Chapter 2 - HMRC tax regime: contributions and allowances Flashcards
What is the minimum annual allowance for an individual subject to the tapered annual allowance in 2024/25?
a.£6,000.
b.£10,000.
c.£4,000.
d.Nil.
b.£10,000.
the tapered annual allowance affects those who have:
threshold income (excluding pension contributions) over £200,000 and adjusted income (which includes their own and their employer’s pension contributions)
over £260,000.
Where these rules apply, the annual allowance is reduced by £1 for every £2 of adjusted
income above £260,000. The maximum reduction in 2024/25 is £50,000, so everyone will
have an annual allowance of at least £10,000 for the 2024/25 tax year.
Chapter reference 2B3A
Which scenario would trigger the money purchase annual allowance?
a.When the member takes a small pots lump sum payment.
b.When the member receives a pension commencement lump sum.
c.The first time the member draws funds from a flexi-access drawdown fund.
d.The first time the member accesses a scheme pension from a defined benefit arrangement.
c.The first time the member draws funds from a flexi-access drawdown fund.
The events that trigger the MPAA rules are where the member:
** 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 was greater than £375,000 on 5 April 2006;
- 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;
- payment of one of the types of benefit listed above from an overseas pension scheme
that has benefited from tax relief.
Chapter reference 2B5A
Isla, who is self-employed and a higher rate taxpayer, has paid a net pension contribution of £10,000 to her personal pension plan. Isla’s higher and/or additional rate tax relief will be awarded by:
a.deducting the gross contribution from her taxable profits.
b.deducting the net contribution from her taxable profits.
c.adding the gross contribution to her basic and higher rate tax bands.
d.adding the net contribution to her basic and higher rate tax bands.
c.adding the gross contribution to her basic and higher rate tax bands.
Contributions to personal and stakeholder pensions receive
tax relief via the relief at source method, i.e. contributions are paid net of basic rate tax with higher and/or additional rate relief claimed through self-assessment or adjustment to the member’s tax code.
With self-assessment, the additional relief is awarded by adding the gross amount of the contribution to the employee’s basic rate tax band and higher rate tax band.
Chapter reference 2A1A
Becca, aged 56, is employed on a salary of £215,000 p.a. and she makes a gross contribution of £20,000 into her personal pension. Her employer also makes a gross contribution of £20,000. What is her threshold income?
a.£195,000.
b.£175,000.
c.£255,000.
d.£235,000.
a.£195,000.
the threshold income (excluding pension contributions) is set at £200,000, if income is above £200,000 then no tapering is required
Threshold income is =
gross taxable income - gross member pension contributions + income given up as result of a salary exchange - taxed lump sum death benefits received
Chapter reference 2B3A
When calculating a pension input for 2024/25, a member of a defined benefit pension scheme should be aware that:
a.investment growth must be included.
b.a factor of 25 is used when calculating total pension input.
c.a CPI increase is applied to the opening pension input value only.
d.a CPI increase is applied to the closing pension input value only.
c.a CPI increase is applied to the opening pension input value only.
Pension input calc;
Step 1
Opening pension input value x 16
+ lump sums that were contributed to the plan
total value x CPI
Step 2
Closing pension input value x 16
+ lump sums that were contributed to the plan
Step 3
Difference between step 1 and 2 is the total pension input
Chapter reference 2B2B
Stan, who has lived and worked in the UK all of his life, is employed on a salary of £18,000 p.a. If he is unable to make any tax relievable pension contributions in the current tax year, the most likely reason for this is because he:
a.has triggered the MPAA.
b.works for the Government.
c.is aged 76.
d.works for a company based overseas.
c.is aged 76.
A relevant UK individual is:
Under the age of 75
and
Has relevant UK earnings chargeable to income tax for that year
or
Is resident in the UK at some time during that year
or
Was resident in the UK both:
* at some time during the five tax years immediately before the year in which the contribution was
made. Relief in such circumstances is subject to a maximum of £3,600 per tax year; and
* when they became a member of the pension scheme
or
They or their spouse have earnings for the tax year from an overseas Crown employment subject to
UK tax.
Chapter reference 2A1
The standard lump sum allowance for 2024/25 is:
a.£1,073,100 and there are no provisions in the legislation for increasing this allowance in future tax years.
b.£268,275 and there are no provisions in the legislation for increasing this allowance in future tax years.
c.£1,073,100 and this will be increased in line with increases in the Consumer Price Index in future tax years.
d.£268,275 and this will be increased in line with increases in the Consumer Price Index in future tax years.
b.£268,275 and there are no provisions in the legislation for increasing this allowance in future tax years.
The standard LSA for 2024/25 is £268,275. This is equal to the maximum PCLS under the
previous LTA regime, i.e. 25% × £1,073,100. There are no provisions in the legislation for increasing this allowance in future tax years.
Chapter reference 2C9
Which relevant lump sum payment is NOT tested against the lump sum allowance?
a.Uncrystallised funds pension lump sum.
b.Serious ill-health lump sum.
c.Pension commencement lump sum.
d.Standalone lump sum.
b.Serious ill-health lump sum.
The following lump sum payments are RBCEs and do count towards the LSA:
* PCLS
* Standalone lump sum
* UFPLS
The only RBCE that is not tested against LSA is the Serious ill-health lump sum
Chapter reference 2C7
Luke, aged 42, has relevant earnings of £80,000 and has contributed £70,000 gross into his personal pension in 2024/25. In each of the three previous tax years he has made a gross contribution of £28,000 and has never been subject to the tapered annual allowance. How much, if any, unused annual allowance will Luke have available to carry forward to the 2025/26 tax year?
a.£46,000.
b.£26,000.
c.£24,000.
d.£44,000.
d.£44,000.
you can use unused pension allowance from the previous 3 years, after utilising the full amount for the current year, then starting with the year longest ago i.e 21/22
Allowance/Contributed/Carry
21/22 - £40k/£28k/£12k
22/23 - £40k/£28k/£12k
23/24 - £60k/£28k/£32k
24/25 - £60k/£70k/ -£10k
the -£10k from this year is taken from the £12k in 21/22, as this doesnt use the full amount it wont take any from 22/23, now going into the next year the remaining £2k from 21/22 is out of the three year limit, leaving the £12k and £32k from the next two tax years as well as £0 from 24/25
so in tax year 24/25 you have £12k + £32k + £0k = £44k
Chapter reference 2B4
The standard transitional basis for reducing the lump sum allowance where benefits were taken before 6 April 2024 is used where the member:
a.had only crystallised benefits prior to 6 April 2006 and they do not hold a transitional tax-free amount certificate.
b.had benefits tested under the previous lifetime allowance regime and they do not hold a transitional tax-free amount certificate.
c.had benefits tested under the previous lifetime allowance regime and they also hold a transitional tax-free amount certificate.
d.has died and the lump sum death benefit was paid to a dependant.
b.had benefits tested under the previous lifetime allowance regime and they do not hold a transitional tax-free amount certificate.
Standard transitional basis
This method of reducing the LSA is used where members:
- had benefits tested under the previous LTA regime; and
- do not hold a transitional tax-free amount certificate (TTFAC).
The deduction applied to their LSA is 25% of their LTA used as at 5 April 2024.
Chapter reference 2C10
Susan works for a company on a part-time basis. She earns £8,000 p.a. in 2024/25. What is the maximum contribution that she can make in 2024/25 if the entire
contribution is to be eligible for tax relief?
