Pensions

… Types of private pension schemes

… Contributions to pension schemes
… Receiving benefits from pension
arrangements

BRUCE NTEGE www.camstudies.org

 Types of private pension scheme
2

Occupational pension scheme

… Occupational pension schemes are operated
by employers on behalf of employees (similar
to staff gratuity schemes in some companies)
Personal pension scheme
… Personal pension schemes are operated by a
pension provider, e.g. bank, insurance
company, on behalf of individuals

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BRUCE NTEGE www.camstudies.org
 Types of pension scheme (contd...)
3

… An occupational pension scheme can fall into one of two

categories:
† A Defined benefits scheme - where the retired
employee’s pension depends upon final salary and
length of service
† A Money purchase scheme - where there is no
guarantee of the amount of pension as investments
are used to 'build up' the fund

… A personal pension scheme can only be a money

purchase scheme

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BRUCE NTEGE www.camstudies.org
 Contributions to pension schemes 1
4

Tax relief on personal pension contributions

… Personal pension contributions are treated as being
made net of 20% basic rate tax which gives basic
rate tax relief
… Higher rate and additional rate tax relief obtained
by increasing the basic rate and higher rate limits
by gross personal pension contributions (EBR and
EHR)
… Deduct gross personal pension contributions from
net income to find adjusted net income for personal
allowance restriction (details on next slide)

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BRUCE NTEGE www.camstudies.org
 Contributions to pension schemes 1
5

Personal Pension Contributions and PA

… PPCs (gross) can be used to determine the eligibility
for the full amount of PA. This is applied in two
circumstances i.e. where:
† The tax payer has net income exceeding £100,000; or
† The tax payer being born before 6 April 1948 is entitled to
a higher PA and his net income exceeds £27,000
… In both cases, the adjusted net income (instead of net
income) must be used to determine whether the full PA
entitlement is available – where adjusted net income =
net income less (gross) PPCs paid
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Contributions to pension schemes 1
6

Tax relief on occupational pension contributions

… Tax relief at all rates is obtained by deducting
contributions from employment income before entering
in the income tax computation
… However unlike PPS relief:

† OPCs are paid GROSS into the scheme (i.e. No basic

rate relief is given at source); and
† Tax relief at all rates is given by deducting the
contributions from the employee’s employment income

20-Sep-15
BRUCE NTEGE www.camstudies.org
 Contributions to pension schemes 2
7

Employer contributions to pension schemes

… If an employer contributes to an occupational
or a personal pension scheme, the contributions:
† Count towards allowances (annual & lifetime)
† Are deductible expenses for trade purposes
for the employer
† Are tax free benefits for the employee
† Do not give rise to NICs for either employer
or employee

20-Sep-15
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 Question 1: Relief for pension contributions
8

… Parks is a single man born on 6 April 1974. His

employer does not maintain an occupational
pension scheme for the staff, and Parks is a member
of a personal pension scheme. The following figures
relate to him for 2014/15. £
Employment income- salary 155,000
Personal pension contributions
paid 2014/15 38,000
… Calculate Parks’ income tax liability for 2014/15.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Question 2: Occupational pension contributions
9

… Facts as in Question 1, except Parks was a member of his

employer’s occupational pension scheme. The following figures
relate to him for 2014/15: £
Employment income
Salary 126,500
Employer’s contributions into
occupational pension scheme 28,500
155,000
Employee’s contributions paid into
occupational pension scheme 19,000
… Calculate Park’s income tax liability for 2014/15.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Contributions to pension schemes 3
10

Annual limit: People with Relevant earnings not

exceeding £3,600
… Tax relief is only available to the higher of:

† £3,600 and

† Relevant earnings

… Where: Relevant earnings comprises employment

income, trading income and furnished holiday lettings
income
… Note: therefore £3,600 is set as the min. relief

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 Contributions to pension schemes 3
11
(contd...)
Annual Allowance (AA)
… The AA is the total pension input that qualifies for
income tax relief in a TY. It is £40,000 for 2014/15
and was (and remains) £50,000 for prior TYs
… If AA is not used in full, can carry forward excess for
up to 3 years (FIFO basis – earliest year first)
… However, carry forward is only possible if a person is
a member of a pension scheme for a particular TY.
Therefore for any TY in which a person is not a
member of a pension scheme the AA is lost.
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BRUCE NTEGE www.camstudies.org
 Illustration 1
12

… Diana and Lucile have made the following gross

personal pension contributions during the tax years
2011–12, 2012–13 and 2013–14:
Diana (£) Lucile (£)
2011–12 Nil 56,000
2012–13 42,000 29,000
2013–14 38,000 Nil
… Diana was not a member of a pension scheme for the
tax year 2011–12. Lucile was a member of a
pension scheme for all three tax years.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Illustration 1
13

Diana
… Diana has unused allowances of £8,000

(50,000 – 42,000) from 2012–13 and

£12,000 (50,000 – 38,000) from 2013–14,
so a total of £60,000 (40,000 + 8,000 +
12,000) is available for 2014–15.
… She was not a member of a pension scheme for

2011–12 so the annual allowance for that

year is lost.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Illustration 1
14

