Chapter 2 - HMRC tax regime: contributions and allowances Flashcards
A pension scheme that is subject to HMRC’s tax regime is known as a
registered pension scheme
Individual contributions
An individual is able to contribute an unlimited amount to any number of registered pension schemes, but there are limits on the amount that is eligible for tax relief. If an individual is to receive any tax relief on a personal contribution at all, they must be a relevant UK individual
How tax relief is awarded - net pay method
employee contributions are taken from the employee’s gross pay before income tax is deducted
NICs are not reduced as a result of an employee’s pension contribution.
Example 2.1
An employee wishes to make a gross contribution of £100. £100 is taken from their pay before any income tax liability is calculated (reducing their pay by £100 for income tax purposes, saving them income tax at their marginal rate). The employee is a higher rate taxpayer, so their income tax liability is reduced by £100 × 40% = £40.
The £40 or 40% is the amount of tax relief that the employee receives.
How tax relief is awarded - relief at source method
contributions are paid net of basic rate tax
Example 2.2
An employee wants to make a gross contribution of £100. The net contribution is £80 and is deducted from the employee’s net pay (i.e. their pay after tax and NICs have been deducted). The pension provider reclaims the £20 (or 20%) basic rate tax relief
from HMRC.
The employee is a higher rate taxpayer so can claim a further 20% tax relief via self- assessment or by an adjustment to their tax code. (If the employee is an additional rate taxpayer they can claim a further 25% tax relief.)
Timing of tax relief – self-employed earnings
This is 50% of the previous year’s tax liability
A payment on account on 31 January during the current tax year (i.e. on 31 January 2022 for 2021/22)
This is also 50% of the previous year’s tax liability
A second payment on account on 31 July following the end of the tax year (i.e. on 31 July 2022 for 2021/22)
This is the difference between the year’s total tax liability and the two payments on account already made
A balancing payment on 31 January following the end of the tax year (i.e. on 31 January 2023 for 2021/22)
Salary sacrifice
Such an arrangement is beneficial because both the employer and the employee will pay reduced NICs
salary sacrifice arrangement can be used to enable a higher pension contribution to be paid, while leaving the employee’s take-home pay unchanged
Annual allowance
The annual allowance for the 2022/23 pension input period is £40,000.
Annual allowance is tapered for individuals with an ‘adjusted income’ above the threshold.
- For 2016/17 the threshold was an adjusted income of £150,000 or more.
- On April 2020 the threshold was amended so that from 2020/21 onwards, the annual allowance is tapered for individuals with an adjusted income of £240,000 or more. Where these rules apply, the annual allowance for the tax year concerned is reduced by £1 for every £2 of adjusted income above the relevant threshold, down to a minimum of £4,000.
- their threshold income for the same tax year is more than £200,000; and
- their adjusted income for the tax year is more than £240,000.
money purchase annual allowance
The MPAA was introduced on 6 April 2015 and is designed to work with the annual allowance rules to ensure that individuals cannot abuse the pension flexibilities
Carry forward of unused annual allowance
possible to carry forward unused annual allowance from the previous three tax years
Triggering the money purchase annual allowance (MPAA) rules
- first draws funds from a flexi-access drawdown fund (including in the form of a short-term annuity);
- takes an UFPLS;
- notifies the scheme administrator of their intention to convert a pre-6 April 2015 capped drawdown fund to a flexi-access drawdown fund and then subsequently takes a withdrawal from that fund (including in the form of a short-term annuity);
- takes more than the permitted maximum for capped drawdown from a pre-6 April 2015 drawdown pension fund;
- receives a stand-alone lump sum when entitled to primary protection where the lump-sum protection exceeds £375,000;
- receives a payment from a lifetime annuity where the annual rate of payment can be decreased in other than permitted circumstances (i.e. payment is received from a flexible annuity contract as introduced by the Taxation of Pensions Act 2014);
- receives a scheme pension paid directly from the funds of a defined contribution arrangement where the arrangement is providing scheme pensions paid directly from the funds of the defined contribution scheme to fewer than eleven other members (including any dependants’ benefits being paid) at the time the first payment is made; or
- payment of one of the types of benefit listed above from an overseas pension scheme that has benefited from tax relief.
Carry forward and the MPAA
you cannot carry forward unused MPAA and it is never possible to have an MPAA that exceeds £4,000
Lifetime allowance
The lifetime allowance limits the amount of savings that can be built up in a tax-advantaged environment
Pension credit effected before 6 April 2006
IAPC / SLA
IAPC is the amount of the pension credit awarded increased by the percentage increase in the RPI from the month in which the rights were acquired to April 2006.
SLA is the standard lifetime allowance for the tax year 2006/07, i.e. £1.5 million.
