Pension Flashcards
Any amount can be contributed by an individual into a pension scheme but tax relief is only available on a maximum amount each year. How is this worked out?
It is the lower of:
✓ Total Gross contributions paid
✓ Maximum amount
Maximum annual amount= higher of:
✓ £3,600 +(rates table)
✓ 100% of the individual’s relevant earnings, e.g. employment income, trading income, FHLA
What are the list of relevant earnings for pension?
e.g. employment income, trading profit, FHLA
Not relevant- dividend, interest, property income
An individual with no relevant earnings can therefore obtain ta relief on contributions of up to 3.6k a year
How is the tax relief given on a personal pension scheme?
The amount you put into the pension is after you pay tax so the scheme will basically get your 20% you’ve paid back and put it into your pension. Higher rate people can claim back the excess.
✓ Basic rate relief of 20% relief given at source
✓ Extends the basic rate and higher rate band thresholds by the gross contributions paid
✓ ANI will be reduced by the gross amount
How is the tax relief given on a occupational pension scheme?
Tax relief at all rates is given at source through PAYE system (i.e. an allowable deduction against employment income)
The employee pays gross contributions in to the company pension scheme and the gross contribution are an allowable deduction for employment income
The amount is deducted before the tax is deducted basically.
How are the employer contributions treated for the employee and the employer?
and what is the one thing that it does affect that you MUST remember
Not treated as a taxable benefit
Tax deductible for employer- can deduct this against profits
Taken into account when calculating total contributions to be compared with annual allowance (AA)
What is the amount of annual allowance and when is there a charge and how is this calculated?
£40K (Rates table)
If Total pension inputs > annual allowance + Unused AA B/F = there is a income tax charge on the individual
▪ The tax charge is taxed as the ‘top slice’ of income @Non-Saving rates (20/40/45)
▪ This is then paid through the self assessment system
▪ ***Unused allowance can be c/fwd 3 tax years
▪ There are certain situations where the £40K can be abated similar to personal allowance
How is the restriction of annual allowance on high income individuals calculated?
This restriction applies to individuals with ‘Adjusted Income’ exceeding £150,000.
▪ Net income (from IT comp) X
▪ Add employee’s OPS contribution X
▪ Add employer’s contribution into any scheme X
▪ Adjusted net income
The annual allowance of £40k is reduced by the formula (ANI-£150K) x 50% .
What is the maximum amount that the annual allowance can be reduced by?
The minimum annual allowance limit is £10k. So, the maximum reduction to the annual allowance is £30k.
What is the minimum age for accessing the pension and what is the tax free amount that can be withdrawn and how is the remaining taxed?
55
25% The remaining is taxed as non-saving income in the tax year they are withdrawn at the normal rate of tax i.e. 20 40 45
What is lifetime allowance and when does this apply?
LA is the total pension value that can obtain tax relief. for 19/20 this is £1,055,000
This is only considered when an individual becomes entitled to take benefits out of the pension scheme.
If the value of the pension at that time exceeds the LA then an additional tax charge arises. Calculation not examinable
What is the advice on the calculation of the charge for when contribution exceeds the AA?
Add the excess to the tax payers total income and tax that part last i.e. after dividends
What is the condition to be able to C/F the unused AA from the previous three tax years
Only if the individual was a member of a registered pension scheme for that tax year.
In what order is the AA used?
Current year AA used first
Then the earlier 3 years unused amount on FIFO basis
if the personal pension contribution is based on how much of a persons annual allowance is remaining, how is this determined?
Annual allowance Less- tapering (( X-150K)/2) Plus Brought forward allowance Less- Employee OPS contribution Less- Employer's OPS contribution
= Remaining available annual allowance
If an employer contributes into the PPS, what happens to their contribution or what qualities do they hold?
▪ It is a tax free benefit.
▪ A tax allowable deduction in the employers corporation tax computation.
▪ It is also combined with the employee’s contribution and compared to the available annual allowance. Where an annual allowance is exceeded, a tax charge is levied on the individual
