Chapter 2 - HMRC Tax Regime

Question 1

Can non-relevant UK individuals make pension contributions?

Answer 1

Yes, but they will not receive any tax relief

Question 2

What is the max contribution eligible for tax relief per annum?

Answer 2

Max of 100% of relevant UK earnings each year (ie if you earn £30,000 you will only receive tax relief on contributions up to £30,000 pa)

Question 3

Tax relief is awarded via which two methods?

Answer 3

Net Pay method: conts are taken from employees gross pay (ie before you are taxed)

Relief at source method: conts are paid net of basic rate tax

Question 4

3 advantages of salary sacrifice…

Answer 4

If the employee was already contributing to a pension, take home pay will be the same if not higher
NIC savings for both employee and employer
For earners on more than £100,000, salary sacrifice could reinstate some of their personal allowance

Question 5

3 disadvantages of salary sacrifice…

Answer 5

Reducing salary could reduce benefits (such as death in service)
Reduction in salary could impact employees ability to borrow/mortgage
Could cause a loss of social security benefits (such as maternity payments)

Question 6

An employers contributions will be spread over a period of years for tax relief purposes if which two conditions are met…

Answer 6

1. If the contribution exceeds 210% of the contribution paid in the previous chargeable period
2. And if the contribution is greater than £500,000

Question 7

If an employers contribution is over £500,000 how will the payments be spread?

Answer 7

£500,000 - £999,999 = spread over 2 accounting periods
£1,000,000 - £1,999,999 = spread over 3 accounting periods
£2,000,000+ = spread over 4 accounting periods

Question 8

What are the steps to calculate a members total pension input (5)

Answer 8

1. Value of the members pension benefits at the beginning of the period
2. Multiply by 16
3. Value revalued to take CPI into account
4. Closing pension value is calculated and this is multiplied by 16
5. Difference between opening and closing value is the total pension input and is tested against the annual allowance

Question 9

What is the tapered annual allowance?

Answer 9

When for every £2 over £240,000 adjusted income, their annual allowance is reduced by £1. Adjusted income is threshold income + employer contribution

Question 10

The annual allowance can be carried forward for how many of the previous tax years?

Answer 10

3

Question 11

What is the current lifetime allowance?

Answer 11

£1,073,100 frozen until 2026

Question 12

Any event that triggers a test against the members LTA is called a…

Answer 12

Benefit Crystallisation Event (BCE)

Question 13

What are the charges for benefits taken over the LTA?

Answer 13

25% charge on any income taken over the LTA
55% charge on any lump sum taken over the LTA

Question 14

What incentive does an employer receive from the Government to provide access to financial advice for members of its pension scheme?

Answer 14

The cost of financial advice up to £500 pa is not a taxable benefit for employees

Question 15

If the fund value is insufficient to provide the guaranteed minimum pension (GMP) element when contracting out of a SERPS, which party is liable for the shortfall?

Answer 15

The current provider

Question 16

Briefly outline the tax treatment of the death benefits of a member who died before 75 (3 steps)

Answer 16

1. Payment is subject to a check against the lifetime allowance for the member
2. If the payment is within the members LTA it is paid free of inheritance tax
3. Any amount above the LTA is subject to a 55% lump sum LTA charge

Question 17

A member of an occupational pension scheme dies and his dependants receive a lump-sum death- in-service benefit. Assuming there is no transitional protection, what key factor dictates whether any of this payment incurs a tax charge?

Answer 17

The amount of the lump sum payment

Question 18

What is the maximum PCLS a member can take?

Answer 18

£375,000 (ie the LTA of 1.5m divided by 25%)
To secure a higher PCLS a member needs fixed protection or primary protection

Question 19

Briefly explain primary and enhanced protection with regard to PCLS benefits

Answer 19

Primary protection gives someone Personal LTA. This is calculated by a LTA enhancement factor (LAEF), which is added to the standard LTA.

Enhanced protection essentially protects people from reductions in the LTA, where benefits are crystallised on or after 6 April 2014 the PCLS is subject to a maximum that is the greater of:
• 25% of the then standard lifetime allowance in the tax year in which the PCLS is taken or £375,000.

Question 20

How does a higher-rate taxpayer receive tax relief when making contributions to an occupational pension scheme under a net pay arrangement?

Answer 20

At the employees marginal tax rate as soon as the contribution is made

Question 21

When might a member of a defined contribution arrangement have unused funds?

Answer 21

When someone is over age 75 and have not used all of the funds in their pension to provide an income

Question 22

What is threshold income?

Answer 22

Someone’s salary minus any pension contributions (both employee and employer conts)

Question 23

In the 2022/23 tax year, the monetary trigger used in determining whether a PCLS has been recycled is:

Answer 23

£7,500

Question 24

“Relevant earnings” can simply be defined as…

Answer 24

Earnings relevant to pension purposes and includes earned income. Excludes property income or charitable donations

Question 25

When carrying forward the annual allowance, do you include the employers contributions in the total contribution?

Answer 25

Yes, you would include both employee and employer contributions

Question 26

What are the 4 income sources defined as relevant UK earnings?

Answer 26

Employment income (inc bonuses)
Trade income
Income arising from patent rights
Earnings from an overseas crown employment

Question 27

Tapered annual allowance only applies to income over what level of a) threshold income and b) adjusted income?

Answer 27

Threshold income £200,000
Adjusted income £240,000