HMRC tax regime: contributions and allowances

Question 1

Q: Is there a limit on contributions to a registered pension scheme?

Answer 1

A: Contributions to a registered pension scheme are unlimited, but there is a limit on the amount of contribution that is eligible to receive tax relief.

Question 2

Q: Who is eligible to receive tax relief on personal contributions to a pension scheme?

Answer 2

A: In order to be eligible for tax relief on personal contributions, an individual must be a relevant UK individual. The maximum individual contribution eligible for tax relief is the greater of £3,600 or 100% of relevant UK earnings each year.

Question 3

Q: How is tax relief on individual contributions awarded?

Answer 3

A: Tax relief on individual contributions can be awarded through the net pay method or the relief at source method.

Question 4

Q: Are dividends included in the definition of relevant UK earnings?

Answer 4

A: No, dividends are not included in the definition of relevant UK earnings, which may affect the tax relief available on a pension contribution.

Question 5

Q: What are the benefits of a salary sacrifice arrangement?

Answer 5

A: A salary sacrifice arrangement can result in National Insurance Contributions (NIC) savings, which can be used to increase pension contributions at no extra cost to the employer or employee.

Question 6

Q: Are there any restrictions on the number of schemes an employer can set up or the amount of contribution they can make?

Answer 6

A: There is no restriction on the number of schemes an employer can set up, and there is no limit on the amount of contribution they can make into a registered pension scheme.

Question 7

Q: Are employer pension contributions tax-deductible?

Answer 7

A: Yes, an employer’s contribution is paid gross and should be allowed in full as a business expense, receiving tax relief, as long as the contributions pass the “wholly and exclusively” for the purposes of trade test.

Question 8

Q: Can tax relief on an employer’s contribution be spread over a number of years?

Answer 8

A: In some circumstances, tax relief on an employer’s contribution may have to be spread over a number of years.

Question 9

Q: What is a pension input period (PIP)?

Answer 9

A: 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. All PIPs run in line with the tax year.

Question 10

Q: What is the total pension input?

Answer 10

A: The total pension input is the amount of contribution or accrual of benefit that is tested against the annual allowance.

Question 11

Q: How is the total pension input calculated for defined contribution schemes?

Answer 11

A: For defined contribution schemes, the total pension input includes any relievable pension contribution paid by the member or paid by someone else on behalf of the member, as well as all employer contributions.

Question 12

Q: How is the total pension input calculated for defined benefit schemes?

Answer 12

A: For active members of defined benefit (and cash balance) schemes, the total pension input is defined as the increase in the capital value of the individual’s rights over the pension input period.

Question 13

Q: What is the annual allowance?

Answer 13

A: The annual allowance is the maximum amount of benefit or total pension input that can build up from contributions or accrual of benefit during each pension input period without incurring a tax charge.

Question 14

Q: Are there any income thresholds that affect the annual allowance?

Answer 14

A: Yes, the annual allowance is tapered for individuals with a threshold income of more than £200,000 and an adjusted income greater than £260,000.

Question 15

Q: Can unused annual allowance be carried forward?

Answer 15

A: Yes, unused annual allowance from the previous three tax years can be carried forward to the current tax year.

Question 16

Q: What are the money purchase annual allowance (MPAA) rules?

Answer 16

A: The MPAA rules are designed to work with the annual allowance rules to prevent individuals from abusing the pension flexibilities. If triggered, the MPAA imposes a reduced annual allowance of £10,000 for defined contribution pension savings.

Question 17

Q: How is the annual allowance charge calculated?

Answer 17

A: The annual allowance charge is payable at the member’s marginal rate (or rates) of income tax, based on their taxable income.

Question 18

Q: How are benefits valued in relation to the lifetime allowance?

Answer 18

A: Benefits are valued against the lifetime allowance each time there is a benefit crystallisation event (BCE).

Question 19

Q: What happens if the lifetime allowance is breached?

Answer 19

A: If the lifetime allowance is breached, any excess taken as a lump sum is taxed as the recipient’s pension income via PAYE.

Question 20

Q: What is required when benefits are not taken simultaneously?

Answer 20

A: When benefits are not taken simultaneously, it is necessary to calculate the percentage of the lifetime allowance that was utilized in respect of each previous benefit crystallisation event.

Question 21

Q: How are benefits taken before A-Day valued?

Answer 21

A: Benefits taken before A-Day are valued using a factor of 25:1.

