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TC > 2. TC - Pensions > Flashcards

2. TC - Pensions Flashcards

1
Q

Who can get tax relief on their pensions?

A

Indivs under 75 who are active members of a registered pension scheme

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2
Q

What are the 2 types of pension scheme?

A

OPS - Occupational pension scheme

PPS - Personal pension scheme

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3
Q

Describe the Occupational Pension Scheme

A
  • Set up by an employer for benefit of employees
  • Contributions can be made by e’er or e’ee
  • Registered OPS can be either
    > Money purchase schemes- benefits received relate to perf of inv in the fund
    > Defined benefit schemes - benefits received relate to level of earnings of the employee
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4
Q

Describe the personal pension scheme

A
  • Run by financial institution e.g. ins company/bank
  • Available to any indiv (empl, self-emp, un-empl)
  • Contributions made by
    > Indivs
    > Any 3rd party on indivs behalf (e.g. e’er/spouse)
  • PPSs are usually money purchase schemes
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5
Q

Can members be a member of an OPS and a PPS?

A

YES
However, the rules learnt apply to all the schemes joined collectively
There are various limits per tax year within which an indiv is bound and this limit applies to all schemes, not each scheme separately

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6
Q

What does the income tax relief for contributions operate in the same way to?
How is it treated?

A

Acts in the same way as Gift Aid
Relief is given at source by the contributions being made net of the basic tax rate at 20%
HMRC then pays an equivalent amount of the basic rate of tax into the pension scheme
Higher rate (40%) taxpayers and additional rate (45%) taxpayers require an additional relief therefore we extend both
- Basic rate band of £37.5k is grossed up by the personal pension contribution
- Higher band of £150k is grossed up by personal pension contribution

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7
Q

How does the personal pension scheme provide tax relief?

What is this similar to?

A

Relief is given at source by the contributions being made net of the basic tax rate at 20%
HMRC then pays an equivalent amount of the basic rate of tax into the pension scheme
Higher rate (40%) taxpayers and additional rate (45%) taxpayers require an additional relief therefore we extend both
- Basic rate band of £37.5k is grossed up by the personal pension contribution
- Higher band of £150k is grossed up by personal pension contribution

Gross PPS contributions are also deducted from net income when calculating adjusted net income

Gift Aid

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8
Q

What are the automatic enrolement regulations for OPS contributions?

A

Under automatic enrolment, employers must enrol all staff into an OPS (with some exceptions)
Contributions must be made by both e’er and e’ee

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9
Q

How do pension contributions made by the employer into e’ees pension scheme impact the e’ee and e’er?

Is this an accruals or cash basis deduction?

A

E’ers contributions to e’ees pension scheme (personal or occupational) are

  • Exempt benefit for the e’ee
  • An allowable trading expense for the employee

On cash basis- i.e. when they are actually paid

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10
Q

When are pension scheme contributions tax reliefs available for e’ers?

A

On a paid basis
i.e. any accrued pension contributions at the end of the e’era ac period are disallowed expenses
Only get the relief when it is actually paid

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11
Q

How does the limit apply to the amount of relief that an individual can obtain on their own contributions in the tax year?

A

Limit applies to the total contributions made into both occupational and personal pension schemes

Its based on gross contributions

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12
Q

Is the limit on tax relief for pension contributions based on the gross or net contributions?

A

Gross contributions

and it applies to contributions made into both occupational and personal pension schemes

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13
Q

How do you calculate the gross pension contributions for personal and occupational contributions?

A

For Personal - gross them up first

For occupational - simply take the amount contributed

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14
Q

What is the maximum gross pension contribution made by an individual that will attract IT relief?

A

The HIGHER of
£3,600

100% * relevant earnings (Taxable trading profits + employment income)

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15
Q

TYU3: The sole trader below want the following gross contributions to be paid into a personal pension scheme in 19/20
Alex
Pension contributions (gross) £5,000
Trading profits £Nil

  1. State the max tax relief available for contributions
  2. Explain how tax relief for the pension contributions will be given
  3. Calc the income tax liability for the tax year 19/20
A

As Alex has now earnings he will obtain tax relief on a max gross amount of £3,600
He will obtain basic rate tax relief at source of £720 (£3,600 * 20%) and pay £4,280 (£5,000 - £720) to the pension scheme

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16
Q

TYU3: The sole trader below want the following gross contributions to be paid into a personal pension scheme in 19/20
Brian
Pension contributions (gross) £5,000
Trading profits £20,000

