2 - HMRC Tax Regime: Contributions and allowances Flashcards
What is relevant UK earnings
4
Employment Income (Salary, wages)
Income derived from carrying exercise of trade
Income arising from patent rights and treated as erned income
General earnings from overseas crown employment- subject to UK tax
What is the max age for pension tax relief on contributions
75
Can you pay into someone elses pension for contribution
Yes but income will be based on members not person who is contributing
If income is not enough e.g. child (limited to £3,600 - no relevant earnings)
What is net pay?
Employee contribution is taken away before any tax.
They contribute “net” of tax. Before Tax. So they will reduce their income by the contribution.
So if they are higher rate tax bracket (40%) - they will save 40% tax.
What is relief of source method
Contributions are paid net of basic rate of tax.
Employee wants to make gross cont of £100. £80 is deduced of employee net pay (after tax and NICs) - then pension provider reclaims £20 (20% from HMRC).
If higher/additional - further 20% or 25%
What self-assessment how is additional relief calculated
Adding gross amount of contribution to employee basic rate and higher rate band.
How are contributions to personal/stakeholder pensions (including group arrangements) received
Relief at source method
What is the dates that tax have to be paid under self-assessment
31st January during current tax year - 50%
31st July following end of tax year (i.e. 31/07/2024 - on 2023/2024 tax year) - 50%
Balancing payment on 31st January following end of tax year (31/01/2025 - 2023/2024)
What are some benefits of Salary sacrifice
Employer may contribute NIC
Dont use as part of new pensions cheme - reduction in home pay less than amount in contribution
How is an employer contribution paid
Gross and alllowable as business expense - so relief against corporation tax/income tax
When is employer contribution spread over years for tax relief
Exceeds 210% of contribution paid in previous chargeable period
Amount of excess is and above 110% is £500,000 or more
What is spreading of tax relief
(Time periods)
500k-999k (2 accounting periods)
1mil -> 1.999 mil (3 accounting periods)
2mil + - 4 accounting periods
What is Annual allowance
£60k
What is MPAA
£10K
When is Pension Input period?
In line with Tax year
6th April -> 5th April
What elements are not included in pension input amount
Investment income/returns
Contributions paid by individual/ someone other than individual employer after individual reaches 75
What is a cash balance scheme
Mix of DB and DC scheme
- Promised lump-sum payment at specific age, they take PCLS and rest is providing income
How is Total Pension input of DB/Cash balance scheme calculated
- Value of member pension benefits calculated “Opening Pension input value”
- Opening pension input value multiplied by 16
- If including lump sum in addition to pension. Ignore Lump Sum in multiplying process - Then mulitply by increase in CPI for Sept before Tax year
- Closing pension input value is then calculated
- Multiply Closing pension input value by 16
- Difference between two figures is total pension input
Who does the taper allowance affect
Threshold income (Excluding pension contributions) over £200,000
Adjusted income (inclding employer/employee cont) over £260k
Annual allowance is reduced by £1 for every £2 of adjusted income above £260k
Max reduction is £50k so everyone should have min of £10k annual allowance
How is threshold income calculated
Gross Taxable Income
Less
Gross member cont (net pay/relief at source or paid by third party - not employer)
plus
Income givern up via salary exchange or flexible remuneration after 08/07/2015
Less
Tax lump sum death benefits receive
If greater than 200k then calculate adjusted income
If not - no need to calculate adjusted income
How is adjusted income calculated
Gross Taxable income
Plus
Any employer contributions
Less
Any taxed lump sum death benefits
If greater than 260k, annual allowance is tapered
If less than 260k, no tapering required
What is the defintiion of member to carry forward unused allowance
Active
Pensioner
Deferred
Pension credit
How long can you carry forward unused allowance
Previous three tax years
What triggers MPAA
First draws funds from Flex-access drawdown fund
Takes an UFPLS
What does not trigger MPAA
Receiving PCLS
Receive a trivial commutation lump sum
Receives a small pot lump sum
Receives a payment from scheme pension from DB arrangement
Receive payment from scheme pension paid directly from funds of defined contribution arrangements
Receives a payment from dependent flex-acess darwdown fund
What is an alternative allowance
Can only be used for pension input for DB schemes/Cash balance schemes
Can you carry forward MPAA
NO
What is annual allowance charge
Tax that is levied on pension scheme mebmer - paid on self-assessment
Conditions - to get scheme pays
- annual charge liability for tax year exceeds £2000
- Total amount of members pension savings in pension cheme for same tax year has exceeded annual allowance of 60k
When can members have LTA protection for higher PCLS
If protection is made or applied before 15/03/2023
When is the PCLS taken for LTA protection
Value at 05/04/2023
What is LTA before 2024/2025
£1,073,100
What is BCE
Benefit Crystallisation event
What are the methods of taking an income in retirement include
A scheme pension
A lifetime annuity
A drawdown pension
An uncrystallised funds pension lump sum (UFPLS)
How many BCES are there
13
Valuation of BCEs
Drawdown pension
Valuation:
Market value of fund
Valuation of BCEs
Entitlement to a scheme pension
Scheme pension x 20
Valuation of BCEs
Excessive increase to scheme pension in payment
Additional increase x 20
Valuation of BCEs
Purchase of lifetime annuity
Uncrystallised funds: Market value of fund used to purchase lifetime annuity
Funds previously crystallised into drawdown: Market value of member drawdown fund used to purchase the lifetime annuity less the market value of the fund designated for drawdown pension at outset
Valuation of BCEs
Defined benefit test at 75
Scheme pension x 20 plus the amount of the lump sum
Valuation of BCEs
Test at 75 for drawdown pension
Market value of members drawdown pension at age 75 less market value of that designated for drawdown pension at outset
Valuation of BCEs
Test at age 75 for uncrystallised defined contribution funds
The amount of any remaining unused funds
Valuation of BCEs
Unused uncrystallised funds designated for drawdown following the members death
Market value of the assets designated as available for drawdown
Valuation of BCEs
Unused crystallised funds used to purchase an annuity following members death
Market value of the assets used to purchase annuity
Valuation of BCEs
Relevant Lump sums
Amount of lump sum
Valuation of BCEs
Relevant lump sum death benefits
Amount of lump-sum death benefits
Valuation of BCEs
Transfers overseas
The amount of transfer value
Valuation of BCEs
Prescribed events
The amount prescribed in the regulations
What was the lifetime allowance tax charge before 2023/2024
55% where excess above taken as lump sum
25% if taken as income
How should BCE be expressed in decimals
if 66.6666%
it is 66.66% not 66.67%
How to calculate available lfietime allowance
%of Lifetime used then.
Multiply % by now Lifetime allowance
What happens if benefits started before A day
25:1 valuation.
10k of annuity valued at 250k
Pensions credit effected before 6 April 2006
IAPC/ SLA
IAPC is the amount of pension credit awarded increase by RPI
SLA- standard lifetime allowance for tax year 2006/2007
