COURSE: ACCA – TAXATION (TX)

Lecture Topic: Income Tax – Pensions

1. Introduction

 Payments into a pension scheme not only provide an individual with income during his retirement, but also
represent a very tax efficient long-term investment. This is because an individual under the age of 75 is entitled to
tax relief on his contributions (payments) into a registered pension scheme.

 The main ways of investing in a pension scheme are:

(i) Occupational pension schemes, and

(ii) Personal pension schemes.

It is important to note that the method of giving tax relief is different for the two types of schemes.

2. Occupational pension schemes

 Occupational pension schemes are set up by employers for their employees. Such schemes may either require
contributions from employees or be non-contributory (in which case only the employer contributes to the plan on
behalf of the employee).

 Where an employee makes payments (contributions) to an occupational pension scheme, tax relief is given as
follows:

The contributions made by the employee to the occupational pension scheme are given as a deduction from his
employment income.

3. Personal Pension Schemes

 Personal pension schemes are provided by banks, insurance companies and other financial institutions.

Any individual (whether employed or not) may join a personal pension scheme.

 Where an individual makes contributions to a personal pension scheme, tax relief is available as follows:

(i) Personal pension plan contributions are deemed to be paid net of 20% tax by the individual. HMRC then
pay an amount equivalent to the 20% to the pension provider (on behalf of the individual).

(ii) If the individual is a higher rate taxpayer (or additional rate taxpayer), further tax relief is given by
extending the basic rate band (and the higher rate band, if necessary) by the gross amount of the
tax relievable contributions paid.

The gross amount = Actual contribution made (i.e. the net amount) × 100/80

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4. Restrictions and other rules relating to registered pension schemes
In the exam you may be required to discuss the types of pension schemes available and the limits on the tax relief due, or
you may have to deal with them in an income tax computation. Therefore, the following rules and restrictions governing
pension contributions should also be noted.

(i) Any amount can be contributed to a pension scheme. However, the maximum gross annual contribution which
qualifies for tax relief is the higher of:

(a) £3,600 (the basic amount), and

(b) The individual’s relevant UK earnings chargeable to income tax in the year.

Relevant UK earnings are employment income, trading income and income from furnished holiday
lettings.

Where an individual contributes to more than one pension scheme, the above limits are applied to the total
contributions made, not each of them individually.

(ii) There is a limit on the amount of contributions that should be paid into an individual’s pension scheme in a tax
year. This is called the annual allowance.

 The annual allowance is £40,000 (gross) per annum.

 If tax-relievable pension contributions exceed the annual allowance (including any brought forward unused
allowances), then there is a charge to income tax on the excess tax-relievable contributions. This annual
allowance charge is calculated by charging the excess contribution to tax at the marginal rate(s).

 If the annual allowance is not fully used in any tax year, then any unused allowance can be carried
forward for up to three years. However, carry forward is only possible if a person is a member of a
pension scheme for a particular tax year. The annual allowance for the current tax year is utilized first, then
any unused allowances brought forward from earlier years, with those from the earliest year used first.

 Both employer and employee contributions count towards the annual limit.

 The normal annual allowance is reduced where a person’s adjusted income exceeds £240,000, down to a
minimum tapered annual allowance of £4,000:

If Adjusted Income < 240,000 Annual Allowance = 40,000

If Adjusted Income > 312,000 Annual Allowance = 4,000
If Adjusted Income is between 240,000 and 312,000 Annual Allowance = 40,000 - ½ (Adjusted Income -
240,000)

Adjusted Income = Net Income + Employee contributions to occupational pension schemes + Employer
contributions to either occupational or personal pension schemes.

(iii) An individual is not allowed to build up an indefinitely large pension fund. There is a maximum value for a
pension fund called the lifetime allowance. The lifetime allowance for 2022-23 is £1,073,100.

Where this limit is exceeded, there will be an additional tax charge when the person subsequently withdraws the
funds in the form of a pension. If the excess fund value is taken as a lump sum, the tax charge is 55% of the
excess. If the excess fund value is used to provide a pension, the tax charge is 25% of the excess.

Both employer and employee contributions count towards the lifetime allowance.

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Questions

1. Shaun received salary of £60,000 in 2022-23. He contributed £9,000 into his employer’s occupational pension scheme
and his employer contributed a further £9,000. There are no brought forward unused annual allowances.

Calculate Shaun’s income tax liability.

2. Daphne is self-employed, and her trading income for 2022-23 is £60,000. She does not have any brought forward
unused annual allowances.

She paid £7,200 (net) into a personal pension scheme for 2022-23.

Calculate her income tax liability

3. In 2022-23 Jeremy has trading income of £2,000 and receives bank interest of £60,000. Jeremy contributes £10,000
(gross) to a personal pension scheme. He does not have any brought forward unused annual allowances

Calculate his income tax liability for 2022-23.

4. Ann is self-employed as an estate agent. For tax year 2022-23 she had trading profit of £15,500 and dividend income
of £51,000. Ann made contributions of £19,000 (gross) into a personal pension scheme during the tax year 2022-23.
This was the first year that she had been a member of a pension scheme.

Calculate her income tax liability for 2022-23.

5. For the tax year 2022-23 Frank has a trading profit of £97,000 and made gross personal pension contributions of
£45,000. He does not have any brought forward unused annual allowances.

(a) What is his income tax liability for 2022-23?

(b) If Frank had made gross contributions of £30,000 into his pension plan in 2021-22, what would be his tax
liability for 2022-23?

6. For the tax year 2022-23, Juliet has trading profit of £286,000.

How much is her annual allowance for tax year 2022-23?