The maximum contribution that Susan can make is the greater of £3,600 and 100%
of earnings, i.e. £8,000.
Chapter reference 1A1
Julia, aged 57, is a member of her employer’s non-contributory defined benefit pension arrangement, which has an accrual rate of 1/60th for each year of pensionable service.
At the beginning of the 2024/25 PIP she had been a member of the scheme for 32 years and had a pensionable salary of £105,000.
At the end of the 2024/25 PIP she had been a member of the scheme for 33 years and, due to a promotion, her pensionable salary had increased to £150,000.
In the year to September 2023 the CPI increased by 6.7%.
Calculate the total pension input that will be measured against the annual allowance in respect of the 2024/25 PIP.
Step 1
opening pension input value is multiplied by 16.
any lump sum is then added to this value (not x 16)
The total value is then increased by the increase in the CPI
Step 2
closing pension input value is multiplied by 16
any separate lump-sum entitlement is added to the value of the pension (without being
multiplied by a factor of 16)
Step 3
The difference between the two figures is the total pension input, which is tested against the annual
allowance. The value of any death benefits provided by the scheme is ignored.
- Value at beginning of 2024/25 PIP: 32/60 × £105,000 = £56,000;
this is multiplied by a factor of 16: £56,000 × 16 = £896,000; and
then increased in line with the 6.7% increase in the CPI, i.e. £896,000 × 1.067 = £956,032. - Value at end of 2024/25 PIP: 33/60 × £150,000 = £82,500
this is multiplied by a factor of 16: £82,500 × 16 = £1,320,000. - Total pension input to be tested against the annual allowance: £1,320,000 – £956,032 = £363,968
Chapter reference 2B2B
A senior employee, Andrew, is a member of a defined contribution scheme to which his employer contributes. Andrew’s salary is £120,000 for 2024/25. His employer wishes to pay a contribution into the scheme that exceeds the annual allowance. Describe the tax treatment of the employer’s contribution.
The employer should be entitled to tax relief on the full amount of the contribution as a business expense, although the Local Inspector of Taxes can decide to restrict the tax relief if they feel that the contribution does not comply with the ‘wholly and exclusively’ for the purposes of trade rules. Andrew will be taxed on the excess over the annual allowance. The tax is levied at
Andrew’s marginal rate of income tax.
Chapter reference 2B3
Simon, aged 57, is a member of a defined contribution arrangement and a defined benefit scheme. On 6 April 2024 he takes his first withdrawal from his flexi-access drawdown plan. His pension input for 2024/25 is £18,000 into his defined contribution arrangement and £43,000 into his defined benefit scheme. He has no available carry forward and is not subject to the tapered annual allowance in 2024/25.
What chargeable amount will apply in calculating Simon’s annual allowance tax charge?
The default chargeable amount is £1,000 (i.e. £18,000 + £43,000 = £61,000 input, so £1,000 excess over the £60,000 annual allowance).
The alternative chargeable amount is £8,000 (i.e. £0 excess in respect of the defined benefit scheme as input is less than £50,000 plus £8,000 in respect of the defined contribution scheme as the input of £18,000 is £8,000 above the MPAA of £10,000).
It is the higher of the two figures that will apply and so the annual allowance tax charge will be calculated on the £8,000 alternative chargeable amount
Chapter reference 2B5B
In 2011/12 Inga crystallised £450,000 of her personal pension plan, using 25% of her LTA. She took a PCLS of £112,500 and designated the balanced into flexi-access drawdown.
In 2017/18, she took an UFPLS of £400,000, which included a tax-free amount of £100,000. This used 40% of her LTA.
Inga has no transitional protection and has not applied for a TTFAC.
Calculate Inga’s remaining LSA for any RBCEs after 5 April 2024 using the standard transitional method.
In total, 65% of Inga’s LTA was used prior to 6 April 2024.
Therefore the amount to be deducted from her LSA is calculated as:
65% × £1,073,100 × 25% = £174,379.
Inga’s remaining LSA is calculated as: £268,275 – £174,379 = £93,896.
Chapter reference 2C10
Which of the following sources of income are classed as relevant UK earnings for pension purposes?
a. Employment income.
b. Dividend income.
c. Interest from a bank account.
d. Earnings from an overseas Crown employment, subject to UK tax.
e. Income arising from carrying on or the exercise of a trade, profession or vocation.
f. Rental income from a buy-to-let property.
a. Employment income.
d. Earnings from an overseas Crown employment, subject to UK tax.
e. Income arising from carrying on or the exercise of a trade, profession or vocation.
Chapter reference 2A1
In the 2024/25 tax year, the monetary trigger used in determining whether a PCLS has been recycled is:
a. £7,500
b. £12,500
c. £15,000
d. £18,000
a. £7,500
Chapter reference 2A1D
In which of the following scenarios will a PCLS be treated as an unauthorised payment?
a. Carrie receives a PCLS of £6,000 from her personal pension plan and two months later she decides to recycle £2,000 into a new personal pension plan.
b. George receives a PCLS of £50,000 from his employer’s defined benefit scheme. He is currently contributing £200 per month into a personal pension plan and six months later he recycles £30,000 of the PCLS into the personal pension plan.
c. Hannah receives a PCLS of £30,000 from her personal pension plan and immediately recycles £5,000 of this back into her personal pension plan into
which she currently contributes £1,500 per month.
d. Phil receives a PCLS of £25,000 from his company’s group personal pension plan. Six months later he receives a large inheritance and uses part of this to pay £20,000 into a new personal pension plan.
b. George receives a PCLS of £50,000 from his employer’s defined benefit scheme. He is currently contributing £200 per month into a personal pension plan and six months later he recycles £30,000 of the PCLS into the personal pension plan.
a. No: the PCLS is less than £7,500.
b. Yes: the PCLS exceeds £7,500, the contribution of £30,000 is significantly higher than the contributions currently being paid and the contribution exceeds 30% of the PCLS.
c. No: although the PCLS exceeds £7,500 the contribution is less than 30% of the PCLS and the increase in contribution would not be deemed to be significant.
d. No: although the PCLS exceeds £7,500 and the contribution exceeds 30% of the PCLS the contribution has been made as a result of an inheritance and therefore would not be treated as being pre-planned.
Chapter reference 2A1D
Which of the following scenarios occurring in 2024/25 automatically trigger the MPAA rules?
a. A member notifies the scheme administrator that he wishes to convert his capped drawdown fund into a flexi-access drawdown fund, and takes no income in 2024/25.
b. A dependant purchases a flexible lifetime annuity from the late member’s drawdown pension fund.
c. A member receives a payment from a short-term annuity purchased with his flexi-access drawdown fund.
d. A member receives a trivial commutation lump sum and two small pots payments.
c. A member receives a payment from a short-term annuity purchased with his flexi-access drawdown fund.
a. No. A payment would need to be taken from the flexi-access drawdown fund for the MPAA to be triggered.
b. No. The member would need to access their own funds flexibly; just taking a dependant’s income does not trigger the MPAA.
c. Yes. The MPAA rules are automatically triggered where the member receives a payment from a flexi-access drawdown fund (from the fund or via a short term
annuity).
d. No. Small pots payments and trivial commutation lump sum payments do not trigger the MPAA rules.
Chapter reference 2B5A
Colin, aged 64, has one defined contribution pension arrangement. He plans to start to draw an income from this arrangement via flexi-access drawdown from his 65th birthday on 11 October 2024. Colin has no available carry forward and is not subject to the tapered annual allowance in 2024/25.