Lucile
… Lucile has unused allowances of £21,000 (50,000 –
29,000) from 2012–13 and £50,000 from 2013–14,
so a total of £111,000 (21,000 + 50,000 + 40,000)
is available for 2014–15. The AA for 2011–12 is
fully utilized, but Lucile was a member of a pension
scheme for 2013–14 so the AA for that year is
available in full.
… The AA for the TY 2014–15 is utilized first, and then
any unused allowances from earlier years with those
from the earliest year
BRUCE used
NTEGE first.
www.camstudies.org 20-Sep-15
 Illustration 2
15

… James has made the following gross personal pension

contributions: £
2011–12 32,000
2012–13 41,000
2013–14 19,000
2014–15 48,000
… The pension contribution of £48,000 for 2014–15 has
used all of James’s AA of £40,000 for 2014–15, and
£8,000 (48,000 – 40,000) of the unused allowance
of £18,000 (50,000 – 32,000) from 2011–12.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Illustration 2
16

… James therefore has unused allowances of £9,000

(50,000 – 41,000) from 2012–13 and £31,000
(50,000 – 19,000) from 2013–14 to carry forward
to 2015–16.
… The remaining unused allowance from 2011–12
cannot be carried forward to 2015–16 as this is
more than three years ago.
… Although tax relief is available on pension
contributions up to the amount of earnings for a
particular TY, the AA acts as an effective annual limit.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Question 3: Un-used Annual Allowance (AA)
17

… Jack, born on 6 April 1974, is self employed and

has been a member of a registered personal
pension scheme since 2004. He paid pension
contributions prior to 6 April 2014 as follows:
£
2011/12 28,000
2012/13 40,000
2013/14 32,000

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Question 3: Un-used Annual Allowance (AA)
18

… His income for 2014/15 is: £

Tax adjusted trading profits 160,000
Bank interest received (gross) 1,000
Calculate the income tax liability of Jack for 2014/15
assuming he pays sufficient personal pension contributions in
2014/15 to utilize the maximum pension AA available to him
for that year.
… Advice jack as to the minimum amount of personal pension
contributions he should pay in 2014/15 if he is not to waste
any of his pension AA available for 2014/15

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Pension contributions in excess of AA
19

… Where (tax relieved) pension contributions are

paid in excess of the AA (including and as
adjusted for any brought forward unused
allowances), then there will be an annual
allowance charge i.e. there is a tax charge on
excess contributions by treating them as an
amount of additional non-savings income.
… This charge is subject to income tax at a

person’s marginal rates (at 20%, 40% 45%).

BRUCE NTEGE www.camstudies.org 20-Sep-15
 Illustration (Pension in excess of AA)
20

… For the tax year 2014–15 Eddie has a trading

profit of £220,000, and made gross personal
pension contributions of £70,000. He does not
have any brought forward unused annual
allowances.
… Eddie’s income tax liability is as follows:

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Illustration (Pension in excess of AA)
21

£ £
Trading profit 220,000
Annual allowance charge (70,000-40,000) 30,000
Net income 250,000
Less: PA (as adj. net income of 250000-70000 is > £120,000)Nil
Taxable income 250,000
Income tax:
101,865 (i.e. 31,865+70,000) at 20% (EBR) = 20,373
118,135 (i.e. 150,000+70,000) at 40% (EHR) = 47,254
30,000 at 45% (AR) = 13,500
Tax liability 81,127
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Illustration (Pension in excess of AA)
22

… Eddie has earnings of £220,000 for 2014–15.

All of the pension contributions of £70,000
therefore qualify for tax relief.
… The AA charge is £30,000 (70,000 – 40,000)

being the excess of the pension contributions

over the AA for 2014–15.
… Eddie’s adjusted net income clearly exceeds

£120,000, so no personal allowance is

available.
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Illustration (Pension in excess of AA)
23

… Eddie will have paid £56,000 (70,000 less

20%) to the personal pension company.
… Higher and additional rate tax relief is given

by extending the basic and higher rate tax

bands to:
† EBR of £101,865 (31,865 + 70,000); and
† EHR of £220,000 (150,000 + 70,000) respectively.

BRUCE NTEGE www.camstudies.org 20-Sep-15

 Question 4: Pension relief with “Excess pension input”
24

… Kenneth, born on 6 April 1952, is self employed. In

2014/15 he paid personal pension contributions of
£46,000. His pension annual allowance is £40,000
and he does not have any un-used annual
allowances brought forward at 6 April 2014. His
only income for 2014/15 is tax adjusted trading
profits of £220,000.
… Calculate the income tax liability of Kenneth for
2014/15 taking into account the effect of the
overpayment of pension contributions for 2014/15
BRUCE NTEGE www.camstudies.org 20-Sep-15
 Receiving benefits from pension
25
arrangements
… When a person retires, a pension is normally
taken in two ways:
† A tax-free lump sum up to ¼ of the pension
fund; plus/and
† A taxable annual pension (annuity) from the
remaining fund

20-Sep-15
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 Receiving benefits from pension
26
arrangements (contd...)
Lifetime allowance
… Lifetime allowance for pension scheme is £1,500,000

… If pension fund exceeds lifetime allowance at the time

the benefit starts to be taken, an income tax charge
arises on excess value of the fund
… Rate of charge is 55% if the excess value is taken as a
lump sum, or 25% if funds are left in the scheme to
provide a pension
… Lifetime allowance charge will not be examined
computationally in the F6 exams

20-Sep-15
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