Pensions

1. Types of Registered Pension schemes (RPS)

2. Occupational Pension schemes
3. Personal Pension schemes
4. Overview of the tax relief for RPS
5. Tax Relief for Pension Contributions
6. Method of obtaining tax relief for pension contributions
7. Accessing the pension fund
8. The Lifetime Allowance
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Shashi Jayatissa
ACCA, MBA (UK)

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Types of Registered Pension schemes (RPS)
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An individual can set up an investment of funds to provide an income during his retirement in a tax
efficient way by making payments into a registered pension scheme. A pension scheme is a savings plan
for retirement that enjoys special tax privileges, but only if the scheme is registered with HMRC. It is a
long-term investment and tax efficient due to below reasons:
• Individual obtains tax relief on the contributions made into the scheme.
• Where an employer contributes into the scheme, tax relief for the employer contributions is available
without there being a taxable benefit for the employee.
• Registered pension scheme funds grow tax free as the scheme is exempt from income tax and capital
gains tax.
• On retirement, some funds can be withdrawn as a tax free lump sum.
There are two main types of registered pension schemes:
1. Occupational pension schemes.
2. Personal pension schemes.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

Occupational Pension schemes
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A scheme set up by an employer for the benefit of his employees. Employers may use an insurance
company to provide a pension scheme for its employees, or it may set up its own self-administered
pension fund. Contributions into occupational schemes may be made by the employer, and the
employee.
Types of occupational pension schemes
1. Defined benefit scheme: benefits obtained on retirement are linked to the level of earnings of the
employee.
2. Money purchase scheme (or ‘defined contribution’ scheme): benefits obtained depend upon the
performance of the investments held by the pension fund.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

Personal Pension schemes
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Personal pension schemes are usually money purchase schemes administered by financial institutions on
behalf of the individual. This can be established by any individual:
• Employed
• Self-employed
• Individuals not working (including children)
Contributions into personal pension schemes may be made by:
• Individual, and
• any third party on behalf of the individual (e.g. employer, a spouse, parent or grandparent)

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

Overview of the tax relief for RPS
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• Amount of tax relief available for pension contributions is the same regardless of whether the
scheme is an occupational or personal pension scheme.
• Method of obtaining tax relief for the contributions is different depending on the scheme.
• Once the funds are invested in the scheme, all registered pension schemes are governed by the same
rules.
An employed individual may:
• Join an occupational pension scheme provided by the employer (may automatically enroll depending
on the size of employer).
• Setup a personal pension scheme without joining the occupational pension scheme.
• Contribute to both occupational scheme and set up a personal pension scheme.

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

 Tax Relief for Pension Contributions
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The relief for contributions made by individuals
Tax relief is available for pension contributions if both:
• the pension scheme is a registered scheme.
• the individual is resident in the UK and aged under 75.
Regardless of the level of earnings, individual may make pension contributions of any amount into either:
a pension scheme, or a number of different pension schemes.
However, tax relief is only available for up to a maximum annual amount each tax year.
Contributions: LOWER OF -

Gross pension contributions paid to all schemes HIGHER OF -

Illustration 1 page 187

£ 3600 (given in tax table) 100% of the individual’s ‘relevant earnings

RELEVANT EARNINGS = TAXABLE TRADING PROFITS (EMPLOYMENT INCOME + PROFITS FROM FURNISHED
HOLIDAY LETTINGS (NOT INVESTMENT INCOME)
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
METHOD OF Obtaining tax relief for pension contributions
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1. Personal Pension scheme
Method of obtaining tax relief for contributions into a personal pension scheme (PPCs) is the same whether they
are made by an employee, a self-employed individual or an individual who is not working. Relief is as below:
Basic rate tax relief
Automatically given by deduction at source when contributions are paid, as an individual makes contributions
net of the basic rate of income tax (20%). Contributions into a personal pension scheme benefit from basic rate
tax relief, even if the taxpayer is paying tax at the starting rate, higher rate or not paying tax at all. HMRC pay the
20% tax relief to the personal pension scheme.
Higher and Additional rate tax relief
i. Basic rate relief of 20% is given at source (as above) and
ii. Higher and additional rate relief is given by extending the basic and higher rate tax bands by the gross
amount of pension contributions paid in the tax year. E.g. if an individual pays a contribution of £8,000
(net), this is equivalent to a gross contribution of £10,000 (£8,000 × 100/80). Therefore the individual’s
higher and additional rate thresholds are extended to £47,500 (£37,500 + £10,000), and £160,000
(£150,000 + £10,000).
Illustration 2 page 189
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
METHOD OF Obtaining tax relief for pension contributions CONT..
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2. Occupational Pension scheme
Pension contributions into an occupational pension scheme, payments are made gross and tax relief is given at
source by the employer through the PAYE system, as an allowable deduction against employment income. Tax
relief is given at basic, higher and additional rates of tax depending on the individual's level of income as follows:
• Employer will deduct the pension contribution from the individual’s earned income, before calculating
income tax under the PAYE system.
• Tax relief is automatically given at source, at the employee's highest rate of tax.
TYU 1 page 193
Contributions made by employers into registered pension schemes
• Tax deductible in calculating the employer’s taxable trading profits (in the year which contributions are paid,
adjust profit computation by add back amount charged to P&L and deduct amount paid) , provided the
contributions are paid for the purposes of the trade, and
• An exempt employment benefit for the employee, and
• Added to the pension contributions paid by the employee on which tax relief is given to determine whether
the annual allowance has been exceeded.
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
METHOD OF Obtaining tax relief for pension contributions CONT..
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Annual allowance
No limit on the amount that may be paid into pension schemes by an individual, his employer or any
other party. However, tax relief for pension contributions made by an individual is restricted to the
maximum annual amount.