Colin wishes to make a series of payments into his pension while ensuring that he does not incur an annual allowance tax charge in 2024/25. Which of the following
payments would achieve this aim?
a. Monthly payments of £5,000 (gross) made on 1st of each month starting 1 May 2024.
b. Payments of £15,000 (gross) on 1 May 2024, 1 July 2024, 1 November 2024 and 1 February 2025.
c. A single contribution of £40,000 (gross) on 1 May 2024 plus monthly contributions of £2,000 (gross) between 1 June 2024 and 1 March 2025.
d. Payments of £6,000 (gross) paid monthly between 1 May 2024 and
1 February 2025.
c. A single contribution of £40,000 (gross) on 1 May 2024 plus monthly contributions of £2,000 (gross) between 1 June 2024 and 1 March 2025.
The only payments made after the trigger event would be the monthly payments made between 1 November 2024 and 1 March 2025 (i.e. five payments of £2,000 = £10,000). As this does not exceed £10,000 the MPAA is not breached and so the contributions are tested against the £60,000 annual allowance that applies for 2024/25. The total contributions for the year equal £60,000 and so no annual
allowance tax charge is due.
With all the other answers the pension input after the trigger event exceeds £10,000 and so the MPAA would be breached leading to an annual allowance tax charge
Chapter reference 2B5B
Which one of the following events occurring on or after 6 April 2015 would not trigger the money purchase annual allowance rules for the member?
a. Drawing an income from a flexi-access drawdown fund.
b. Taking an uncrystallised funds pension lump sum payment.
c. Converting a pre-6 April 2015 capped drawdown pension fund into a flexi-access drawdown fund an immediately drawing an income.
d. Crystallising benefits in a defined benefit scheme into a PCLS and a scheme pension.
d. Crystallising benefits in a defined benefit scheme into a PCLS and a scheme pension.
Receiving a pension commencement lump sum does not trigger the MPAA rules. The funds come from a defined benefit scheme and so the scheme pension purchased cannot trigger the MPAA rules.
Chapter reference 2B5
Florence entered drawdown in 2005, aged 55. In October 2024 she decides to crystallise another pension fund – this is her first RBCE since 6 April 2024 and she did not crystallise any other pension benefits between 6 April 2006 and 5 April 2024. Her original drawdown fund is now a capped drawdown fund. How will this capped drawdown fund be valued when the RBCE in October 2024 takes place?
The maximum amount is 25 × 80% of the maximum annual amount that can be paid as a capped drawdown pension immediately prior to her first RBCE in October 2024. 80% is used because the maximum GAD income is now 150% of the basis amount and prior to 27 March 2014 it was only 120% of the basis amount. 25% of this figure will then be deducted from Florence’s LSA and LSDBA
The reason the calculation is now 80% of 25 x maximum GAD income is because the maximum income from a capped drawdown contract was 120% of basis amount increased to 150% of basis amount on 27 march 2014. if you multiply 150% by 80% you get back to 120%
the 25:1 factor and the 80% are applied to the maximum permitted withdrawal as calculated at the most recent review.
when you see capped drawddown, remember that if they go over 150% then it would turn to flexible annuity, use that to remember
Chapter reference 2C10
What criteria must be met for an individual to be deemed a ‘relevant UK individual’?
• Under age 75 and has relevant UK earnings, or
• Resident in UK at some time during the year or
• Resident both at some time during 5 years prior to contribution (restricted to £3,600) and when they became member of scheme
What constitutes relevant UK earnings?
• Employment income
• Income from trade, profession or vocation
• Patent rights treated as earned income
• Earnings from overseas Crown employment subject to UK tax
How is tax relief given on pension contributions under the ‘relief at source’ method?
• Contributions paid net of basic rate tax
• Higher/additional rate claimed through self-assessment
What conditions must apply for a pension contribution sourced from a PCLS (Recycling) to be treated as an unauthorised payment?
- Contribution treated as unauthorised payment where all of the following are met:
- PCLS and other PCLS in 12 months exceeds £7,500
- Contribution is significantly greater (more than 30%) than expected
- Cumulative sum of extra contributions exceeds 30% of PCLS
- Additional contributions are made by the individual or someone else
- Recycling was pre-planned
When will an employer’s pension contributions be spread for tax relief purposes?
If the contribution exceeds 210% of the contribution in the previous chargeable period and the amount of the excess (over 110% of previous contribution) is £500,000 or more
Excess Spread
£500,000 – £999,999 2 accounting periods
£1,000,000 – £1,999,999 3 accounting periods
£2,000,000 or more 4 accounting periods
Example
Last year, ABC plc made an annual contribution of £600,000 to its pension scheme. This year, it decided to boost the retirement benefits of three directors and the total pension contributions amounted to £1,900,000. The spreading calculation would be:
210% of previous chargeable period contribution = 210% × £600,000 = £1,260,000.
£1,900,000 exceeds £1,260,000 so spreading will apply if the excess is £500,000 or more.
Excess over 110% of previous contribution = £1,900,000 – (£600,000 × 110%) = £1,240,000.
As this falls in the band of £1,000,000 – £1,999,999, the relief on this ‘excess’ contribution will be spread evenly over three accounting periods, i.e. £413,333 per period.
In the current period, relief will be given on 110% of the previous year’s contribution (i.e. £660,000) plus the first of the three sums of £413,333, giving a total of £1,073,333.
What is not included in the ‘total pension input’ calculation for a DC scheme?
• Contributions paid by individual or someone other than the employer after
• Investment income or returns
How is ‘total pension input’ calculated on a defined benefit scheme?
• Calculate the value of benefits at the start of the PIP (opening pension input value)
• Multiply this by 16
• Any lump sum is added but not multiplied by 16
• Increase this by CPI
• Calculate the benefits at the end of the PIP (the closing pension input value)
• Multiply by 16
• Any lump sum is added but not multiplied by 16
Do not increase by CP| as this value is already in today’s terms
• Difference between the two is total pension input
Who does the tapered annual allowance apply to?
• For those with threshold income of more than £200,000
• And adjusted income of more than £260,000
Name three events that do not trigger the MPAA.
• MPAA is not triggered when member receives:
- a PCLS
- a trivial commutation lump sum/small pots lump sum
- payment from a scheme pension from a DB Scheme
- payment from a DC scheme where at least 11 other people (including dependants) are receiving a pension directly from scheme funds
- receives an annuity from a DC scheme
- receives a lifetime annuity where payments cannot go down except in specific circumstances
- no more than the allowed amount from a pre-6 April 2015 capped fund
- payment from a dependant or nominee or successor FAD fund
What is the ‘alternative annual allowance’?
• Where MPAA rules are triggered
• £10,000 against DC savings
• Can be used for DB savings (or cash balance scheme)
• £50,000 against DB savings (or less where taper applies/EO if taper reduces annual allowance to £10,000)
How was a pension valued when BCE 2 (member becomes entitled to a scheme pension), triggered?
Valuation basis was the scheme pension x 20
Who was liable to pay any lifetime allowance charge?
• Scheme administrator and member were jointly liable for payment of charge
• Scheme administrator was in the first instance responsible, but member must inform HMRC
Where income drawdown started before A-Day and the first BCE after 6 April 2006 occurred after 6 April 2015, how were the benefits valued if the form of drawdown was capped?
25 x 80% of the maximum annual amount that could be paid as capped drawdown at the date of the BCE
Give three examples of when a higher lifetime allowance may have applied.
