Annual Allowance Flashcards
‘What is ‘Annual Allowance’?
The annual allowance is the maximum amount of pension savings an individual can make each year without an annual allowance charge applying. This includes pension contributions made by the individual, their employer, a company or a third-party.
What is the current ‘Annual Allowance’?
Current 2024/25 annual allowance is £60,000
- 2023/24 - £60,000
- 2022/23 - £40,000
- 2021/22 - £40,000
How does a ‘Defined Contribution’ test against the Annual Allowance?
Defined contirbution test against annual allowance, is against the gross contributions on all areas
How does a ‘Defined Benefit’ test against the Annual Allowance?
20 years service, in a 60th scheme and currently on 30k a year = entitlement of 10k per annum
end of tax year, 21 years service on same scheme, pay rise 32k = new entitlemtn 11.2k per annum
increase of 1200 and multiple by a factor of 16:1 (x by 16) 16 x 1200 = 19,200
equates to 19200 to be tested against the annual allowance
What is the ‘Money Purchase Annual Allowance’ (MPAA)?
Anyone taking income from a flexi-access drawdown plan or using an uncrystallised funds pension lump sum will trigger the money purchase annual allowance of £10,000.
When is the ‘Money Purchase Annual Allowance’ (MPAA) triggered?
The MPAA is triggered when you withdraw income from a defined contribution pension scheme, and either:
Move your pension pot into flexi-access drawdown and start to withdraw a taxable income.
Take a lump sum (UFPLS - Uncrystallised Funds Pension Lump Sum)
Are defined benefits tested against the money purchase annual allowance?
No.
Accrual under defined benefits schemes isn’t tested against the money purchase annual allowance, but is included in the test of total contributions against the annual allowance/tapered annual allowance.
What is the ‘Tapered Annual Allowance’ (TAA)?
The ‘tapered annual allowance’ is a mechanism introduced by the Government to gradually reduce the annual allowance for high-income earners, aiming to limit the amount of tax relief individuals with significant earnings can claim on their pension contributions.
What triggers the ‘Tapered Annual Allowance’ (TAA)?
Your ‘threshold income’ is over £200,000 – usually all your income minus the amount you pay into a pension.
Your ‘adjusted income’ is over £260,000 – all your income plus the amount your employer pays into your pension, or the amount your defined benefit pension has grown by.
What happens to the standard ‘Annual Allowance’ if the ‘Tapered Annual Allowance’ has been triggered?
The standard annual allowance of £60,000 reduces by £1 for every £2 of adjusted income you have above £260,000 (Combination of two triggers).
‘Tapered Annual Allowance’ (TAA) example:
Shannan has a salary of £220,000. Trigger 1 (Over £200,000)
His company pay £60,000 into his pension, making his total adjusted income £280,000. Trigger 2 (Over £260,000 adjusted income)
His ‘Annual Allowance’ is then reduced by £1 for ever £2 over the £260,000.
Shannan is £20,000 over the adjusted income threshold and therefore 50% of that figure £10,000 will be reduced from his ‘Annual Allowance’ now making it £50,000
If an individual starts taking an income from a Flexi Access Drawdown arrangement, their Annual Allowance thereafter would be…
A. £40,000.
B. £10,000.
C. £4,000.
D. nil
B. £10,000.
What factor is used to value the amount of contributions to a defined benefit pension scheme, when determining if the annual allowance has been exceeded?
A. 15:1
B. 16:1
C. 20:1
D. 25:1
B. 16:1
What is the minimum amount that the Tapered Annual Allowance (TAA) can reduce to in the current tax year?
A. £0
B. £4,000
C. £10,000
D. £56,000
C. £10,000
Annual Allowance cannot drop below £10,000
What is ‘carry-forward’?
Pension carry-forward rules allow an individual to carry forward any unused annual allowance from the three previous tax years and still receive tax relief on their contributions.
How does ‘carry-forward’ work?
It is possible to bring forward unused annual allowances from the previous 3 tax years.
