13 - Relief for pensions.

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In general, tax relief for pension contributions are available for individuals who are...
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resident in the UK | and aged under 75.
The pension scheme is a registered scheme,
What kind of HMRC registered pension scheme is available for self-employed and for non-pensionable employment?
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Personal Pension Plan (PPP).
What kind of pension scheme is available for pensionable employment?
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Occupational Pension Plan (OPP).
Pension tax relief is available for contributions up to higher of:
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£3,600 | and Relevant earnings.
RE = trading profits, employment income + FHA income.
Relevant earnings components:
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Trading profits | employment income | FHA income.
Relief method of Occupational Pension Plan?
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Exempt benefit for employment income.
Relief method of Personal Pension plan?
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Basic rate: at source. | Higher and additional rates: extended basic i higher rate bands.
Pension schemes. Employer contributions operating:
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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).
The excess of the pension Annual allowance is taxed as the individual's ... of income.
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top slice income (e.g. after dividends).
It is paid through the self-assessment system.
Order of utilisation of pension Annual allowance:
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Current year Annual allowance is used first. | Then earlier 3 years unused amount | (FIFO).
The Annual allowance of £40,000 is reduced for individual with...
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with a 'threshold income' exceeding £200,000 | and 'adjusted income' exceeding £240.000.
The Annual allowance of £40,000 reduction formula:
If the threshold income is > £200,000 and adjusted income > £240,000.
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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%.
The maximum reduction to the Annual allowance is £36,000, meaning the minimum Annual allowance is...
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£4000.
g i v e n
Threshold income formula:
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Net income* − gross PPCs
*from the income tax computation
Adjusted income formula:
for pension purposes
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Net income* + Individual's OPP contributions + Employer's contributions into any scheme
NI + OPPC + EAC
*from the income tax computation
Lifetime allowance of £1,073,100 = Total pension value that can obtain tax relief. It is considered when...
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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.
Pension fund grows tax-free. It means it is exempt from...
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income tax | and CGT.
Commencement age of pension benefits:
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Aged 55; Individual can continue to work and draw a pension.
The maximum tax-free pension lump sum formula:
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On retirement, part of the funds can be withdrawn ONES as a tax-free lump sum.
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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%).
Taxation rates when value of pension fund is higher than Lifetime allowance:
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25% if INCOME withdrawal. | 55% if taken as a lump sum.
Only for the lifetime allowance excess.
On the death of the individual, the pension scheme may provide:
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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.
Current year Pension Annual Allowance Restriction determination:
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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
Pension Annual Allowance charge formula:
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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.
Calculation of PA available:
Employment income: 190,000; Gross PPCs - 90,000.
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Full PA as ANI = 100,000
Note: remember that taxpayer actually paid £72,000 PPCs.
Calculate revised pension Annual Allowance:
Employment income: 203,000; Unfurnished property income: 92,000.
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12,500
40,000 − [(295,000 −240,000) × 50%] = 12,500
Note: It cannot be reduced to less than £4,000.
Calculate Annual Allowance Charge:
CY gross PPCs - 90,000 | CY revised annual allowance 12,500 | Previous 3 years annual allowance - 10,000.
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67,500 × taxpayer's marginal rate of tax (usually 40% or 45%).
Purchase pension scheme is valued at 1,550,000. What is tax rates for withdrawal:
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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
Calculate the maximum amount of contributions paid into pension scheme to without incurring an annual allowance charge in year 1 and year 2.
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Registration: in the middle of year 1. | Year 1 income: £6,000 rental income (unfurnished). | Year 2 trading income: 80000.
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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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