• Not always been UK resident
• Transferred benefits from recognised overseas schemes
• Pension credit for a sharing order before A-Day
• Pension credit for a sharing order after A-Day if payment to original member already in payment (and pension in payment started on or after A-Day)
• Benefits in a pre-A-Day scheme with primary protection
• Registered for fixed protection 2012
• Registered for fixed protection or individual protection 2014
• Registered for fixed protection or individual protection 2016
How was a lifetime allowance enhancement calculated where it arises from a pension credit following a divorce before 6 April 2006?
IAPC/SLA
- IAPC is the amount of pension credit awarded increased by the % increase in RPl from the month in which rights were acquired to April 2006
- SLA is the standard LTA for the tax year 2006/07 i.e., £1.5m
What is the lump sum allowance for a scheme member holding Fixed Protection 2014?
With Fixed protection 2014, the lump sum allowance is £375.000.
Ben took his pension commencement lump sum from his defined benefit scheme in August 2024. On the same day, he took an uncrystallised funds pension lump sum from defined contribution funds. Which lump sum will be deemed to have been first?
Ben may decide the deemed order of payment.
Name three lump sum payments that are not relevant BCEs.
• Small pots lump sum
• Trivial commutation lump sum
• Winding up lump sum
• Charity death benefit lump sum
• Trivial commutation lump sum death benefit
What is a transitional tax-free cash amount certificate?
A document showing the real lump sums taken by a member rather than those deemed to have been taken under the standard transitional calculation.
At what rate are overseas transfers in excess of the overseas transfer allowance taxed?
They are taxed at 25% of the value of the transfer.
Simon, whose relevant UK earnings for 2024/25 are £90,000, wishes to contribute to a personal pension. As Simon is self-employed, tax relief will be given by contributions
A paid gross and claimed as an expense against profits.
B. paid net of 40%, as Simon is a higher-rate taxpayer.
C. paid net of 20% and Simon claims extra relief via self-assessment.
D. deducted from income before tax is levied; the net pay system.
C. paid net of 20% and Simon claims extra relief via self-assessment.
All of a member’s contributions to a personal pension plan are paid net of basic rate tax (20%). The self-employed can claim any additional relief via self-assessment (usually by deducting the extra relief from their balancing payment).
Chapter reference 2A1A
Pension input periods run from
A. 5 April - 6 April.
B. 1 March - 29 February.
C. 30 April - 29 March.
D. 6 April - 5 April.
D. 6 April - 5 April.
All pension input periods run in line with the tax year, ie between 6 April and 5 April each year.
Chapter reference 2B1
Bob is aged 67. He receives the following payments during the 2024/25 tax year
Salary - £200,000
DB pension commencement lump sum - £60,000
Scheme pension - £50,000
Non-flexible lifetime annuity - £25,000
Bob’s annual allowance for the year will be:
A. £60,000
B. £52,500
C. £22,500
D. £10,000
B. £52,500
Both Bob’s threshold and adjusted income are £275,000. As this exceeds the threshold of £260,000 by £15000, his annual allowance of £60,000 will be reduced by £15,000/2 = £7,500. A PCLS is tax free and therefore does not count towards this figure. Neither a PCS or non-flexible lifetime annuity income trigger the money purchase annual allowance.
Chapter reference B3A
Jim crystallised benefits from a personal pension five years ago and took a PCLS together with flexi-access drawdown income. During the current year, he has paid a gross amount of £15,000 into his SIPP and has also accrued €25,000 worth of defined benefit input. The £25,000 will be tested against the
A standard annual allowance.
B. money purchase annual allowance.
C. tapered annual allowance.
D. alternative annual allowance.
D. alternative annual allowance.
Jim’s flexi-access drawdown income triggered his money purchase annual allowance, which was exceeded by his £15,000 input during the current tax year. Therefore, his scheme pension input would be tested against the alternative annual allowance of £50,000.
Chapter reference 2B5B
Patryk has numerous sources of income. His financial adviser should be aware that relevant UK earnings for the purposes of investing in a UK registered pension scheme include
(Tick all that apply-)
A. income from a trade or profession.
B. employment overtime and bonuses.
C. rent from a buy to let property.
D. income derived from the payment of equity dividends.
A. income from a trade or profession.
B. employment overtime and bonuses.
Income from a trade or profession, employment overtime and employment bonuses are all classed as relevant UK earnings for pension purposes. Rent and dividends are not.
Chapter reference 2A1
Petra has the following sources of income per annum;
Employment income £25,000
Buy to let rental income £6,000 (after expenses)
Patent Income £1,200
Interest arising from a savings account £1,500
Income arising from her gardening job £2,500
Calculate Petra’s relevant UK earnings for pension purposes.
Answer £28,700
Detailed explanation
Buy to let income & bank account interest is not classed as relevant UK earnings for pension purposes.
Allowable source of income
Employment income (inc. bonus & overtime)
Earnings from overseas Crown employment (subject to tax)
Income from vocation, trade or profession
Income arising from patent rights
Not allowable
Dividends - treated as investment income Bank interest - treated as savings income
Rental Income - treated as investment income
CII R04 Study Text Chapter 2, Section 2A
Edward earns £60,000 per annum and wants to pay £400 gross per month into his personal pension plan.
Calculate his effective net contribution after receiving all tax relief.
Answer
Edward would make an effective net contribution of £240 per month.
Detailed explanation
Edward would make his payments net of basic rate tax (20%) so:
£400 × 80% = £320
He would also be entitled to higher rate tax relief of 20% on the gross contribution which would be reclaimed via his self-assessment or adjusting his tax code:
£400 × 20% = £80
So, after reclaiming both basic & higher rate relief his effective net contribution is £320 - £80 = £240. The actual net contribution would have been £320 as this is the net amount actually paid into the pension using the relief at source method.
NB. E400 x 60% = £240 (so Edward has received 40% relief)
CII RO4 Study Text Chapter 2, Section 2A1A
Felicity is an employee with total earnings this tax year of £116,000.
(a) Calculate Felicity’s personal allowance.
(b) Calculate the tax savings if Felicity makes a gross personal pension contribution of £16,000.
Answer
(a) £4,570
(b) £9,600
Detailed explanation
(a) Personal allowance is lost at a rate of E1 for every £2 of adjusted net income above £100,000.
Felicity will therefore lose £16,000/2 = £8,000. Her personal allowance will be
£12,570 - £8,000 = £4,570
(b) She will pay the gross contribution net of basic rate tax - so she will pay £12,800 She will reclaim £8,000 of her personal allowance saving tax at 40% = £3,200
Her basic rate band will be extended by £16,000 saving tax at 20% = £3,200
In total Felicity saves £3,200 x 3 = £9,600 equivalent to 60% tax relief on the contribution (£9,600/£16,000)
CII R04 Study Text Chapter 2, Section 2A1A
Down Tools Ltd have just made an annual pension contribution of £400,000; up significantly from last accounting period’s figure of £150,000.
Calculate, showing all your workings how the contribution in the current accounting period will be treated for the purposes of tax relief, including the amount that will qualify for tax relief in the current accounting period.
Answer
There is no spread of relief and the total contribution of £400,000 will qualify for tax relief in the current accounting period.
Detailed explanation
Previous contribution £150,000 x 210% = £315,000
Although, the increased payment of £ 400,000 is greater than 210% of the previous accounting period’s contribution (as shown above), it does not exceed £500,000 therefore the total new contribution will qualify for tax relief in the current accounting period.