  1. State the max tax relief available for contributions
  2. Explain how tax relief for the pension contributions will be given
A

Brian’s pension contributions are less than his earnings for the year and he will therefore receive tax relief on the full amount of the contribution

He will obtain basic tax relief at source of £1,000 (£5,000 * 20%) and will pay £4,000 (£5,000 - £1,000) to the pension scheme

As Brian is not a higher rate or additional rate taxpayer no adj is required to his basic or higher rate bands

17
Q

TYU3: The sole trader below want the following gross contributions to be paid into a personal pension scheme in 19/20
Charlotte
Pension contributions (gross) £25,000
Trading profits £20,000

  1. State the max tax relief available for contributions
  2. Explain how tax relief for the pension contributions will be given
A

The tax relief available on Charlotte’s pension contributions is restricted to 100% of her earnings i.e. £20,000

She will obtain basic rate tax relief at source of £4,000 (£20,00 * 20%) and pay £21,000 (£25,000 - £4,000) to the pension scheme

As Charlotte is not a higher rate or additional rate taxpayer no adjustment is required to her basic rate or higher rate bands

18
Q

TYU3: The sole trader below want the following gross contributions to be paid into a personal pension scheme in 19/20
Desmond
Pension contributions (gross) £40,000
Trading profits £80,000

  1. State the max tax relief available for contributions
  2. Explain how tax relief for the pension contributions will be given
  3. Calc the income tax liability for the tax year 19/20
A

D’s pension contributions are less than his earnings for the year and he will therefore receive tax relief on the full amount of the contribution

He will have obtained basic rate tax at source of £8k (£40k * 20%) and pay £32k (£40k - £8k) to the pension scheme
Higher rate relief will be given by extending the basic band by £40k

Extended basic rate band = £37.5k + £40k = £77.5k

  1. Income tax comp
    Trading income/net income £80k
    Less PA £(12,500)
    Taxable income = £67,500

Income tax
NSI- basic rate (W) £67,500 * 20% = £13,500

Income tax liability = £13,500

19
Q

What is the annual allowance? and how long has this been the case?

A

£40,000

Since TY 14/15

20
Q

Can the annual allowance be carried forward?

A

It can be carried forward for 3 years and is used on the FIFO basis, after the current years annual allowance has been used

21
Q

What does the annual allowance charge do?

A

It removes the relief given on excess contributions

22
Q

How is the annual allowance charge treated on the tax comp?

A

It is added to income tax liability

But won’t be examined on this numerically

23
Q

Are there any restrictions on the annual allowance?

A

Since 16/17 the annual allowance is gradually reduced for indiv with high income

Restriction is calculated separately for each relevant tax year but you won’t be examined on it numerically

24
Q

How is the restriction to the annual allowance on higher income calculated?

A

Restriction is calculated separately for each relevant tax year but you won’t be examined on it numerically

25
Q

When does the lifetime allowance apply?

A

In retirement

26
Q

What is the lifetime allowance?

A

Limit on the amount that an indiv can accumulate in a pension scheme to obtain the benefit of tax free growth

27
Q

What is the lifetime allowance for 19/20?

A

£1,055,000

28
Q

When can a pension be drawn?

A

All or part can be taken to provide a pension at any time after they reach pensionable age

For the purpose of the exam, pensions can’t be paid out a scheme until the indiv reaches 55

29
Q

Can you receive a pension and continue to work?

A

YES

30
Q

What happens when an indiv reaches pension age?

A

They may receive a tax free lump sum payment and withdraw the balance of the pension fund at any time

Tax free lump sum is capped at 25% of the lower of

  • Value of the fund
  • Lifetime allowance
31
Q

What is the tax free lump sum that an indiv can receive at pensionable age capped at?

A

Tax free lump sum is capped at 25% of the lower of

  • Value of the fund
  • Lifetime allowance
32
Q

Is the growth of a pension fund taxed when an indiv reaches pension age?

A

Any undrawn funds can continue to grow in a relatively tax free environment

33
Q

When retrieving a pension, how is it taxed if the fund doesn’t exceed the lifetime allowance?

A

Any pension income not taken as a tax free lump sum is taxable as non-savings income in the TY which it is received

34
Q

When retrieving a pension, how is it taxed if the fund does exceed the lifetime allowance?

A

Any EXCESS over the lifetime allowance is taxed when the funds are taken from the scheme at either 55% or 25% depending on who the benefit is taken

TC (25 decks)

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