3. Taxation Flashcards
Criteria to receive tax relief on pension contributions? (4)
< 75yo and any of:
- taxable earnings in-year
- UK resident in-year or in prev. 5 yrs
- contributor or spouse received overseas income subject to UK tax as a Crown employee
What is the maximum contributions on which you can receive tax relief?
Greater of £3.6k p.a and earned income
At what level and rate does the annual allowance reduce by?
Reduces by £1 for every £2 that adjusted income is > £260k
What is the result of pension input amount exceeding the annual allowance? Ee and Er
Relief still given on contribution but offset by charge at marginal rate
CT relief still given on Er conts
What is included in the pension input amount? DC (3) & DB (3)
DC; Ee and Er contributions:
- Excl pension credits received on divorce
- Excl conts from age 75+
DB; Real increase in capital value:
(value at end of yr x 16) - (value at start of year x 16 x CPI) + (increase in PCLS x CPI)
- Excl increase to lump sum death benefits
What are rules on annual allowance carry-forward?
What is the order of use?
Unused allowance c/f from previous 3yrs into current year
- CY allowance used first
- c/f allowance taken from oldest year first
How is tax relief given to individuals on personal/stakeholder pension contributions? (3)
Conts paid net of basic rate
Provider claims back 20% from HMRC
Higher/Add’l payers claim further 20/25% through self-assessment
How is tax relief given to individuals on occupational pension contributions? (2)
Net pay arrangement; ee conts deducted from gross salary giving income tax relief via PAYE (not NI)
Salary sacrifice; relief on income tax & NI
What is the limit on Er contributions?
Unlimited as long as wholly & exclusively for trade
High %’s of salary could be challenged
What is the CT treatment of large one-off Er contributions?
Criteria (2) and periods (3)
Spread over up to 4 yrs if both:
- cont > 210% PY cont
- cont > £500k above 110% of PY cont
Excess cont / yrs spread:
500k - 1m / 2yrs
1 - 2m / 3yrs
2m + / 4yrs
What is the lifetime allowance?
How do you calculate whether a DB scheme has reached it?
Limits total value of all registered schemes that can benefit from tax relief
Convert DB pension into notional capital sum:
Retirement lump sum + (annual pension x 20)
- x 25 if in payment pre-2006
When does the LTA charge apply?
LTA charge removed from Apr23
Lump sum withdrawals > LTA due to serious ill-health or uncrystallised death benefits subject to income tax charge @ marginal
What are the pension benefit crystallisation events? (4)
- commencing draw-down incl lump sums
- purchasing lifetime annuity
- reaching 75yo with uncrystallised benefits
- transferring to overseas scheme
Criteria for fixed protection from LTA? (4)
Pensions valued > LTA when it was reduced
Stop accruing benefits forever
Must opt-out of auto-enrol within 1 month
Do not have primary or enhanced protection
Criteria for individual protection from LTA? (2)
Pension fund value between 1m - 1.25m at Apr16
Do not have primary protection
What is the CT treatment for registered pension funds?
Exempt from charges on gains and income
Tax deducted at source can be reclaimed by fund
When are lump sum death benefits tax-free? (3)
What is the treatment if not met? (2)
If all apply:
- death < 75yo
- within LTA
- paid <2 yrs from when scheme is aware of death
If not met, benefit taxable via PAYE or 45% charge if paid to trustee or personal representative
What are the recycling criteria for withdrawing tax relief given on PCLS? (5)
If all are met:
- subsequent conts are higher than normal
- applies to conts made by member or anyone else
- recycling was planned
- PCLS in CY+PY > £7.5k
- conts increase by >30% of PCLS
Describe these 2 types of annuities and their tax treatment:
- compulsory-purchase
- purchased-life
Compulsory-purchase; bought through pension scheme - income fully taxable
Purchased-life; bought outside of pension scheme - income split into return of capital (tax-free) and interest (taxable)
Key features primary protection from LTA (3)
If accrued benefits >£1.5m at Apr06
LTA increases by proportion of fund value > £1.5m
25% PCLS also increases in line
Key features enhanced protection from LTA (3)
If stopped accruing benefits at Apr06
LTA does not apply as long as no further schemes/conts
Available for all sized pensions
Key features Employer-financed retirement benefit scheme (EFRBS) (4)
Until 2011, Er conts were not treated as BIK. Now subject to income tax + NI so no real benefit
Er could not claim conts as deductible until benefits payable
Fund pays tax on income & gains
Retirement benefits taxable but not incl in LTA
Key features qualifying recognised overseas pension scheme (QROPS) (2)
Accepts transfer of UK pension excl state pension & annuities
HMRC-approved if operates as regulated scheme in place of establishment
When does an overseas transfer charge apply (2) and what is the charge (2)?
Post-2007 if none apply:
- Resident in country where QROPS is based or in EEA, Gibraltar or UK and QROPS is in EEA/Gibraltar
- QROPS is occupational/public service/international organisation
25% deducted pre-transfer. Applies if conditions fail within 5 yrs
How did pension protection arrangements change in 2023? (2)
What is now the main benefit of being protected?
No restrictions on contributions
No tax charge if exceed protected LTA
Can access higher PCLS
Difference between protections:
- fixed
- individual
- primary
- enhanced
Fixed; large fund and ceased conts by 06, LTA level kept (LTA introduced)
Individual; previous LTA level kept (2014-16 LTA reduced)
Primary; large fund, still conts in 06 - ongoing increased LTA as %
Enhanced; any size, ceased conts by 06, exempt from LTA charge
