Chapter 6 - Pensions

Question 1

Amount of contribution

Answer 1

Lower of:
Total gross pension contributions paid
OR
Maximum of:
£3,600 if no relevant income
100% of ‘relevant earnings’ (Trading profit, employment income, NOT investment income or Property income)

Question 2

What does maximum amount of relief mean? PPCs

Answer 2

E.g. if my maximum amount of contribution is £36k, then I only have to pay in £28.8k and the govt will top up the remaining 20%

Question 3

Extension of tax bands: PPCs

Answer 3

Always happens if a PPC is made, a charge is only incurred if you exceed the annual allowance of $40k inc b/f

If a basic rate tax payer (trading profits), do not adjust the income tax computation
If higher rate tax payer, the basic band extends by the gross contribution value (gross) (questions will trick you - if it doesn’t say gross assume net)
If additional rate tax payer, extend the higher band

or additional rate tax payer, extend the bands they fall into by the the amount of pension contribution (gross)

E.g. I make $87k, so I’m a higher rate tax payer, I extend the basic band by the gross contribution, but I also incur a 20% tax on the overspend

Question 4

PPCs Example

Answer 4

Fran:
Pension Contributions Gross: £30k, Trading Profits: £195k

Trading Profit: £195k
Less: PA: £0
Taxable Income: £195k

Income tax:
Basic rate: £67,70020%=£13,540
Higher rate: £87,44040%=£34,976
Additional rate: £39,860*45%=£17,937

Income tax liability: £66,453

Question 5

OPCs

Answer 5

The % Employee pays simply comes off the employment income before personal allowance is deducted

Question 6

Annual Allowance: tax free amount

Answer 6

No limit, but there is tax after £40k
BUT, can bring forward any unused allowance from previous THREE tax years.
Only if was a member of pension scheme in that year
Current year is used first, then FIFO basis

Question 7

Annual allowance vs Contribution Differences

Answer 7

The annual allowance is simply the amount you can contribute before incurring a charge on your pension contribution this excludes dividend and property income

The Maximum Gross Contribution is the legal limit eg you can’t contribute more than relevant earnings

Question 8

Annual Allowance for High Income Individuals

Answer 8

If Adjusted Income exceeds £240,000 PA, the annual allowance is reduced
Up to a maximum of £312,000, where it becomes £4k

Question 9

Adjusted Income

Answer 9

Net Income (from income tax computation) (includes saving income)
+ Eer’s pension contrbution
+ Eee pension contribution
Adjusted Income

Question 10

Annual Allowance reduction formula

Answer 10

(Adjusted income - $240,000)*50%

Question 11

Adjusted Income Further notes

Answer 11

Question will often give you annual salary which includes OPC Eee Income e.g. SALARY INCLUDES Eee INCOME
Excludes personal pension scheme

if it gives you trading profit/NET income (add both eer and eee?)

Question 12

Relevant Earnings

Answer 12

Furnished holiday letting YES
Warehouse - Taxable Income - NO
Charity donations - NO