CIl R04 Study Text Chapter 2, Section A2A
In the last accounting period, XYZ Ltd made total contributions of £800,000 to its pension scheme. This accounting period the figure has tripled to account for the dramatic increase in the number of new entrants.
Calculate showing all your workings, how the contribution in the current accounting period will be treated for the purposes of tax relief, including the amount that will qualify for tax relief in the current accounting period.
Answer
Tax relief on the employer’s total contribution of £2,400,000 will be given in the accounting period in which the contribution is paid.
Detailed explanation
In this instance, no calculation is required as the increased contribution relates to future service liability for new scheme entrants and therefore the employer contribution does not have to be spread. The increased contribution will all qualify for tax relief in the current accounting period.
CIl R04 Study Text Chapter 2, Section A2A
Up Sticks Ltd has made an annual contribution of £2,200,000 this accounting period to its SSAS, this is an increase from £700,000 last accounting period and has been made in recognition of the members’ contribution towards the firm’s significant increase in profits.
Calculate, showing all your workings, how the contribution in the current accounting period will be treated for the purposes of tax relief, including the amount that will qualify for tax relief in the current accounting period.
Answer
The contribution for the current accounting period will be spread over 3 accounting periods and the amount allowed for relief in the first accounting period will be £1,246,667.
Detailed explanation
Previous contribution
£700,000 x 210% = £1,470,000
The increased contribution of £2,200,000 exceeds both 210% of the last accounting period’s contribution and £500,000 therefore tax relief will be spread.
The excess above 110% of previous contribution
£700,000 × 110% = £770,000
£2,200,000 - £770,000 = £1,430,000
This is greater than £1,000,000, so tax relief is spread over 3 accounting periods,
£1,430,000 ÷ 3 = £476,667
This is the amoun that will spread over 3 accounting periods.
In the first year, the amount allowed for relief is £ 476,667 + £770,000 = £1,246,667
NB. The question asked how much would qualify for tax relief in the first accounting period.
CII R04 Study Text Chapter 2, Section A2A
James is a member of his employer’s group personal pension. He has a salary from his job (and no other income) of £30,000 per annum, and his employer contributes 6% of his salary each month into the plan, which James is required to match.
Having recently inherited a sum of money, James now wishes to make a lump sum contribution to his pension.
How much of a gross contribution can James contribute to his pension and obtain tax relief on the full amount?
Answer
£28,200 gross can be contributed by James into his pension with all of it being eligible for tax relief.
Detailed explanation
An individual’s tax relievable contributions are limited to their relevant UK earnings (£30,000 in James’s case) or £3,600 gross, whichever is higher, less any existing individual or third-party contributions. Employer contributions are ignored.
For James, he will therefore be able to make a lump sum contribution of £30,000 less his existing 6% regular contributions i.e., 94% of £30,000.
The important point is that the initial entitlement to tax relief is not related to the annual allowance. This will be considered later to see whether he can keep all of the tax relief. The employer contribution will count towards James’ annual allowance.
CII R04 Study Text Chapter 2, Section A1A, B2 and B3
the beginning of the 2023/24 PIP, Nigel had been a member of his defined benefit scheme for 12 years, the scheme had an accrual rate of 1/60th and his pensionable salary was £62,000.
At the end of the 2023/24 PIP Nigel had been a member of the scheme for 13 years and his pensionable salary had increased to £67,000.
CPI increased by 0.5% for the year to September 2022.
Calculate Nigel’s total pension input for the year 2023/24.
Answer
£32,874.72
Detailed explanation
Nigel’s benefits at the beginning of the 2023/24 pension input period were:
12/60 x £62,000 = £12,400
This is then valued using a factor of 16: £12,400 x 16 = £198,400
Then increased in line with the 0.5% increase in the CPI = £198,400 × 1.005 = £199,392
Nigel’s benefits at the end of the 2023/24 pension input period are:
13/60 x £67,000 = £14,516.67
This is valued using a factor of 16:
£14,516.67 × 16 = £232,266.72
Nigel’s total pension input is therefore:
£232,266.72 - £199,392 = £32,874.72
CII RO4 Study Text Chapter 2, Section B2B
Simon has been a member of a pension scheme since July 2022 and has not been subject to the tapered annual allowance in any year. He has made the following contributions to his SIPP:
2022/23 - £30,000
2023/24 - £29,000
What is the total unused annual allowance Simon can carry forward to 2024/25?
Answer
£41,000
Detailed explanation
In 2021/22 Simon was not a member of a pension scheme so he cannot carry forward any unused annual allowance from this year.
£10,000 from 2022/23 plus £31,000 from 2023/24 = £21,000 to carry forward to 2024/25.
CII R04 Study Text Chapter 2, Section B4
Sarah has fully utilised her annual allowance in 2021/22, 2022/23 and 2023/24 and is not subject to the tapered annual allowance. In the current tax year, she has relevant UK earnings of £98,000 and has made a single gross contribution of £45,000 into her company’s occupational defined contribution scheme that gives tax relief via the net pay method. Her employer has also made a contribution of £60,000.
Calculate the annual allowance excess tax charge payable.
Answer
£18,000.
Detailed explanation
Sarah’s personal contribution of £45,000 wil qualify for tax relief on the entire contribution as this is below her relevant UK earnings.
The employer’s contribution should also receive tax relief in full.
As the total contribution of £105,000 (£45,000 + f60,000) that has received tax relief exceeds the annual allowance, Sarah will be liable for the annual allowance charge.
Her taxable income is £98,000 - £45,000 - £12,570 which equals £40,430. This is in excess of the higher rate income tax threshold of £37,700 and so therefore Sarah is a higher rate taxpayer.
The amount above the annual allowance is £45,000 (£105,000 - £60,000).
Sarah’s taxable income is £40,430 and the excess over the annual allowance is added to this figure giving a total of £85,430. The excess of £45,000 all falls into the higher rate tax band and will therefore be subject to a tax charge of £45,000 x 40% = £18,000.
CII R04 Study Text Chapter 2, Section B6
Steve receives a gross salary in 2024/25 of £181,000. He also receives savings interest of £600 and dividends of £5,600.
Steve entered into a salary sacrifice arrangement on 1$ September 2015 sacrificing £10,000 of his original salary. His employer also pays an employer contribution of £10,000.
Calculate Steve’s threshold income and his adjusted income.
Answer
Threshold income - £197,200
Adjusted income - £207,200
Detailed explanation
Calculation for threshold income:
Gross taxable income = £181,000 + £600 + £5,600 = £187,200
Where a new salary sacrifice arrangement was entered into after 9 July 2015, the sacrificed salary must be added back into the calculation.
£187,200 + £10,000 = £197,200. The employer contribution can be ignored.
Threshold income = £197,200
As Steve’s threshold income is below £200,000 then he would not be subject to the tapered annual allowance regardless of his threshold income. However, to calculate adjusted income, we would also add in the employer pension contribution of £10,000, hence £207,200.
CII R04 Study Text Chapter 2, Section B3A
In 2024/25 Paul receives a salary of £266,000. He has savings interest of £1,000 and dividend income of £40,000. Paul is a member of his employer’s occupational defined contribution pension scheme and contributions are paid via the net pay arrangement. In 2024/25 Paul pays £20,000 gross to the scheme and his employer pays £10,000.
Calculate Paul’s tapered annual allowance.
