Chapter 2.1 Written Notes Flashcards
On April 2006, A-day happened. What did this mean to tax regimes ?
The government removed all existing complex rules, regulations and tax regimes and replaced them with one single simplified tax and regulatory regime.
For an individual to receive tax relief on a personal contributions, they must be defined as a ?
Relevant UK Individual and have relevant UK earnings.
What account as a relevant UK individual (who is eligible for personal pension contribution tax relief) :
- Under the age of 75 years old (AND)
Is a resident in the UK at some time during that year or
Was a 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 this circumstance would be subject to a maximum of £3,600 per year and when they became a member of the pension scheme or
They or their spouse have earnings for the tac year from an overseas crown employment subject to UK tax or
Has relevant UK earnings chargeable to income tax for that year (see below)
What accounts as Relevant UK earnings?
Employment income, such as salary, wages, bonus, overtime and commission
Income derived from carrying on or the exercise of a trade, profession or vocation (whether as a sole trader or as a partner)
Income arising from patent rights and treated as earned income
General earnings from an overseas crown employment, which are subject to UK tax
What is the maximum individual contribution that is eligible for tax relief ?
£3600 gross p.a (if you earn less than 3600 or nothing at all or 100% of relevant uk earnings each year.
An individual can pay more than this, but will receive no tax relief on the excess.
What are the two ways tax relief is awarded?
The net pay method (employee contributions are taken form the employers gross pay before income tax is deducted).
The relief at source method (contributions are paid net of basic rate tax).
Higher tax bracket earners can apply for a self assessment of tax relief to earn their tax %
What method is used to receive tax relief on contributions to personal and stakeholder pensions (including group arrangements)?
Tax relief via the relief at source method
(contributions are paid net of basic are tax with higher and/additional rate relief claimed through self-assessment or adjustment to the members tax code)
Retirement annuity contracts before 6th April 2006 used what method of tax relief?
Relief on making a claim method (contributions to retirement annuity contracts were made gross and the individual reclaimed all their tax relief via self assessment or adjustment to their tax code).
The retirement annuity provider may choose to continue using this method, or change to relief at source.
What are the three timings for a self assessment tax return (self employed) ?
31st January - A payment on 31st January during the current tax year e.g 31st January 2020 for 19/20) - This is 50% of the previous years liability
31st July - Second payment following the end of tax year e.g. 31st July 2020 for 19/20 (This is the other 50% of the previous years tax liability)
Balancing payment on the following 31st January e.g January 2021 for 19/20 - This is the difference between the years total tax compared to the two already paid. Paid at the same at next following years first payment.
Controlling directors often take a small salary and a large dividend from their limited companies. Do dividends qualify for tax relief ?
Dividends are not included within the definition of relevant UK earnings and therefore do not qualify for tax relief.
If they want to make a significant personal contribution, the employer can either increase their salary for that year or make the contribution as an employer contribution.
Q) What is a salary sacrifice agreement and why is it beneficial ?
- When an employee agrees to a reduction in their salary (or sacrifice a bonus payment) and in return the employer pays a pension contribution on the employees behalf.
This is beneficial as both the employer and employee will pay reduced NICs. The NIC can be recycled back into the pension arranger and a larger contribution paid at no extra cost to the employer or employee.
What are some advantages to salary sacrifice?
• if the employee was already paying a pension contribution take-home pay is usually the same or even slightly higher;
• if salary sacrifice is being used because of a new pension scheme, the reduction in take-home pay will be less than the amount of the gross pension contribution;
• National Insurance savings made by the employer and the employee may be paid into the pension arrangement to increase the contribution at no additional cost;
• since salary is reduced, the employee’s entitlement to Working Tax Credits may be increased;
for those on higher earnings, salary sacrifice may be used to reinstate some or all of the personal allowance (where earnings are initially in excess of £100,000); and
• those with earnings in excess of £50,000 p.a. can use salary sacrifice to reduce their earnings back below £50,000 so that the High Income Child Benefit tax charge is not payable.
What are some disadvantages to salary sacrifice?
• salary is reduced for all purposes: this may reduce benefits such as death in service cover;
– however, a notional salary may be used by the employer, to ensure that benefits are not reduced;
• the reduction in salary may reduce the employee’s borrowing capacity for mortgages and other loans;
– however, changes in the mortgage rules mean lenders will assess a borrower’s affordability, rather than using a multiple of salary. Since take-home pay is unreduced (or may even be slightly increased), the salary sacrifice arrangement is likely to have little impact on the amount that can be borrowed for a mortgage; and
• the salary reduction may cause a reduction or even a loss of other social security benefits, such as maternity benefits.