You must use the current years first (2024/25)(£60,000)
Then you ‘fill up’ the gaps starting with the earliest year (2021/2022)(£40,000)
You must have the income in the current tax year to justify the additional contribution.
‘Carry-forward’ example:
Annual Allowance Rates:
* 2024/25 - £60,000
* 2023/24 - £60,000
* 2022/23 - £40,000
* 2021/22 - £40,000
Contributions:
* 2024/25 - N/A
* 2023/24 - £10,000
* 2022/23 - £10,000
* 2021/22 - £10,000
Potentially an ‘Annual Allowance’ of £60K (Current year), plus 50K, 30K and 30K. This is the difference between contirbutions made and what could of been made.
Maximum carry-forward is then £170,000.
Unless earning atleast £170,000 you would not be able to carry-forward this amount, as you can only put in 100% of net relevent earnings.
What is a ‘Pension Saving Statement’?
Is a stament provided when an ndividual exceeds the annual allowance, also issued where a scheme administrator suspects that benefits have been accessed flexibly via another scheme.
If the Annual Allowance has been exceeded, this will result in an Annual Allowance Charge
When must a ‘Pension Saving Statement’ be issued?
A. 01st January
B. 31st December
C. 06th October
D. 05th April
C. 06th October
6 months after tax year end
When must a reply to ‘Pension Saving Statement’ be recieved?
A. 31st January
B. 01st December
C. 06th October
D. 05th April
A. 31st January
‘What is an ‘Annual Allowance’ charge?
When the total pension input exceeds the annual allowance a charge will inccur.
Added to net income and taxed at 20%, 40% or 45%
Collected under self assessment.
Pension savings statement / Employer should advise member where issue suspected.
‘Annual Allowance Charge’ example:
(Carry-forward unavailable as previousled maxed)
Beth earns £60,000pa and has inherited some money, she invests £70,000 in contirbutions.
This is an excess of £10,000 over the annual allowance.
- Basic - Under £50,270 - 20%
- Higher - upto £125,140 - 40%
- Additonal - over 125,140 - 45%
As a higher-rate tax payer, Beth would then be charged at 40% of the excess
Resulting in a charge of £4,000
Peter has not been a memeber of scheme and made zero contributions in the last three years and has since joined a new scheme, how much can he carry-forward?
A. £60,000
B. £Nil
C. £10,000
D. £268,275
B. £Nil
Must have net relevent earnings to make a person contribution and therefore be able to potentially carry-forward.
Sally earns £100,000pa, and hs inherited some money she has spoken to an IFA who has advised her to contribute £100,000 using carry-forward.
In what order should carry-forward then be calculated?
- 2024/25 - £60,000
- 2023/24 - £60,000
- 2022/23 - £40,000
- 2021/22 - £40,000
A. 1, 2, 3, 4
B. 4, 3, 2, 1
C. 1, 4, 3, 2
D. 4, 1, 2, 3
- 2024/25 - £60,000
- 2023/24 - £60,000
- 2022/23 - £40,000
- 2021/22 - £40,000
C. 1, 4, 3, 2
First contribution always allocated to current year, then the oldest tax year and work backwards
If an individual’s total pension input exceeds the annual allowance by £12,000, what rate of tax be charged, assuming he is an additional rate tax payer?
A. 0%.
B. 20%.
C. 40%.
D. 45%.
D. 45%
Annual allowance charge is paid at your marginal income tax rate. In this case, an additional rate taxpayer so 45%
Jenny earns £40,000 a year and has triggered the money purchase annual allowance. This means that for the 2024/25 tax year, the maximum tax relievable contributions she can make into a defined contribution shcheme is:
- A. £3,600
- B. £4,000
- C. £10,000
- D. £60,000
C. £10,000.
The money purchase annual allowance given to those who access their pensions flexibly reduces the meber’s annual allowance to £10,000
**If the total pension input for an individual exceeds the annual allowance during the tax year, the excess is taxed at:
- A. The higher-rate
- B. Their marginal rate
- C. The basic-rate
- D. The addiitonal-rate
B. Their marginal rate.
