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
