ecmdocument - bpp notes.pdf

8/10/2019 ECMDocument - BPP NOTES.pdf

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Student

Notes

ACCA Paper F6Taxation (UK) FA 2011

For exams in June 2012 and December 2012

To be used with the BPP Study Text for exams in June 2012 and

December 2012 FA 2011 edition)


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All our rights reserved. No part of this

publication may be reproduced, stored in a

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photocopying, recording or otherwise,

without the prior written permission of BPP

Learning Media Ltd.

BPP Learning Media Ltd

2012

First edition 2009

Fourth edition 2012

ISBN 9781 4453 2496 8

(Previous edition 9781 4453 2067 0)

British Library Cataloguing-in-Publication Data

A catalogue record for this book

is available from the British Library

Published by

BPP Learning Media Ltd

BPP House, Aldine Place

London W12 8AA

www.bpp.com/learningmedia


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Introduction iii

CONT

ENTS

chapter 1

INTRODUCTION TO THE UK TAX SYSTEMpage 1

chapter 2THE COMPUTATION OF TAXABLE INCOME AND

THE INCOME TAX LIABILITYpage 11

chapter 3

EMPLOYMENT INCOMEpage 23

chapter 4TAXABLE AND EXEMPT BENEFITS.

THE PAYE SYSTEMpage 31

chapter 5

PENSIONSpage 41

chapter 6PROPERTY INCOME

page 49

chapter 7

COMPUTING TRADING INCOMEpage 55

chapter 8

CAPITAL ALLOWANCES

page 61

chapter 9

ASSESSABLE TRADING INCOMEpage 71

chapter 10TRADING LOSSES

page 77

chapter 11PARTNERSHIPS AND LIMITED LIABILITY

PARTNERSHIPSpage 85

chapter 12NATIONAL INSURANCE CONTRIBUTIONS

page 91

chapter 13

COMPUTING CHARGEABLE GAINSpage 97

chapter 14

CHATTELS AND THE PRINCIPAL PRIVATERESIDENCE EXEMPTION

page 113

chapter 15BUSINESS RELIEFSpage 121

chapter 16SHARES AND SECURITIESpage 131

chapter 17

SELF-ASSESSMENT AND PAYMENT OFTAX BY INDIVIDUALSpage 139

chapter 18INHERITANCE TAXpage 151

chapter 19

TAXABLE TOTAL PROFITSpage 165

chapter 20COMPUTING THE CORPORATION TAX

LIABILITYpage 177

chapter 21CHARGEABLE GAINS FOR COMPANIESpage 183

chapter 22

LOSSESpage 193

chapter 23GROUPSpage 199

chapter 24OVERSEAS MATTERS FOR COMPANIESpage 205

chapter 25

SELF-ASSESSMENT AND PAYMENT OF

TAX BY COMPANIESpage 213

chapter 26

AN INTRODUCTION TO VATpage 219

chapter 27FURTHER ASPECTS OF VAT

page 235


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iv


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1

chapter 1

INTRODUCTION

TO THE UK TAX

SYSTEM

This chapter contains background knowledge which

underpins the whole of your later studies of taxation.

THE OVERALL FUNCTION AND PURPOSE OF

TAXATION IN A MODERN ECONOMY

DIFFERENT TYPES OF TAXES

PRINCIPAL SOURCES OF REVENUE LAW AND

PRACTICE

TAX AVOIDANCE AND TAX EVASION


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Tax avoidance

and tax evasion

Principal sources of

revenue law and practice

Different types

of taxes

The overall function and purpose

of taxation in a modern economy

Economic factorsTaxation represents a withdrawal from the UK economy. Tax policies can be used to encourage anddiscourage certain types of activity.

saving charitable donations entrepreneurs investment in plant and machinery

Encourages

smoking alcohol motoring

Discourages

Social factorsTax policies can be used to redistribute wealth

Direct taxes tax only those who have these resources Indirect taxes discourage spending Progressive taxes target those who can afford to pay

Environmental factorsTaxes may be levied for environmentalreasons

Climate change levy Landfill tax

THE

OVERALLFUNCTION

AND

PURP

OSE

OFTAXATION

IN

A

MODERN

ECONOMY


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1: Introduction to the UK tax system 3

Context

When a government is setting its taxation policies it will consider various factors.

