Contributing to Pensions Flashcards
Tax Relief As an Income Tax reducer Annual Allowance Money Purchase Annual Allowance
1
Q
Tax Relief on Pension Contributions
A
Individuals and Employers can put in as much as they like - but there is a limit on the amount that will get TR
2
Q
Tax Relief Rules - Personal
A
- the pension scheme member needs to be classed as Relevant UK Individual
3
Q
Relevant UK Individual Rules
A
- under age 75
- have relevant UK earnings charged to Income Tax OR
- be resident at some time during that year OR
- have been resident in the UK both
- – at some time during the five tax years immediately before the year in which the contribution was made
- – max relief is £3,600 per tax year AND
- – when they became a member of the pension scheme OR
- – they / spouse has earnings from an overseas Crown Employment subject to UK tax
4
Q
Relevant UK Earnings
A
- Employment income e.g salary, bonus, or self employment/partnership profits
- income arising from patent rights and treated as earned income
- general earnings from overseas Crown employment subject to UK tax
5
Q
Non Relevant UK Earnings
A
- pension scheme income
- investment dividends
6
Q
How much Tax Relief
A
- £3,600 Gross OR
- 100% of UK relevant earnings
7
Q
How to Claim Tax Relief
A
- relief at source OR
- “net pay method”
- relief is at highest marginal rate
8
Q
Relief at Source
A
- contributions are paid net of basic rate tax
- the pension provider claims the TR from HMRC
- higher/additional rate tax payers must claim the additional amount via Self Assessment if self employed OR
- via adjustment to their PAYE Tax code if Employed
9
Q
Net Pay Method
A
- pension contributions deducted from Gross income
- at highest marginal rate
- income tax via PAYE is then deducted
- RAC - no TR upfront - need to claim via self assessment - known as RELIEF THROUGH A CLAIM
10
Q
Employer Contributions
A
- paid gross into all pension schemes
- tax relief will be provided as long as contributions meet the definition of ALLOWABLE DEDUCTIONS for /employed and Co. Directors
11
Q
PENSIONS AS AN INCOME TAX REDUCER
A
- Adjusted Net Income ANI
- – Child Benefit - ANI of greater than £50k
- – ANI over £100k - £1 lost for each £2 of ANI (Personal Allowance)
12
Q
What is ANI
A
- it is the gross total of all income less certain deductions e.g
- – charity payments
- – trading losses
Pension contributions can also reduce ANI
13
Q
PCLS - “recycling”
A
HMRC see this as an abuse of the Pension Tax Relief system and do not allow it
14
Q
PCLS - “recycling” - the Rules
A
HMRC will therefore treat the entire PCLS as an unauthorised payment where all the following six conditions are met.
- The member receives a PCLS which, when added to any other PCLS drawn in the previous twelve-month period, exceeds £7,500 AND
- The PCLS means that the pension contribution paid on behalf of the member is significantly greater than it would otherwise have been AND
- ‘Significantly greater’’ is taken to be ‘more than 30% of the contributions that might otherwise have been expected’ AND
- And the cumulative sum of extra contributions exceeds 30% of the PCLS AND
- The additional contributions can be made by the member or by someone else, such as
an employer AND - The recycling was pre-planned.
15
Q
Pensions - Advantages
A
Potential for higher or additional rate tax relief on contributions.
• Potential to restore some or all personal allowance for those on incomes over
£100,000.
• Boost retirement funds available, and so have a longer sustaining pot or higher
annuity and/or higher/more PCLS which could be used to produce income tax
free income.
• Cash is out of the estate for IHT planning.
• Potential for gifting regular contributions to the next generation and so reduce
estate for IHT- exempt as normal expenditure out of income.
16
Q
Pensions - Disadvantages
A
No tax relief on contributions made after age 75.
• All pension income is assessed for care benefits means testing, whereas
alternative investments, such as investment bonds, are excluded from means
testing.
• Putting more money into an ever changing, complex rules environment requiring
more advice which costs money.
17
Q
ANNUAL ALLOWANCE
A
- introduced at A Day - 6 April 2006
- limit for gross pension contributions each tax year
- possible tax charge for exceeding this = tax relief gained on any excess
18
Q
Pension Input Period PIP
A
- each scheme has one
- PIP now runs with tax year since April 2016
19
Q
Total Pension Input Amount
A
- amount of pension savings made during PIP compared to tax year Annual Allowance
- for Money Purchase = total Gross amount of premiums paid in by member and Employer
- – ignoring contributions in tax year of death
- – ignoring contributions in tax year of serious ill health claim
20
Q
Annual Allowance Charge AAC
A
- If the total input amount exceeds the allowance, an annual allowance charge is payable
= ANI plus Annual Allowance excess
The AAC is usually paid via self- assessment. However, where:
• The member’s AAC for the tax year is over £2,000 and
• The total amount of the member’s pension savings in the pension scheme for the same tax year has exceeded the annual allowance
21
Q
AAC and Scheme Pays
A
Scheme pays instead of member
22
Q
Annual Allowance - history
A
- 2006 = £215k
- 2010/11 = £255k
- 2011/12 = £50k - Carry forward for 3 previous tax years started
- Now £40k
23
Q
Carry Forward Rules
A
- can only use unused annual allowance from the preceding three tax years.
