2 - HMRC Tax Regime Flashcards
When did A-Day come into force and what is it?
6th April 2016
Changed what can put into/build in a pension and what you can take out as benefits
6 changes brought in by A-Day
- Cap on contributions for DC and benefits for DB - If limit exceeded then charged at marginal income tax rate. (Annual allowance charge)
- Cap on benefits, death pre-retirement or overseas transfers - if cap is breached tax charge due. (Lifetime allowance charge)
- Tapered annual allowance - clawback tax from higher earners
- Money purchase annual allowance - prevent pension cash recycling
- Carry forward - allows unused contribution allowances to be used
- Transitional fund protection
Measures against allowances and valuation factors:
Annual allowance
Money purchase annual allowance
Tapered annual allowance
Standard lifetime allowance
AA - £60,000 - DB 16:1
MPAA - £10,000 - None
TAA - Depends upon income - DB 16:1
SLA - £1,073,100 - DB 20:1, pre A-Day 25:1
When does tapered annual allowance take effect and reduce £60k annual allowance?
What is the exception?
When adjusted income of more than £260k, will start to lose income at rate of £1 for every £2 made, down to a minimum of £10k annual allowance.
Exception - If personally contributed less than £200k and employer then contributed over £60k. Then TAA doesn’t apply.
What is minimum annual allowance can be tapered down to?
£10k
How was cash received Pre-A-Day compared to Post-A-Day?
Pre - tax free cash
Post - Tax free lump sum and tax free cash with UFPLS
Max. tax relief available on contributions?
Greater of £3,600 or 100% of gross annual salary if relevant UK individual
When is a person a relevant UK individual?
Under age 75
&
Satisfy one of the below rules:
- relevant UK earnings subject to income tax
- resi. in current tax year
- resi. in 1 of 5 latest tax years and became a member of the pension scheme
- have UK taxable earnings from crown employment
Patent income
Income from an invention that has registered a patent at the intellectual property office (IPO)
Overseas crown employment
Employees of the crown working overseas but still subject to UK income tax
Are dividends classed as UK earnings and pensionable?
No to both
Limit to number of pension scheme contribute to from person or employer?
No limit
Salary sacrifice & 3 rules
Reduce salary in return for higher employer pension contributions.
- Employee must agree to this in writing that is not retrospective
- Decision cannot be changed unless suffer lifestyle change (e.g. divorce)
- Salary cannot reduce below min. wage
3 benefits and drawbacks to salary sacrifice
+ Reduxe employer and employee NI contributions
+ Reduce income tax
+ Could retain child benefit
- Could effect future applications (e.g. mortgage)
- Could reduce DWP benefits (e.g. maternity pay)
- Could reduce company benefits (e.g. sick pay)
In-Specie pension contribution
Contribution made using assets not cash (e.g. shares, investments)
Do in-specie transfers qualify for tax relief?
No, subject to CGT when contribute to pension also
Recycling cash into a pension
Tax free 25% lump sum and contribute this into a pension again
What happens if caught recycling pension income by HMRC?
Can lose tax free cash amount and this will all be treated as an unauthorised payment.
4 conditions for tax free sum to be considered as unauthorised: (All must be met)
- members PCLS in 12 month period is over £7,500
- Contribution paid due to recycling increases by over 30% and over 30% PCLS used
- Additional contributions made by individual or employer
- recycling was pre-planned
What does tax rate go upto for unauthorised payment?
Upto 55%
What if someone with no income contributes more than £3,600 to pension annually?
Will be taxed at marginal tax rate on amount above £3,600
What if self employed person contributes more than annual profit for tax yr?
Any excess will be paid in self assessment at marginal rate
3 methods of individual contribution tax relief:
Net pay method
Relief at source
Relief by making a claim
Net pay method - contribution deducted from gross pay before calculating income tax
Relief at source - contributions made net of basic rate tax and claimed by the provider from HMRC then added to pension contributions. Higher or additional rate tax reclaimed through self assessment
Relief by making a claim - Contributing to an retirement annuity contract so don’t receive tax relief on contributions up-front and all tax relief reclaimed through self assessment
What are employer pension contributions offset against as a tax relief?
LTD company - Corporation tax
Sole trader - Income tax
Wholly and exclusively rule
Employers must treat employees fairly and so if employees carrying out the same job then employer contributions must be the same
Employers pension contribution can be spread tax relief when: (3)
All 3 must be a yes:
- Over 210% of PREVIOUS employer contribution paid in last chargeable period
- Excess over 110% Of employer contributions in previous chargeable period
- Value of £500k+
How many years can employer contributions be spread over should the conditions be met?
