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In general, tax relief for pension contributions are available for individuals who are... 2cz start learning
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resident in the UK | and aged under 75. The pension scheme is a registered scheme,
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What kind of HMRC registered pension scheme is available for self-employed and for non-pensionable employment? start learning
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Personal Pension Plan (PPP).
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What kind of pension scheme is available for pensionable employment? start learning
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Occupational Pension Plan (OPP).
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Pension tax relief is available for contributions up to higher of: 2cz start learning
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£3,600 | and Relevant earnings. RE = trading profits, employment income + FHA income.
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Relevant earnings components: 3 start learning
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Trading profits | employment income | FHA income.
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Relief method of Occupational Pension Plan? start learning
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Exempt benefit for employment income.
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Relief method of Personal Pension plan? start learning
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Basic rate: at source. | Higher and additional rates: extended basic i higher rate bands.
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Pension schemes. Employer contributions operating: 3 start learning
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Tax allowable against business profits. | Exempt benefit for individual. | Taken into account when calculation total contributions to be compared with the Annual allowance (£40,000).
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The excess of the pension Annual allowance is taxed as the individual's ... of income. start learning
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top slice income (e.g. after dividends). It is paid through the self-assessment system.
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Order of utilisation of pension Annual allowance: 3cz start learning
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Current year Annual allowance is used first. | Then earlier 3 years unused amount | (FIFO).
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The Annual allowance of £40,000 is reduced for individual with... 2 start learning
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with a 'threshold income' exceeding £200,000 | and 'adjusted income' exceeding £240.000.
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The Annual allowance of £40,000 reduction formula: If the threshold income is > £200,000 and adjusted income > £240,000. start learning
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£40,000 − [(Adjusted income − £240,000) × 50%] The Annual allowance for the tax year must be reduced by (Adjusted income − £240,000) × 50%.
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The maximum reduction to the Annual allowance is £36,000, meaning the minimum Annual allowance is... start learning
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g i v e n
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Threshold income formula: start learning
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*from the income tax computation
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for pension purposes start learning
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Net income* + Individual's OPP contributions + Employer's contributions into any scheme NI + OPPC + EAC *from the income tax computation
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Lifetime allowance of £1,073,100 = Total pension value that can obtain tax relief. It is considered when... start learning
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when individual becomes entitled to take his pension or lump sum on retirement. If the value of the pension fund exceeds the Lifetime allowance, an additional charge arises.
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Pension fund grows tax-free. It means it is exempt from... 2 start learning
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Commencement age of pension benefits: start learning
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Aged 55; Individual can continue to work and draw a pension.
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The maximum tax-free pension lump sum formula: 4cz On retirement, part of the funds can be withdrawn ONES as a tax-free lump sum. start learning
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25% | of lower of | value of fund | and Lifetime allowance On retirement, part of the funds can be withdrawn ONES as a tax-free lump sum. The balance of the fund can be withdrawn at any time. Withdrawals are subject to income tax at normal rates (20%, 40% or 45%).
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Taxation rates when value of pension fund is higher than Lifetime allowance: 2 start learning
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25% if INCOME withdrawal. | 55% if taken as a lump sum. Only for the lifetime allowance excess.
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On the death of the individual, the pension scheme may provide: 2 start learning
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pension income, | lump sums. For dependants, e.g. spouse, civil partner, child under the age of 23 or other dependant. Further tax charges may arise.
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Current year Pension Annual Allowance Restriction determination: start learning
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If threshold income does not exceed £200,000 it is not necessary to calculate adjusted income to determine if a restriction to the Annual Allowance is needed. E.g. 208,141 − 120,000 = 88,141
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Pension Annual Allowance charge formula: start learning
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(Employee gross PPCs + Employer gross contributions − Annual Allowance*) × marginal % (usually 40% or 45%) Ee gross PPCs + Er PCs ×40% CY + 3 last years (FIFO). | Annual allowance tax charge is calculated using the taxpayer’s marginal rate of tax.
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Calculation of PA available: Employment income: 190,000; Gross PPCs - 90,000. start learning
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Note: remember that taxpayer actually paid £72,000 PPCs.
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Calculate revised pension Annual Allowance: Employment income: 203,000; Unfurnished property income: 92,000. start learning
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40,000 − [(295,000 −240,000) × 50%] = 12,500 Note: It cannot be reduced to less than £4,000.
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Calculate Annual Allowance Charge: CY gross PPCs - 90,000 | CY revised annual allowance 12,500 | Previous 3 years annual allowance - 10,000. start learning
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67,500 × taxpayer's marginal rate of tax (usually 40% or 45%).
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Purchase pension scheme is valued at 1,550,000. What is tax rates for withdrawal: 3 start learning
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25% of the lower of life time allowance and pension fund* is tax-free, | remaining 75% will be treated as non-saving income. | The excess of life time allowance will be taxed at 55% for lump sum and 25% pension income (known as annuities). *268,275
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Calculate the maximum amount of contributions paid into pension scheme to without incurring an annual allowance charge in year 1 and year 2. 2 Registration: in the middle of year 1. | Year 1 income: £6,000 rental income (unfurnished). | Year 2 trading income: 80000. start learning
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year 1: £3,600 | year 2: £76,400 relevant earnings: employment income, trading income, FHA. | Unused allowance can by brought forward regardless of relevant entitlement in 3 previous years.
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