Question 22

Q: In what circumstances may individuals be entitled to a higher lifetime allowance?

Answer 22

A: Individuals may be entitled to a higher lifetime allowance in certain circumstances, such as having enhanced protection, primary protection, or fixed protection.

Question 23

The money purchase annual allowance would be triggered if an individual:

a.
took an uncrystallised funds pension lump sum from their personal pension plan.

b.
took an income withdrawal from their nominee’s flexi-access drawdown fund that they inherited from their father.

c.
used their personal pension fund to purchase a conventional lifetime annuity.

d.
commuted a personal pension fund valued at £6,000 for a small pots lump sum.

Answer 23

a.
took an uncrystallised funds pension lump sum from their personal pension plan.

Question 24

Sophie’s capped drawdown pension commenced in 2005 and is still a capped drawdown pension when she crystallises further benefits in 2023/24. For lifetime allowance purposes, her pension will be valued as the:

a.
maximum annual income withdrawal x 25.

b.
maximum annual income withdrawal x 25 x 80%.

c.
maximum annual income withdrawal x 20 x 80%.

d.
current market value of the fund.

Answer 24

b.
maximum annual income withdrawal x 25 x 80%.

Question 25

Roger, aged 68, died in June 2023. His only pension plan was an uncrystallised personal pension plan valued at £1.2m. His wife, Eva, chooses to take the full fund as a lump sum. How will the payment be taxed?

a.
The fund will be paid tax free up to the lifetime allowance and the excess will be subject to a lifetime allowance charge of 25%.

b.
The fund will be paid tax free up to the lifetime allowance and the excess will be taxable as Eva’s pension income via PAYE.

c.
The fund will be paid tax free up to the lifetime allowance and the excess will be subject to a lifetime allowance charge of 55%.

d.
The full fund will be taxable as Eva’s pension income via PAYE.

Answer 25

b.
The fund will be paid tax free up to the lifetime allowance and the excess will be taxable as Eva’s pension income via PAYE.

Question 26

Mia started her first personal pension plan on 1 June 2023. Her first pension input period will end on:

a.
5 April 2024.

b.
31 December 2023.

c.
31 May 2024.

d.
5 April 2025.

Answer 26

a.
5 April 2024.

Question 27

An individual makes regular contributions to his employer’s group personal pension plan [GPP] and occasional lump sum payments into a retirement annuity contract [RAC]. Assuming the RAC provider has not changed its method of awarding tax relief since the plan started, pension tax relief will be awarded:

a.
through the relief at source method for the GPP and through his self-assessment tax return for the RAC.

b.
using the net pay method for the GPP and the relief at source method for the RAC.

c.
through his self-assessment tax return for both the GPP and the RAC.

d.
using the net pay method for the GPP and through his self-assessment tax return for the RAC.

Answer 27

a.
through the relief at source method for the GPP and through his self-assessment tax return for the RAC.

Question 28

Sam, who has a salary of £82,000, has fully utilised his annual allowance in each of the previous three tax years. In 2023/24 his employer makes a pension contribution for Sam that exceeds the annual allowance by £12,000. How much annual allowance tax charge, if anything, must he pay?

a.
No charge is payable.

b.
£2,400.

c.
£4,800.

d.
£3,000.

Answer 28

c.
£4,800.

Question 29

Individuals may be entitled to a higher lifetime allowance in a range of circumstances, except when they have:

a.
registered for enhanced protection.

b.
registered for fixed protection 2012, 2014 or 2016.

c.
registered for primary protection.

d.
transferred benefits in from recognised overseas pension schemes.

Answer 29

a.
registered for enhanced protection.

Question 30

Jean receives an annual salary of £55,000 and also has a company car with a taxable value of £5,000. If she pays £5,500 gross into a personal pension, what is her adjusted net income?

a.
£49,500.

b.
£54,500.

c.
£60,000.

d.
£55,000.

Answer 30

b.
£54,500.

Question 31

Which client would HMRC regard as having recycled their pension commencement lump sum [PCLS]?

a.
Teresa, who has not made any contributions for several years, receives a PCLS of £30,000 and shortly afterwards decides to recycle £10,000 into a personal pension.

b.
Kevin, who has not made any contributions for several years, receives a PCLS of £5,000 and shortly afterwards decides to recycle £2,000 into a personal pension plan.

c.
Miranda, who makes pension contributions of £100 per month, receives a PCLS of £50,000 and shortly afterwards decides to recycle £10,000 into a personal pension plan.

d.
Ernest, who makes pension contributions of £1,000 per month, receives a PCLS of £25,000 and shortly afterwards decides to recycle £5,000 into his personal pension plan.