- must have been a member of a registered pension scheme at some point in these earlier years to be able to use them. Member definitions includes those who are active, a pensioner, with deferred benefits or have a Pension Credit.
- Must use up the current tax tax-year’s allowance first, before utilising any CF
- Must use unused allowances in chronological order, starting with the earliest first – there will be no unused allowance if the maximum input value was made in a previous year. If the pension input in a previous tax year was in excess of that year’s allowance, then the excess is treated as using up any amount of available unused annual allowance from the preceding years first; this will reduce the available annual allowance that can be carried forward to the current year.
- Does not need to have paid into a pension OR even have had any UK relevant earnings in the years with the unused annual allowance – they will still be able to carry the unused relief forward.
24
Q
Ignored transitional arrangements
A
x
x
x
x
25
Money Purchase Annual Allowance MPAA
- Certain actions on/after 6 April 2015 will "trigger" MPAA
- Takes an income withdrawal from a flexi-access drawdown fund (including in the form of a short-term annuity).
• Takes an uncrystallised funds pension lump sum (UFPLS).
• Notifies the scheme administrator of their intention to convert a pre-6 April 2015 capped
drawdown fund to a flexi-access drawdown fund and then subsequently takes an income
withdrawal from that fund (including in the form of a short-term annuity).
• Takes more than the permitted maximum for capped drawdown from a pre-6 April 2015
drawdown pension fund.
• Receives a stand-alone lump sum when entitled to primary protection where the lump
sum protection exceeds £375,000.
* Receives a payment from a lifetime annuity where the annual rate of payment can be decreased in other than permitted circumstances (i.e. payment is received from a flexible annuity contract as introduced by the Taxation of Pensions Act 2014).
* Receives a scheme pension paid directly from the funds of a money purchase arrangement where the arrangement is providing a scheme pension paid directly from the funds of the money purchase scheme to less than eleven other members (including any dependant benefits being paid) at the time the first payment is made.
* Payment of one of the types of benefit listed above from an overseas pension scheme that has benefitted from tax relief will also be a trigger event.
* Those members who entered flexible drawdown before 6 April 2015 will automatically be subject to the MPAA rules from 6 April 2015. More about this later.
26
Events that do NOT trigger MPAA rules
These are where the member:
* Receives a pension commencement lump sum.
* Receives a trivial commutation lump sum.
* Receives a small pots lump sum.
* Receives a payment from a scheme pension from a defined benefit arrangement.
• Receives a payment from a scheme pension paid directly from the funds of a money
purchase arrangement where at least 12 people (including dependants) are receiving a
scheme pension paid directly from scheme funds.
• Receives a scheme pension secured by way of an annuity from a money purchase scheme
of any size.
• Is in receipt of a lifetime annuity where payments cannot go down except in prescribed
circumstances (conventional lifetime annuity).
• From 6 April 2015, takes no more than the permitted maximum for capped drawdown from
a pre-6 April 2015 capped drawdown pension fund.
27
Key Points
Contributions to a registered pension scheme are unlimited, although there is a limit on the amount of contribution that is eligible to receive tax relief.
• The maximum member contribution that will be eligible for tax relief is the greater of £3,600 or 100% of relevant UK earnings each year.
• Specific rules apply to stop the recycling of pension commencement lump sums.
• There is no restriction on the number of schemes that an employer can set up and no limit on the amount of contribution that an employer can make into a registered pension scheme.
• An employer’s contribution is paid gross and should be allowable in full as a business expense (i.e. receive tax relief) if the contributions pass the ‘wholly and exclusively’ for the purposes of trade test.
• In certain circumstances, the tax relief on an employer’s contribution may have to be spread over several years.
• Dividends are not included in the definition of relevant UK earnings, which may affect the tax relief available on a pension contribution.
• The annual allowance is the maximum amount of ‘accrued benefit’ or ‘total pension input’ that can build up from contributions during each pension input period without incurring a tax charge.
• A pension input period (PIP) is the period over which the amount of pension input is measured for the purposes of an annual allowance test. From 2016/17 this was aligned to the tax year.
• All PIPs now run in line with the tax year (if the member is a member from the start).
• The total pension input, in the PIP, is the amount of contribution (or accrual of benefit)
that will be tested against the annual allowance.
• For money purchase schemes, the total pension input is any relievable pension contribution paid by the member or paid by someone else on behalf of the member and all employer contributions.
• The annual allowance is tapered for members with an adjusted income of over £150,000 AND a threshold income of over £110,000.
• Unused annual allowance from the previous three tax years can be carried forward, subject to a maximum of each year’s annual allowance.
• The carry forward rules are largely unaffected by the transitional rules for the annual allowance but a member may have an annual allowance of up to £40,000 (2018/19), which must be utilised first.
• The money purchase annual allowance (MPAA) rules are designed to work with the annual allowance rules to ensure that members cannot abuse the new pension flexibilities.
• Certain events will trigger the MPAA and if it is triggered the member will have a reduced annual allowance imposed for future money purchase pension savings. This is £4,000 from 2017/18.
• The annual allowance charge (AAC) is payable at the member’s appropriate rate of income tax; the calculation of this appropriate rate of income tax (for the purposes of the AAC is based on the member’s taxable income’.