Answer
£31,500
Detailed explanation
Net income = £266,000 salary + £1,000 in prest + £40,000 dividends = £307,000
Deduct Paul’s pension contribution = £287,000
His threshold income is above £200,000 so we need to calculate his adjusted income
Adjusted income = £307,000 + employer pension contribution of E10,000 = £317,000
(£317,000 - £260,000) / 2 = £28,500
£60,000 - E28,500 = £31,500 for 2024/25
CII R04 Study Text Chapter 2, Section B3A
Joseph is a member of a defined contribution scheme and a defined benefit scheme. On 5th May 2023, he takes an uncrystallised funds pension lump sum from his defined contribution scheme. He has no carry forward available and is not subject to the tapered annual allowance.
In June 2024, Joseph makes a contribution into his defined contribution scheme of £3,000. The pension input amount for his DB scheme for the 2024/25 tax year is calculated as £25,000.
Calculate any annual allowance charge Joseph may be liable for.
Answer
There is no annual allowance charge
Detailed explanation
The MPAA rules are triggered when Joseph took the UFPLS.
The input into the defined contribution scheme occurred after he triggered these rules.
The input is £3,000 which is less than £10,000 and below the MPAA
The pension input for both schemes is £28,000 and this is tested against the £60,000 annual allowance for 2024/25 so there is no ammual allowance tax charge.
CI R04 Study Text Chapter 2, Section B5
Alison is aged 55 and a higher rate taxpayer. She is a member of a defined contribution scheme and a defined benefit scheme. On 5th May 2024, she took part of the defined contribution scheme as an uncrystallised funds pension lump sum. She has no carry forward available and is not subject to the tapered annual allowance.
In June 2024, Alison pays £18,000 into her defined contribution scheme and the pension input for her defined benefit scheme has been worked out as £23,000.
Calculate any annual allowance charge Alison may be liable for.
Answer
£3,200.00
Detailed explanation
Total input into both schemes is £41,000
As this is less than the annual allowance of £60,000 the default chargeable amount is £0
Her pension input into the DB scheme is less than the alternative annual allowance of £50,000 so the alternative chargeable amount in respect of the DB scheme is £0 but for the DC scheme the alternative chargeable amqunt is £8,000 (£18,000 - £10,000 MPAA).
Alison must pay an annual allowance tax charge on the higher of the default chargeable amount and the alternative chargeable amount, so she pays an annual allowance tax charge on £8,000. As Alison is a higher rate taxpayer, she will pay 40% on this.
CIl R04 Study Text Chapter 2, Section B5B
Ethan is a member of a defined contribution scheme and a defined benefit scheme. On 5th May 2024, he took part of the defined contribution scheme as an uncrystallised funds pension lump sum. He has no carry forward available and is not subject to the tapered annual allowance.
In June 2024, Ethan pays £14,000 into his defined contribution scheme and the pension input for his defined benefit scheme has been worked out as £49,000.
What is the chargeable amount that will be used to calculate Ethan’s annual allowance tax charge?
Answer
The alternative chargeable amount of £4,000
Detailed explanation
The default chargeable amount is £63,000 - £60,000 = £3,000
The alternative chargeable amount is EO for the DB scheme as less than £50,000 plus £4,000 for the DC scheme (£14,000 - £10,000 MPAA)
The annual allowance charge will be calculated on the alternative chargeable amount of £4,000
you go with the higher chargable amount
ClI R04 Study Text Chapter 2, Section B5B
Darcey has an uncrystallised personal pension plan which she contributes £500 gross to on the 8th of each month. She is not subject to the tapered annual allowance.
Darcey also has another personal pension plan which on 15th October 2024 she takes part of as a UFPLS.
Calculate any annual allowance charge that she might be liable for.
Answer
Darcey will not be liable for an annual allowance charge in 2024/25
Explanation
Taking the UFPLS has triggered the MPAA.
We need to split the pension input for the PP to calculate the contributions paid prior to the trigger event and those paid after it.
Darcey has paid 7 x £500 since 6th April 2024 until 15th October 2024 (8th April - 8th October) = £3,500 which can be ignored for MPAA purposes
Darcey has paid 5 x £500 from 16th October 2024 until 5 April 2054 (8th November - 8th March) = £2,500 and this is assessed against thig MPAA.
Darcey will not breach the MPAA for 2024/25 so she is assessed against the £60,000 annual allowance. Her total pension input is £6,000 so she is below the annual allowance as well.
CII R04 Study Text Chapter 2, Section B5
How are contributions made to personal and stakeholder pensions made in comparison to occupational pensions
Contributions to personal and stakeholder pensions (including group arrangements) receive tax relief via the relief at source method, i.e. contributions are paid net of basic rate tax with higher and/or additional rate relief claimed through self-assessment or adjustment to the member’s tax code.
Whereas with occupational pensions, they use the net pay method where the payment is made before tax is calculated on the income, as such relief is given at the marginal rate immediately.
It’s worth remembering though that NICs is still calculated on the entire salary and so NICs are not reduced as a result of an employees pension contribution
What is adjusted net income
Adjusted net income is total income from all sources (i.e. salary, interest, dividends etc.) less certain deductions. One of the deductions that reduces an individual’s adjusted net income is the gross value of a personally made pension contribution.
How is tax paid under self assessment for the self employed
The self-employed can choose to contribute to an individual defined contribution arrangement such as a personal pension or a SIPP. Self-employed individuals are assessed for income tax via a self-assessment tax return.
Under self-assessment, tax is paid in three instalments as follows:
A payment on account on 31 January during the current tax year (i.e. on 31 January 2025 for 2024/25) - this is 50% of the years tax liability
A second payment on account on 31 July following the end of the tax year (i.e. on 31 July 2025 for 2024/25) - this is also 50% of the years tax liabilities
A balancing payment on 31 January following the end of the tax year (i.e. on 31 January 2026 for 2024/25) - This is the difference between the year’s total tax liability and the two payments on account already made The following year’s first payment on account is made at the same time Any higher and/or additional rate tax relief in respect of personal or stakeholder pension contributids made in the current tax year is received along with the balancing payment
E.G
Claire is self-employed and is a higher rate taxpayer. She submitted her tax return for 2023/24 on 10 June 2024. Claire’s tax bill for 2022/23 was £14,000. Her total tax liability for 2023/24 is £18,000. She will pay her tax for 2023/24 as follows:
• Her first payment on account would have already been paid on 31 January 2024 - this would be 50% × £14,000 liability for 2022/23 = £7,000.
• Her second payment on account will be due on 31 July 2024: this will also be for £7,000.
• Her balancing payment will be due on 31 January 2025 this will be for £18,000 -
£7,000 - £7,000 = £4,000
Joanne is self-employed and a higher rate taxpayer; her tax liability for 2022/23 was £15,000 and for 2023/24 was £20,000. She made a single gross contribution to her personal pension plan of £4,000 during 2024/25.
What were her payments on account in January 2024 and July 2024 and what will her balancing payment be in January 2025?
Answer
31/01/24 Payment on account £7,500
31/07/24 Payment on account £7,500
31/01/25 Balancing payment £4,200
Detailed explanation
Joanne’s first payment on account on 31/01/24 was for 50% of her tax liability for • 2022/23:
£15,000 × 50% = £7,500
Joanne’s second payment on account paid on 31/07/24 was for the remaining 50% of her tax liability for 2022/23, so was exactly the same as above.