£500,000 - £999,999 over 2 accounting periods
£1m - £1,999,999 over 3 accounting periods
£2m+ over 4 accounting periods
Pension input period measurement for DC or DB schemes
Pension input period - period for which measuring total pension input for AA. Starts when:
DC input period from first contribution
DB input period from when rights start to accrue within scheme
Pension input period runs from and to what dates?
April 6th to April 5th
Total pension input measurement for DC scheme and what’s will be ignored?
DC = member contributions and contributions made by employer
Will ignore:
- contributions paid by anyone age 75+
- pension investment profits
Total pension input measurement for DB scheme steps and what will be ignored
- Establish opening balance
- Add CPI
- Establish closing balance
- Subtract inflation proofed opening balance from closing balance
- Multiply result by 16 (16:1)
Will ignore:
- Contributions made in which year died
- Contributions made in which year crystalise due to serious illness
How do you calculate threshold income? (T in threshold for takeaway)
Gross taxable income - EMPLOYEE pension contributions - lump sum death benefit + salary sacrifice deductions
How do you calculate adjusted income?
(A in adjusted for add first)
Gross taxable income + EMPLOYER pension contributions - Lump sum death benefits
How many years unused annual allowance can you carry forward and how is this used?
3 years worth of unused AA and used in chronological order (e.g. use 3yrs ago then 2yrs then 1yrs)
Money purchase annual allowance (MPAA)
Stops people using tax freedoms and reinvesting in DC scheme and claiming tax relief again, recycling this cash.
Established by:
- Has a trigger event occurred?
- level of DC PIP in subsequent PIP’s
Once an MPAA is triggered it is applicable for all future tax yrs
MPAA triggers
Crystalise funds and take flexi access drawdown, including short term annuity purchase
Crystalise funds and take cash using UFPLS
Convert capped drawdown to FAD and take drawdown as income
Exceed cap of 150% GAD on pre 6th April 2015
Receive income from flexi-annuity where income is permitted to decrease
Receive stand alone lump sum using primary protection of over £375k
Received a DC pension that is paid to less than 11 other members
What happens if a trigger event occurs and MPAA applies?
If subsequent DC contributions £10k or less:
- No change
If subsequent DC contributions over £10k:
- £10k MPAA triggered forever
- Alternative annual allowance (AAA) made up of 2 parts £50k limit for DB scheme & £10k MPAA for DC scheme
- Can carry forward £50k AAA for DB scheme but not £10k MPAA
Longer the pension fund is in place has what effect on risk?
Can take more risk in general
What pension investments are not allowed and how are they taxed?
Taxable property (e.g. skiing resorts, holiday home, vintage wines) - Type of property that gives a personal benefit
Taxable in 3 groups:
- unauthorised payment charge - flat rate of 40% through self assessment
- unauthorised payment surcharge - Surcharge of 15% through self assessment
- scheme sanction charge - charge of 15% to 40%
Tax implications for a scheme in event of unauthorised payment charge against them
Deregistration charge - Withdraws RPS status and 40% tax charge on all scheme assets immediately before losing RPS status
Can overseas schemes have UK tax benefits? And who would use these?
Yes if qualified recognises overseas pension scheme (QROPS) or recognised overseas pension scheme (ROPS)
Ex-Pats
How are QROPS or ROPS treated for tax?
If within same country as pension scheme based then no overseas tax charge otherwise flat rate of 25%
Only taxable in 1 country if abides by double taxation agreement
No tax above LTA
Must report to HMRC any charges that would not be allowed under a UK RPS
40% tax charge and 15% surcharge if tax rules are broken
What if non-resident and receive QROPS or ROPS?
Classified as non-resi.:
- pre 5th April 2017 - Upto 5yrs
- post 6th April 2017 - Upto 10yrs
Withdrawal amount upto £100k:
- Not UK taxable
Withdrawal amount over £100k:
- Taxed in UK on return at marginal rate
Lifetime allowance
- Tax charge if go beyond LTA
£1,073,100 without incurring tax charge
If go beyond this then a tax charge of either:
55% if taken as a lump sum
Or
25% if designated as income then subject to income tax when draw income
What is lifetime allowance for pre A-Day pensions already receiving income?
Use valuation factor of 25:1 to calculate lifetime allowance useage
How can lifetime allowance be higher than usual amount?
- Individual is not resi. to UK
- Benefits are transferred from overseas
- Individual received pension credit in a divorce settlement (prior to 6th April 2006)
Pension credit
2 types:
- From HMRC and gives a guaranteed income realated benefit
- From a divorce settlement where divorce and split pension (enhancement of LTA only applicable to pre A-Day awarded pensions)
Pension debit & pension credit when in a divorce settlement
Pension debit - debt to other
Pension credit - money owed to you
At what age can you crystallise a pension? Do you have to cease employment to receive pension?