TOTAL OF ALL CONTRIBUTIONS > ANNUAL ALLOWANCE (£40,000 -given) = TAX CHARGE

• Annual allowance can be increased by bringing forward any unused annual allowances from the
previous three tax years provided that the individual was a member of a registered pension scheme
for that tax year, otherwise it is lost.
• The Annual allowance for the current year is used first, then from earlier years, starting with the
earliest tax year (FIFO basis).
Illustration 3 page 194
TYU 2 page 195

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

METHOD OF Obtaining tax relief for pension contributions CONT..
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Calculation of annual allowance charge
This is the tax charge on excess contribution above annual allowance. Tax charge is calculated as if the
excess is the individual’s top slice of income (i.e. taxed last after all sources of income, including
dividends). It becomes part of the individual's total liability and is either paid through the self-
assessment system or, may be taken from the individual's pension fund.
Illustration 4 page 196
TYU 3 page 197

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022

METHOD OF Obtaining tax relief for pension contributions CONT..
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Restriction of annual allowance – high income individuals
Annual allowance is gradually reduced for individuals with high income. Restriction applies to individuals with
a ‘threshold income’ exceeding £110,000 (not examinable) and ‘adjusted income’ exceeding £150,000. The
restriction operates in a similar way to the reduction of the personal allowance for high earners.
REDUCTION OF ANNUAL ALLOWANCE = (ADJUSTED INCOME - £150000) * 50%
• The reduced AA is rounded up to the nearest pound (although in the examination rounding up or down is
acceptable).
• Minimum that the annual allowance can be reduced to is £10,000. Where the annual allowance has been
reduced for a high income individual, it is the reduced annual allowance which is compared to actual
contributions in a tax year when determining if there is any unused annual allowance to carry forward.

ADJUSTED INCOME = NET INCOME + EMPLOYEE’S OCCUPATIONAL + EMPLOYER’S CONTRIBUTION

PENSION CONTRIBUTION TO ANY SCHEME

• When an individual’s adjusted income is £210,000 or more the annual allowance is reduced to £10,000.
Illustration 5 page 198/ TYU 5 page 200
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 Accessing the pension fund
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Once invested, funds in a registered pension scheme are accumulated and can grow in value, tax free, as the scheme is:
• exempt from income tax in respect of any income earned from the assets invested.
• exempt from capital gains tax in respect of any capital disposals made by the trustees over the life of the scheme.
The funds in the pension scheme cannot be accessed by the individual until they reach pension age. Each pension
scheme will have its own scheme rules regarding when an individual can access the scheme funds. The minimum pension
age can never be below 55.
Individuals in defined benefit schemes, benefits on reaching pension age are linked to the level of earnings of the
employee.
Individuals in money purchase schemes, benefits on pension age are dependent on the amount of funds accumulated in
the pension fund (i.e. contributions plus investment income/gains). Individuals with money purchase schemes have
complete flexibility in the way in which they can access the accumulated funds in their pension scheme when they reach
pension age.
• They can withdraw 25% of the fund as a tax free lump sum.
• Balance (75%) can be accessed in a variety of ways, to suit the individual’s circumstances, to provide income for the
individual in their retirement.
Withdrawals from the balance of the fund are taxed as non-savings income in the tax year they are withdrawn at the
normal rates of tax
Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022
 The Lifetime Allowance
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Once invested, funds in a registered pension scheme are accumulated and can grow in value, tax free.
There is no restriction on the total contribution that an individual may make into a registered pension
scheme. There is only a limit upon the annual contributions upon which tax relief is available.
To prevent wealthy individuals accumulating large sums in pension funds which can grow tax free, there
is a maximum limit to the amount that an individual can accumulate in a pension scheme tax free,
known as the ‘lifetime allowance’.
Lifetime allowance is £1,055,000 for the tax year 2019/20 (not given in tax table), considered when a
member becomes entitled to withdraw benefits out of the scheme.

VALUE OF PENSION FUND > LIFETIME ALLOWANCE (£1,055,000) = TAX CHARGE (during withdrawal)

TYU 6 page 204/ TYU 7 page 204/ TYU 8 page 204

TYU 9 page 205/ TYU 10 page 205/ TYU 11 page 205

Shashi Jayatissa. ACCA, MBA (UK) 02/22/2022