Qualifying Recognised Overseas Pension Schemes

Question 51

How is an QROPS taxed?

Answer 51

It is not subject to any UK taxes, including IHT.

However, it does become subject to taxation in the jurisdiction it is based in

Question 52

Which countries make popular choices for locating a QROPS?

Answer 52

Countries with low or no taxation

Eg: Guernsey, Jersey and the Isle of Man.

Question 53

What is the other benefit of a QROPS?

Answer 53

It is also possible to take advantage of the less restricted pension rules in other countries.

Eg: in the UK, no one can touch their pension until the legal minimum retirement age. However, if transferred to a New Zealand rules pension fund, they can take out their pension as a lump sum before official retirement age.

Question 54

How is income taken from a QROPS?

Answer 54

There is no requirement to purchase an annuity. Income may be drawn down as the client wishes.

Question 55

What does QNUPS stand for?

Answer 55

Qualifying Non-UK Pension Schemes

Question 56

What are QNUPS used for?

Answer 56

Tax Planning Opportunities for British Expatriates and UK Domiciles

Question 57

What does the ‘Qualifying’ part of QNUPS mean?

Answer 57

It means that the overseas pension scheme must meet HMRC’s criteria for pension schemes that will not attract IHT

Question 58

In a QNUPS, is there is limit to the size of contributions?

Answer 58

No

Question 59

In a QNUPS, is it subject to income tax?

Answer 59

Depending on where the client is resident, income may be subject to income tax.

Question 60

In a QNUPS, on the client’s death, how are any assets left in the fund treated for IHT?

Answer 60

Any assets left in the fund pass to beneficiaries without counting towards IHT.

Question 61

In a QNUPS, is there a requirement for trustees to report to HMRC?

Answer 61

No - except if the fund holds assets that were

originally transferred from an authorised UK pension fund.