Section 2 - Contributions And Tax Reflief Flashcards
For individual contributions what does a relevant UK individual have to be and what must their earnings be
Relevant UK individual is:
• Under age 75 and has relevant UK earnings, or
• Resident in UK at some time during the year or
• Resident both at some time during 5 years prior to contribution (restricted to £3,600) and when they became member of scheme
Relevant UK earnings are:
• Employment income
• Income from trade, profession or vocation
• Patent rights treated as earned income
Earnings from overseas Crown employment subject to UK tax
What are the possible methods that employer sponsored occupational schemes offer Individuals tax relief
Relief at source
• Contributions paid net of basic rate tax
• PP and stakeholder (including group arrangements)
• Higher/additional rate claimed through self-assessment
Net pay method
• Contributions taken from employee gross pay
• Before income tax deducted (DB schemes)
• NICs still calculated on gross salary
What is the relief on making a claim’ method
• Applies to retirement annuity contracts
Contribution paid gross, individual • claims tax relief via self-assessment or adjustment to tax code
• Since 6 April 2006, use this method or change to relief at source method
What is adjusted net income
• Total income from all sources (e.g., salary, interest, dividends etc)
• Less tax reliefs such as gross value of a personal pension contribution
Total income - tax relief = adjusted net income
• Used to calculate personal allowance/High Income Child Benefit charge
• Pension contributions can be used to avoid some/all High Income Child Benefit charge and regain some/all personal allowance
Timing of tax relief for the self-employed
Any higher/additional rate tax relief on current year personal pension/stakeholder pension contributions is applied to balancing payment
What is the difference between dividends and a salaried earning in the context of individual pension contributions
Salary vs dividends
• Dividends are not relevant UK earnings
• Employer can make an employer contribution
How does salary sacrifice work
• Employee agrees to a salary reduction
• In exchange for employer pension contribution
• Both employer and employee pay less NICs
• NIC savings can be recycled back into pension
• HMRC conditions - agreement to reduce salary is in writing, reduction goes ahead, reduced salary not below national minimum wage
• Salary is reduced for all purposes e.g., personal allowance, working tax credits, High Income Child Benefit charge, death in service (although notional salary could be used), mortgages (although affordability used now rather than multiple of salary so may not impact), income protection, maternity benefits
What is PCLS recycling
lump sum recycling occurs when a client takes their tax-free pension commencement lump sum (PCLS) and then pays it back into a pension as a new contribution. The logic is that the new contribution would attract tax relief.
• Would receive tax relief on payment
• Even though contribution had received tax relief
• Treated as unauthorised payment where all of the following are met:
- PCLS and other PCLS in 12 months exceeds £7,500
- Contribution is significantly greater (more than 30%) than expected
- Cumulative sum of extra contributions exceeds 30% of PCLS
- Additional contributions are made by the individual or someone else
- Recycling was pre-planned
How are employer contributions treated for tax purposes
• Paid gross
• Employer eligible for tax relief in full against corporation tax (if Ltd company)
• Or income tax (if sole-trader or partnership)
• Must pass the wholly and exclusively test i.e., not excessive and appropriate for the role and responsibilities
• Employer must spread tax relief if:
- contribution exceeds 210% of contribution in previous chargeable period and
- amount of excess (over 110% of previous contribution) is £500,000 or more
• No spreading if contribution is due to cost of living rises or future service liability
What is a spreading table and what are the excess to spread splits
In relation to the tax relief provided by employer contributions, where spreading of tax relief is to apply to the excess, a table is used as follows
For each amount of excess the spread is:
• £500k - £999,999 has 2 accounting periods
• £1M - £1,999,999 has 3 accounting periods
• £2m + has 4 accounting periods
Example below
Last year, ABC plc made an annual contribution of £600,000 to its pension scheme. This year, it decided to boost the retirement benefits of three directors and the total pension contributions amounted to £1,900,000. The spreading calculation would be:
210% of previous chargeable period contribution = 210% × £600,000 = £1,260,000.
£1,900,000 exceeds £1,260,000 so spreading will apply if the excess is £500,000 or more.
Excess over 110% of previous contribution = £1,900,000 - (£600,000 × 110%) = £1,240,000.
As this falls in the band of £1,000,000 - £1,999,999, the relief on this ‘excess’ contribution will be spread evenly over three accounting periods, i.e. £413,333 per period.
In the current period, relief will be given on 110% of the previous year’s contribution (i.e.£660,000) plus the first of the three sums of £413,333, giving a total of £1,073,333.
What is a spreading table and what are the excess to spread splits
In relation to the tax relief provided by employer contributions, where spreading of tax relief is to apply to the excess, a table is used as follows
For each amount of excess the spread is:
• £500k - £999,999 has 2 accounting periods
• £1M - £1,999,999 has 3 accounting periods
• £2m + has 4 accounting periods
Example below
Last year, ABC plc made an annual contribution of £600,000 to its pension scheme. This year, it decided to boost the retirement benefits of three directors and the total pension contributions amounted to £1,900,000. The spreading calculation would be:
210% of previous chargeable period contribution = 210% × £600,000 = £1,260,000.
£1,900,000 exceeds £1,260,000 so spreading will apply if the excess is £500,000 or more.
Excess over 110% of previous contribution = £1,900,000 - (£600,000 × 110%) = £1,240,000.
As this falls in the band of £1,000,000 - £1,999,999, the relief on this ‘excess’ contribution will be spread evenly over three accounting periods, i.e. £413,333 per period.
In the current period, relief will be given on 110% of the previous year’s contribution (i.e.£660,000) plus the first of the three sums of £413,333, giving a total of £1,073,333.