Joanne’s balancing payment due by 31/01/25 considers the tax due for 2023/24 and takes into account the 2 payments on account already made:
£20,000 - £15,000 = £5,000
But next we need to consider the gross pension contribution. Joanne would have made this net of basic rate tax:
£4,000 x 20% = £800
So, Joanne actually paid (£4,000 - £800) £3,200
And as she is a higher rate taxpayer, she would be entitled to higher rate tax relief of a further 20% on the gross contribution. Her payments on account remain unchanged, but her balancing payment is reduced by £800 to £4,200 (£5,000 - £800).
CII R04 Study Text Chapter 2, Section A1A
In 2024/25, Paul receives a salary of £266,000. He has savings interest of £1,000 and dividend income of £40,000. Paul is a member of his employer’s occupational defined contribution pension scheme and contributions are paid via the net pay arrangement. In 2024/25 Paul pays £20,000 gross to the scheme and his employer pays £10,000.
What is Paul’s tapered annual allowance?
A. £31,500
B. £30,000
C. £28,000
D. £25,000
A. £31,500
To assess if the tapered annual allowance applies, threshold income must be above £200,000, and adjusted income must be above £260,000 (the allowance is then reduced by £1 for each £2 above the adjusted income). Paul’s threshold income is taxable income = £266,000 + £1,000 + £40,000 = £307,000 less gross pension contributions (£20,000) = £287,000. The threshold income is over the limit; therefore, we must now calculate the adjusted income, i.e., taxable income £307,000 + employer contribution £10,000 = £317,000. This is £57,000 over the adjusted income limit, and therefore Paul’s annual allowance is reduced by half the excess, i.e., £28,500. £60,000 less £28,500 = £31,500. - Chapter 2, Section B3A , Learning Outcome 2
Debbie has a basic salary of £40,000 and benefits in kind totalling £7,500 per annum. Debbie’s employer contributes 5% of her basic salary to her pension and Debbie tops this up with a contribution of 8% of her total relevant UK earnings. What is the total gross contribution being made to her pension plan?
A. £4,640
B. £5,850
C. £6,175
D. £5,800
D. £5,800
While Debbie’s employer restricts its pension contribution to basic salary, Debbie’s total relevant earnings include both her basic salary and her benefits in kind.
Debbie’s contribution is therefore 8% of £47,500 (i.e., £40,000 plus £7,500) = £3,800 plus her employer’s contribution of 5% of £40,000 = £2,000. Her total gross pension contribution is therefore £5,800. - Chapter 2, Section A, Learning Outcome 2
Martin is about to retire and looking into how he wishes to take his pensions. He is particularly curious about the lump sum allowance which limits tax-free lump sums payable within his lifetime. He should be aware that the lump sum allowance test will be applied to any amounts taken as a
A. trivial commutation lump sum.
B. standalone lump sum.
C. winding-up lump sum.
D. small pots lump sum.
B. standalone lump sum.
A standalone lump sum would be tested against the lump sum allowance. The other options are not relevant BCEs and therefore do not count towards the LSA or LSDBA. - Chapter 2, Section C7, Learning Outcome 2
Hisam, aged 30, earns £30,000 per annum. He is a member of his employer’s workplace pension scheme, to which both he and the employer contribute 5%. Hisam receives an inheritance and decides to make a £29,600 net (£37,000 gross) contribution. Hisam is later informed that he will be subject to a tax charge. In terms of the charge he is required to pay
A. the scheme cannot pay his tax charge.
B. he can make a mandatory scheme pays election.
C. he can request, but not compel, the scheme to pay the tax charge.
D. he and the scheme will have joint liability for the tax charge.
C. he can request, but not compel, the scheme to pay the tax charge.
A scheme member facing an annual allowance excess tax charge may make a mandatory scheme pays nomination where the input into that scheme exceeds the standard annual allowance of £40,000 and the tax charge exceeds £2,000. Where those criteria are not met, the scheme may voluntarily agree to pay the tax charge but cannot be compelled to do so. - Chapter 2, Section B6, Learning Outcome 2
Joe is in receipt of the following payments during the 2024/25 tax year:
Basic salary £200,000
Benefits in kind £25,000
Annuity £30,000
ISA dividends £25,000
Joe opted out of his occupational pension scheme when he joined his employer in favour of an increased salary as he held fixed protection 2014. He is now looking to recommence contributions.
He has been informed that his tax relievable input into his personal pension will be reduced from the standard £60,000. This is because
A. his adjusted income exceeds £260,000.
B. he is an additional rate income taxpayer.
C. the annuity is a flexible one.
D. his benefits in kind are taxable.
C. the annuity is a flexible one.
Receipt of payments from a flexible annuity contract is a trigger event for the money purchase annual allowance, which reduces money purchase input to £10,000 per annum. Joe would not exceed the £260,000 adjusted income threshold regardless of whether his benefits in kind are taxable as ISA dividends are not and he has received no employer pension contributions. Tax status, in itself, does not determine annual allowance. - Chapter 2, Section B5A, Learning Outcome 2
George is a member of a 1/80ths final salary pension scheme with a 3/80ths PCLS entitlement paid separately. At the start of the pension input period, his salary was £60,000 and he had been a member of the scheme for 15 years. At the end of the year, his salary had increased to £70,000. Assuming CPI for the previous September to be 2%, his pension input during the year will be
A. £41,320
B. £44,525
C. £47,975
D.£49,660
C. £47,975
George’s original salary was £60,000 and he had been a scheme member for 15 years.
His entitlement was therefore 15/80 x £60,000, or £11,250, with a PCLS of £33,750.
This is a total of £213,750, (11,250 x 16) + £33,750.
Increased by the 2% CPI figure, this gives £218,025.
At the end of the period, his salary was £70,000 and his entitlement £70,000 x 16/80, or £14,000 with a lump sum of £42,000.
This gives a total of £266,000, which when taking away the original £218,025 gives £47,975. - Chapter 2, Section B2B, Learning Outcome 2
Joe, aged 60, is an additional rate taxpayer earning £300,000 per annum. He has recently taken a £200,000 pension commencement lump sum (PCLS) from his group personal pension and purchased a holiday home worth £150,000. He intends to contribute the additional £50,000 back into his pension to benefit from additional rate tax relief, using carry forward. He should be aware that he
A. will incur a Money Purchase Annual Allowance (MPAA) excess tax charge.
B. may be in breach of PCLS recycling rules.
C. can only do this if he was a member of the scheme prior to A-day.
D. will only receive basic rate tax relief on this contribution.
B. may be in breach of PCLS recycling rules.
PCLS recycling rules will be triggered where a number of criteria are met. Firstly, the PCLS (together with any other taken in the previous 12 months) must exceed £7,500 and this must mean that the pension contribution is significantly greater than it would otherwise have been. The cumulative sum of additional contributions must exceed 30% of the PCLS. The contributions must be made by the individual or someone else on their behalf. Finally, the recycling must be pre-planned. There is therefore a risk that this may catch Joe. An additional rate taxpayer is eligible to claim additional rate tax relief using carry forward even where they exceed the annual allowance. The MPAA is not triggered by taking a PCLS. Whether he was a member of the scheme prior to A-day is not relevant to protected tax free cash. - Chapter 2, Section A1D, Learning Outcome 2
Caroline is aged 70 and retired. She is in receipt of state pension income and is also taking income from a pre-2015 capped drawdown plan. At her most recent review, the maximum permitted withdrawal was calculated to be £10,000 per annum. Caroline decides that she would like to purchase a new car and therefore decides to draw £20,000 during the 2023/24 tax year. She should be aware that