55 and no
When can you access a pension earlier than age 55? (2)
- Contractual right due to occupational scheme
- special occupations - a those that typically mean earlier retirement e.g. athlete
What is a bulk transfer when regarding a RPS
Where 2 or more members transfer their benefits away from the RPS
What is a scheme wind up when regarding an RPS?
Closed to new members and then wound-up
What happens to life time allowance if crystalise early?
Lose 2.5% of LTA for each complete year took funds early (e.g take retirement at 35, then took 19 complete years earlier than 55)
What is secured pensions income
Guaranteed income so can be either DB scheme or annuity
What is a drawdown pension?
Drawdown pension as unsecured income but remains invested so can either use to encashment or purchase an annuity
Trivial commutation and rules
DB
Small pots triviality
Commuting a dependent pension
OPS being wound up
Small pension sums that cost a lot in administration so can commute for cash. Rules:
DB schemes:
- Max value of £30k
- 25% tax free
- min. age 55
- must be commuted within 12month period
Small pots triviality:
- Max value of 3 pots at £10k each so £30k total
- 25% tax free for uncristalised or all taxable for benefits in payment
- min. age of 55
- all benefits must be commuted
Commuting a dependent pension:
- £30k max value
- No tax free element
- No min. Age
- All rights to scheme must be extinguished
OPS being wound up:
- £18k max. value
- 25% tax free
- No min. Age
- All rights to scheme must be extinguished
Benefit crystallisation event (11) and basis valuation
Becoming entitled to DB or DC scheme - 20:1
Becoming entitled to an annuity - 20:1
Reach age 75 with Uncrystalised DB benefits - 20:1
Rest based upon lump sum value or market value of fund
Pre-crystallisation death benefit
Dies pre-Age 75:
- Can get tax free lump sum upto LTA, which must be paid within 2 yrs of when administrator knew of death or taxable in full at recipients marginal rate
- Taxable at marginal rate above LTA but if paid to a trustee then taxable at flat rate of 45%
Does from age 75:
- Pension amount is fully taxable at marginal rate of recipient in full or if paid to a trustee then fixed tax rate of 45%
Charity lump sum death benefit
Method to avoid taxation on a lump sum - Leave lump sum to a registered charity then lump sum will be paid tax free regardless of members age at death
What terms must be met to be considered for a dependent pension or to be considered a dependent by HMRC? (4)
Married to member at time of death
Married to member when receiving pension (even if divorced before members death)
Dependent under age 23 at time of death
Dependent over age 23 that is disabled
Nominee
nominated by moment to receive pension upon death and can only happen when they had no dependents
Successor
Individual nominated by a dependent to continue to receive income on death of current recipient
How is pension income taxed:
Die pre age 75:
- All income taxable on recipient at marginal rate except no tax on LTA excess on annuity, beneficiary/nominee/successor drawdown
- funds already drawn now tested
- Not classed as a BCE unless is an annuity or drawdown pension
Die age 75+:
- All income taxable on recipient at marginal rate
-
Transitional reliefs
For those who had done nothing wrong but because HMRC lowered LTA could be subject to tax charge. Entitled to this by completing a protection of existing rights form.
Primary protection (as a transitional relief )
Available for funds over £1.5mil as at A day and gives people their own individual lifetime allowance whilst still permitting contributions.
If exceed individual lifetime allowance then pa income tax at marginal rate above this (not lifetime allowance charge)
Enhanced protection (as a transitional relief )
- no min. value required
- registered benefits completely protected against LTA but cannot make further contributions to new schemes or lose protection (unless auto-enroll as employee into a scheme)
- full protections even allies if exceed LTA at point of crystallisation
What valuation is used for 25% tax free lump sum?
Value as of 5th April 2023, unless fund value drops as value at 5th April 2023 is max. PLCS possible for that year
Fixed protection (as a transitional relief )
- protection lost if there is a cessation event
- PCLS capped at £450k, £375k or £312,500 or 25% of fund value at BCE point
- further contributions will cause loss of protection
- PCLS capped at £268,725 (25% of LTA)
Individual protection (as a transitional relief )
- PCLS capped at £268,725 (25% of LTA)
- standard March 2023 budget rules apply
Tax free cash protection: (PCLS protection)
Scheme specific protection
Primary protection
Enhanced protection
Scheme specific protection
- have automatic registration
- Available for those with cash entitlement of less than £375k but more than 25% of fund
Primary protection
- Must register for
- Available for those with cash entitlement of £375k+ but more than 25% of fund
Enhanced protection
- Form of TFC protection
Enhanced protection:
- Available for those with TFC entitlement of £375k+ as at 5th April 2006 but elected for enhanced protection
Lifetime allowance charges if go beyond LTA and take as lump sum or income
If go beyond this then a tax charge of either:
55% if taken as a lump sum
Or
25% if designated as income then subject to income tax when d
