Chapter 2 - HMRC Tax Regime: Contributions and Annual and Lifetime Allowances Flashcards
1
Q
Pension Contributions - An Overview
A
- Contributions can be paid by the member, a third party on behalf of the member or a member’s employer or former employer
- Unlimited contributions can be made in any tax year. However, to qualify for individual tax relief, the contribution must be made by a ‘relevant UK individual’ with ‘relevant UK earnings’.
- A relevant UK individual is eligible to receive tax relief on personal contributions up to a gross value which is the greater of £3,600 p.a. or 100% of relevant UK earnings, subject to limits imposed by the various annual allowance rules.
- If a relevant UK individual has no relevant UK earnings, or has relevant UK earnings up to £3,600 in a tax year, the individual can still contribute up to £3,600 gross to pensions in the tax year and receive full tax relief
2
Q
Relevant UK individual
A
- A relevant UK individual is some under 75 who, in respect of a tax year, meets at least one of the following criteria:
- Has relevant UK earnings chargeable to income tax for that year;
- Is UK resident during that year
- Is UK resident both when they become a member of the pension scheme AND at some time during the five years immediately prior to the year in which the contribution was made; or
- either they or their spouse/civil partner have earnings from an overseas Crown employment subject to UK tax
3
Q
Relevant UK earnings
A
- Relevant UK earnings include:
- Employment income: salary, wages, bonuses, overtime and commission
- Taxable profits for the self-employed
- Income arising from patent rights and treated as earned income
- Earnings from an overseas Crown employment, subject to UK tax
- Earnings from furnished holiday lettings businesses based in the EEA which satisfy certain criteria
NB Dividends are NOT included in the definition of relevant UK earnings.
4
Q
Net pay
A
- Net pay only applies to occupational pension schemes (but not group/stakeholder pensions); this is a ‘gross from gross’ method: the employer deducts gross contributions from gross pay before PAYE income tax and the employee gets tax relief immediately
5
Q
Relief at source
A
- Individual contributions are made net (of BRT) from net pay. Any additional higher or additional rate tax relief on contributions is given by increasing the basic rate band (and higher rate band, if applicable) by the amount of the gross contribution when calculating the amount of total tax due on self-assessment
6
Q
Impact on personal allowance of making pension contributions
A
- The personal allowance is lost if adjusted net income goes over £100,000. It’s reduced by £1 for every £2. In 2020/21, the £12,500 personal allowance will completely disappear when the adjusted net income reaches £125,000
7
Q
Tax relief for the self employed
A
- The self-employed pay tax via self-assessment in three installments - two payments on account and one balancing payment. Higher/additional rate tax relief is accounted for in the calculation of the balancing payment
8
Q
Salary Sacrifice
A
- The employer agrees to change their contract to give up art of their salary or a bonus and in exchange, the employer pays a contribution directly into their pension.
- Both employee and employer pay reduced NIC, the savings can be recycled into the pension scheme, making the pension contribution larger at no extra cost to either party
- HMRC has a number of rules that must be followed for the sacrifice to work:
- There must be a written agreement between both parties regarding the reduction in salary
- The agreement must be in place before the salary is reduced
- The salary cannot be reduced below the national minimum wage
9
Q
Recycling of PCLS
A
- These rules impose tax charges where much larger pension contributions are made for an individual as a result of a pre-planned drawing of the PCLS from a registered pension scheme and recycling it back into a registered pension scheme to get more PCLS. The rules apply when:
- The PCLS in any twelve-month period is more than £7,500 and
- The pension contribution is significantly (@30%) higher and
- The total of the increases in pension contributions exceeds 30% of the PCLS and
- The contribution was made by the individual or someone else on their behalf and
- Recycling was pre-planned
10
Q
Employer contributions
A
- For larger contributions, tax relief on employer contributions to a particular scheme will be spread, if the employer contributions:
- Exceed 210% of the contributions then made to the scheme in the previous chargeable period, and
- Amount of the relevant excess is £500,000 or more, where the relevant excess is any amount paid over and above 110% of the contributions in the previous chargeable period
- Tax relief is spread over 2 years (£500k-£1m excess), 3 years (£1-£2m) or 4 years (£2m+)
11
Q
Annual Allowance
A
- If the total pension input amount is more than the Annual Allowance, there could be an AA tax charge, which in effect, enables HMRC to claw back the relief given.
- The AA was £50,000 for 2011/12-2013/14
- Since 2014/15, it has been reduced to £40,000
- Since 2016/17 the AA has been tapered to a floor of £10,000 where the member has adjusted income in excess of £150,000.
- From 2020/21, the floor is £4,000 and the adjusted income £240,000.
- Those who have flexibly accessed their pension benefits are subject to the MPAA of £4,000.
12
Q
2015/16 Tax Year Split for AA purposes
A
- The 2015/16 tax year was split into pre and post alignment mini-tax years on account of the changes in pension rules that came in in that tax year.
- 6/4/2015 - 8/7/2015 (Pre-alignment tax year). Maximum AA was £80,000
- 9/7/2015 - 5/4/2016 (Post-alignment tax year).
Maximum AA was the lesser of £40,000 or £80,000 less pension actual pension input in pre-alignment year.
13
Q
Calculation of pension input amount
A
MP schemes - Total of relievable pension contributions made during the PIP by member, employer or third party, regardless of whether tax relief has been given on these contributions. It does not include any contributions paid after the member’s 75th birthday or increases in fund value due to investement income or capital gains.
DB Schemes - The value of the increase in pension benefits from the start of the period to the end of the PIP. The increase is the value of the members rights under the scheme at the end of the PIP less the value of those at the beginning of the pension input period. The opening and closing values for pension rights are calculated using a factor of x16
14
Q
Tapered Annual Allowance (TAA)
A
- Those individuals whose earnings exceeds both a threshold income of over £200,000 and an adjusted income in excess of £240,000 will have their annual allowance tapered down to a floor of £4,000. Both these income tests must be satisfied for Tapered Annual Allowance to apply.
15
Q
Net Income
A
- Gross taxable income
LESS
allowable deductions which includes gross employee pension contributions made via net pay.
