Pensiosn And Relief Ch 9

Question 1

Type of pension schemes ?

Answer 1

Occupational pension scheme and personal pension scheme

Question 2

How does occupational and personal pension scheme contributions impact employee/indiviudal?

Answer 2

OPS - contribution deducted from mr smith gross salary hence no income tax paid on salary used to make contribution (income still subject to NIC)

PPS-hmrc gross up mr smiths contribution by 20% (hence gross contribution = amount paid by mr smith x 100/80)

Extend his tax band by the gross contribution

Question 3

How does occupational and personal pension scheme contributions impact employer?

Answer 3

Same for both - an employer contribution is an allowable deduction when calculating taxable trading profits

The contribution is an exempt benefit for the employee (not subject to IT OR NI)

Question 4

What is the maximum tax reliable contribution

Answer 4

The max gross tax receivable contribution that can be made in the tax year is the higher of:
- earnings (employment income trading income etc)
- £3600

Note: no relief will be given on contribution in excess of this limit

Question 5

What is the annual allowance limit

Answer 5

The annual allowance is the overriding limit on total gross contribution into an individuals pension schemes for each tax year:
- annual allowance is £40k for all tax years covered in atx exam

Question 6

What is the tapered annual allowance?

Answer 6

1. The normal annual allowance of £40k is reduced by £1 for every £2 by which a persons adjusted income exceeds £240k, down to a minimum annual tapered allowance of £4000 (hence if AI>=£312k, AA=£4k)
2. Tapering applies on a tax year basis, so a taxpayer with variable income might find themselves entitled to the full £40k allowance in some years and a tapered allowance in other years.
3. Tapering does not apply unless an individuals threshold income exceeds £200k

Question 7

Key terms for pension

Answer 7

1. AI for an employee is net income plus + employee contributions to an OPS (which will have been deducted in computing net income) And
   Employer contributions to either an occupational or a PPS
2. AI for the self employed is net income
3. Threshold income is net income less gross PP contributions

Question 8

How is unused AA in pension treated?

Answer 8

1. Unused AA can be cf for upto 3 years (the oldest available allowance is used first)
2. AA is not available to cf if the individual was not a member of a pension scheme in the year concerned

Question 9

What is the annual allowance charge?

Answer 9

1. If the total gross contributions exceed the available annual allowance, there is an annual allowance charge (AAC) - clawback tax relief given in error
2. Include individual and employer contributions when looking at total gross contributions
3. The excess contribution is taxed at the individual marginal rate of tax and added to the individual ITL

The AAC does not impact the individuals ANI

STEP 1. Qualifying contribution = give tax relief

Step 1. Max AA (cy+bf) - qualifying contributions total (EE+EM)

Question 10

Types of pensions funds available upon retirement?

Answer 10

When you return, can access the pension fund and use ‘vest’ the funds to:

• take out a cash lump sum
• provide pension income (annuity/drawdown)
• when the amounts are vested, the taxpayer is taxed as follows

Question 11

Treatment of taxation of pensions upon retirement if lump sum taken or amounts vested to provide pension income?

Answer 11

Lump sum taken:
Tax free amount - 25% of lower of fund value & lifetime allowance of £1,073,100
Fund amounts vested up to lifetime allowance - taxed as NSI
Excess funds over the lifetime allowance vested - lifetime allowance charge of 55%

Amounts vested to provide pension income:
Tax free amount - N/A
Fund amounts vested up to lifetime allowance - no immediate tax charge, but pension income received is taxed as NSI
Excess funds over the lifetime allowance vested - 1. Lifetime allowance charge of 25%, 2. And pension income taxed as NSI when received