A. she will become subject to the Money Purchase Annual Allowance (MPAA).
B. this will be classed as an unauthorised member payment.
C. the excess will be taxed at higher rate.
D. she will not be permitted to make this withdrawal.
A. she will become subject to the Money Purchase Annual Allowance (MPAA).
Where a capped drawdown payment is made which exceeds the permitted maximum, the MPAA will be triggered. - Chapter 2, Section B5A, Learning Outcome 2
Joyce is a member of an occupational pension scheme, which is receiving employer national insurance savings. This is an indication that
A. her scheme is a defined benefit one.
B. it contains an element of guaranteed minimum pension (GMP).
C. she is making her contributions via the net pay method.
D. she is using a salary sacrifice arrangement.
D. she is using a salary sacrifice arrangement.
Employer national insurance contributions can be rebated into a pension where a salary sacrifice arrangement is being used. The type of scheme being used is irrelevant, though the rebate would only be of benefit to defined contribution members with a pension pot. Guaranteed minimum pension is not relevant and relief-at-source contributions do not attract employer national insurance rebates. - Chapter 2, Section A1C, Learning Outcome 2
What is Annual Allowance tax charge
The annual allowance charge is a tax charge that is levied on the pension scheme member and is usually paid via their self-assessment tax return. However, the member may have the right to elect for the scheme administrator to pay some or all of the annual allowance charge on their behalf, known as ‘scheme pays’.
The conditions that must be satisfied to allow this are:
* the member’s annual allowance charge liability for the tax year exceeds £2,000; and
* the total amount of the member’s pension savings in the pension scheme for the same tax year has exceeded the annual allowance of £60,000.
If the annual allowance charge is paid by the scheme, an appropriate reduction is made to the member’s pension benefits. The way in which the reduction is made depends upon the type of pension scheme as follows.
- In a defined contribution scheme, the adjustment reduces the overall amount of the fund from which the benefits are provided, i.e. the member’s fund is simply reduced by the amount of the annual allowance charge.
- In a defined benefit (or cash balance) arrangement, the adjustment is to the benefits that the member has accrued under the arrangement, i.e. the value of the benefits is reduced and the reduction is based on the amount of the annual allowance charge. The scheme must be able to demonstrate to HMRC that the adjustment made to the member’s benefits is ‘just and reasonable’, having regard to normal actuarial practice.
Joanne, aged 65, earned a total of £60,000 from her employment during the 2022/23 tax year. In January 2023, she took a pension commencement lump sum (PCLS) of £20,000 and drew down £10,000 of income from a flexi-access drawdown account. At the end of the 2022/23 tax year, she retired in full. What is the maximum gross tax relievable contribution she may make to a personal pension in the 2023/24 tax year?
A. £0
B. £3,600
C. £10,000
D. £60,000
B. £3,600
An individual with no relevant UK earnings may contribute a maximum of £3,600 gross (£2,880 net) per tax year to a personal pension and receive tax relief. This rule takes precedence over the £10,000 MPAA. - Chapter 2, Section A1A, Learning Outcome 2
Becca, aged 56, is employed on a salary of £215,000 p.a. and she makes a gross contribution of £20,000 into her personal pension. Her employer also makes a gross contribution of £20,000. What is her threshold income?
a. £195,000.
b. £175,000.
c. £255,000.
d. £235,000.
£195,000.
Threshold income =
Gross taxable income - Member pension contributions + income given up as a result of salary exchange - taxed lump sum death benefits
in Becca’s case it would be £215,000 - £20,000 = £195,000
as employer contributions do not count towards threshold income
Chapter reference 2B3A
what are the two types of pension contribution and when are they paid
Employer sponsored occupational schemes (but not group personal or group stakeholder pension schemes) have the choice of two methods of awarding tax relief. These are:
net pay method, employee contributions are taken from the employee’s gross pay before income tax is deducted
relief at source method, contributions are paid net of basic rate tax.
Contributions to personal and stakeholder pensions (including group arrangements) receive tax relief via the relief at source method, i.e. contributions are paid net of basic rate tax with higher and/or additional rate relief claimed through self-assessment or adjustment to the member’s tax code
Sylvia moved from the UK to Spain in 2020. She has a UK personal pension scheme which she joined prior to her move. In terms of contributions to the scheme during the current tax year, Sylvia should be aware that she is
A. unable to contribute to the scheme.
B. not a relevant UK individual.
C. able to contribute a maximum of £3,600.
D. only able to contribute if she is in crown employment.
C. able to contribute a maximum of £3,600.
Where a member was resident in the UK at the time they joined the scheme and at some point during the five years before the contribution was made, they will be classed as a relevant UK individual. Tax relievable pension contributions, where this applies but they are no longer UK resident, will be limited to £3,600 gross. - Chapter 2, Section A1, Learning Outcome 2
Kevin has opened a pension for his daughter, Kelly, who is aged 16. In terms of contributions to the pension, it is correct to say that
A. only Kevin can contribute to the pension.
B. Kelly cannot contribute to the pension until she turns 18.
C. Kelly may contribute up to £3,600 gross to her pension.
D. Kelly’s contributions are limited by her relevant UK earnings.
D. Kelly’s contributions are limited by her relevant UK earnings.
Eligibility for pension tax relief is based on the income of the holder, which is Kelly in this instance. However, she or anyone else may contribute on her behalf. If Kelly has no relevant UK earnings, then tax relievable contributions will be limited to £3,600 gross. However, if she has earned income then she may contribute up to the level of that earned income. - Chapter 2, Section A1A, Learning Outcome 2
Pension contributions and defined benefit accrual are not classed as pension input if they are made
A. in the year of the member’s death.
B. in the year of the member’s retirement.
C. to a contracted-out scheme.
D. by a non-eligible jobholder.
A. in the year of the member’s death.
Pension contributions and defined benefit accrual are not classed as pension input where they are made in the year of the member’s death. Contributions in the year of retirement would count as input unless the retirement is due to serious ill-health where life expectancy is less than 12 months. - Chapter 2, Section B2C, Learning Outcome 2
The standard lump sum allowance for 2024/25 is:
a.£268,275 and there are no provisions in the legislation for increasing this allowance in future tax years.
b.£1,073,100 and this will be increased in line with increases in the Consumer Price Index in future tax years.
c.£268,275 and this will be increased in line with increases in the Consumer Price Index in future tax years.
d.£1,073,100 and there are no provisions in the legislation for increasing this allowance in future tax years.
a.£268,275 and there are no provisions in the legislation for increasing this allowance in future tax years.
Chapter reference 2C8
In 2023/24 a company made an annual contribution of £400,000 to its pension scheme. In 2024/25 it increased its contribution to £1.43m. As a result, the tax relief will be awarded:
a.over three accounting periods.
b.fully in 2024/25.
c.over four accounting periods.
d.over two accounting periods.
d.over two accounting periods.
An employer’s contribution will be spread over a period of years for tax relief purposes if:
* it exceeds 210% of the contribution paid in the previous chargeable period; and
* the amount of the excess (defined as the amount paid over and above 110% of the
contribution paid in the previous chargeable period) is £500,000 or more
£400,000 x 210% (2.1) = £840,000
£840,000<£1,430,000
£1,430,000 - (£400,000 x 110% (1.1)) = £990,000
Where spreading of tax relief is to apply to the excess, a table is used as follows.
Excess Spread
£500,000 – £999,999 2 accounting periods
£1,000,000 – £1,999,999 3 accounting periods
£2,000,000 or more 4 accounting periods
£500,000 < £990,000 < £999,999 = 2 accounting periods
Chapter reference 2A2A