Answer 31

a.
Teresa, who has not made any contributions for several years, receives a PCLS of £30,000 and shortly afterwards decides to recycle £10,000 into a personal pension.

Question 32

Liam crystallised his personal pension plan in 2023/24 to take advantage of the pension flexibilities. This was the first time he had taken any benefits from his defined contribution pension funds. He was NOT subject to the money purchase annual allowance because he:

a.
used the fund to purchase a flexible annuity.

b.
took his pension commencement lump sum, designated the balance into flexi-access drawdown but did not take any income withdrawals in 2023/24.

c.
took the entire fund as an uncrystallised funds pension lump sum.

d.
took his pension commencement lump sum, designated the balance into capped drawdown and took an income withdrawal that did not exceed the permitted maximum.

Answer 32

b.
took his pension commencement lump sum, designated the balance into flexi-access drawdown but did not take any income withdrawals in 2023/24.

Question 33

If the annual allowance is exceeded, the annual allowance charge is payable at:

a.
45%.

b.
the individual’s marginal rate or rates of income tax.

c.
40%.

d.
20%.

Answer 33

b.
the individual’s marginal rate or rates of income tax.

Question 34

If four clients are all UK residents and have not made any application for transitional protection, which of them will be entitled to an enhancement to the standard lifetime allowance?

a.
Martin, who has transferred benefits in from a recognised overseas pension scheme.

b.
Charles, who is a Member of Parliament.

c.
Muriel, who is a controlling director, and will have earnings in excess of £500,000 p.a. for the five years leading into retirement.

d.
Jane, who has elected to work until she is 75 years of age.

Answer 34

a.
Martin, who has transferred benefits in from a recognised overseas pension scheme.

Question 35

In 2023/24 Maud receives a salary of £230,000 and has gross dividend income of £12,000. She contributes £25,000 into a personal pension plan in 2023/24 and her employer contributes £5,000. What is Maud’s adjusted income for tapered annual allowance purposes?

a.
£242,000.

b.
£267,000.

c.
£247,000.

d.
£272,000.

Answer 35

c.
£247,000.

Question 36

Andre, aged 62, has threshold income of £185,000 and adjusted income of £264,000 in 2023/24. What is his annual allowance in the current tax year?

a.
£58,000.

b.
£60,000.

c.
£56,000.

d.
£52,000.

Answer 36

b.
£60,000.

Question 37

When calculating the total pension input for a defined benefit pension scheme, what factor is the closing pension input value multiplied by?

a.
16 and this value is not increased in line with CPI.

b.
20 and this value is not increased in line with CPI.

c.
16 and this value is increased in line with CPI.

d.
20 and this value is increased in line with CPI.

Answer 37

a.
16 and this value is not increased in line with CPI.

Question 38

If a self-employed higher rate taxpayer makes a personal pension contribution in 2023/24, when will they receive the higher rate tax relief?

a.
31 July 2023.

b.
31 January 2024.

c.
31 January 2025.

d.
31 July 2024.

Answer 38

c.
31 January 2025.

Question 39

Fiona, aged 50, wishes to transfer the benefits held in her previous employer’s defined benefit pension scheme to a qualifying recognised overseas pension scheme in Spain. Fiona has been resident in Spain since 2015. She has been informed that the current preserved pension is £15,000 p.a. and that the transfer value is £210,000. In respect of the lifetime allowance this transfer will be:

a.
valued at £375,000.

b.
valued at £210,000.

c.
valued at £300,000.

d.
ignored until she takes an income or cash lump sum from the pension in Spain.

Answer 39

b.
valued at £210,000.

Question 40

Hannah, who will reach the age of 75 in 2023/24, entered drawdown in May 2006. What value will be placed on her drawdown pension under Benefit Crystallisation Event 5A?

a.
The amount designated for drawdown pension at outset uplifted in line with the underpinned lifetime allowance.

b.
The market value of the drawdown fund at age 75.

c.
The market value of the drawdown fund at age 75 less the amount designated for drawdown pension at outset.

d.
The maximum permitted income withdrawal multiplied by a factor of 20.

Answer 40

c.
The market value of the drawdown fund at age 75 less the amount designated for drawdown pension at outset.