Learning example 1.1

Name the three factors that may affect the UK governments tax policies.

Solution 1.1


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DIFFERENTT

YPES

OFTAXES


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Context

There are a large number of taxes in the UK. Some are collected directly from the taxpayer,

although often someone else actually pays the tax to HMRC, eg income tax and NIC on employment

income is paid directly from the employees salary to HMRC by the employer. Others, such as VAT,

are charged and collected by a middle man.


How would you explain the difference between a direct and an indirect tax?

Solution 1.2


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HM Revenue and Customs

Structure of the UK Tax system

Tax avoidanceand tax evasion

Principal sources ofrevenue law and practice

Different typesof taxes

The overall function and purposeof taxation in a modern economy

Treasury

Officers of Revenue and Customs Receivables management officers Revenue and Customs Prosecutions Office

Appeals heard by

First Tier Tribunal (most cases) Upper Tribunal (complex cases)

Sources of revenue law and practice

StatuteStatutory instrument

Law

Statements of practice

Extra-statutory concessionsExplanatory leafletsBusiness economic notesRevenue and Customs BriefInternal Guidance (HMRC manuals)Working Together

Practice

PR

INCIPALSOURCES

OFREVENUE

LAW

AND

PRACT

ICE


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Context

There are a number of sources of tax rules. Only some of them have the force of law, while others

provide guidance, explanations and interpretations of existing law.


Which of the following have the force of law?

(a) Extra Statutory Concessions

(b) Finance Act 2011

(c) Income Tax Act 2007

(d) HMRC manual on employment income

(e) Statement of Practice

(f) Case law

Solution 1.3


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Tax avoidanceand tax evasion

Principal sources ofrevenue law and practice

Different typesof taxes

The overall function and purposeof taxation in a modern economy

Tax evasion Tax avoidance

Tax evasion consists of seeking to mislead HMRCby either:

Suppressing information, or

Providing deliberately false information.

Tax avoidance includes any legal method ofreducing your tax burden, eg

Using tax shelters, or

Participating in schemes designed to minimisetax.

LegalIllegal

TAXAVO

IDANCE

AN

D

TAXEVA

SION


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Context

Taxpayers are allowed to organise their tax affairs in the most efficient way for themselves.

However, they need to ensure that they stay within the law.


Which of the following is a legitimate means of minimising a taxpayers tax liability?

(a) Tax avoidance

(b) Tax evasion

Solution 1.4


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Reinforcement

Study Text Chapter 1

Scan and note section 4 on tax avoidance and evasion. This is arguably the

most examinable part of the chapter. Note particularly the material in section

4.4 on the need for an ethical and professional approach

Attempt Quick Quiz


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chapter 2

THE COMPUTATION OF

TAXABLE INCOME AND

THE INCOME TAX

LIABILITY

The computation of income tax is a key exam topic.This chapter deals with the income tax computation

which draws together all of the taxpayers income. Thefollowing chapters will cover the rules for computingtaxable income from each different source.

BASIC PRINCIPLES

CHARGEABLE/EXEMPT INCOME

DEDUCTIBLE INTEREST

COMPUTING INCOME TAX

JOINTLY HELD PROPERTY


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Personal allowanceIndividual aged < 65

7,475 for 2011/12

Restrict if adjustednet income > 100,000

by 1 for each 2 excess(nil if > 114,950).

Individual aged > 65

9,940 age 65-74 for 2011/1210,090 age 75+ for 2011/12

Restrict if adjustednet income > 24,000

by 1 for each 2 excessto minimum 7,475

(unless income > 100,000, then

restrict as for standard allowance)

Aggregation of income

Jointly heldproperty

Deductibleinterest

Basicprinciples

Computingincome tax

Chargeable/Exempt income

A basic principle of income tax is the aggregation ofincome. All of an individuals income for a tax year isadded up in a personal tax computation as total income.

An individual who is resident in the UK is taxable on his worldwide income.

Resident

An individual is resident in the UK if he:

Is present in the UK for 183 days or more, or

Makes visits to the UK averaging 91 days per year ormore over four consecutive years. Taxable income

Net income minus personal allowance.

Adjusted net incomeNet income less grossed up gift aid/personal pension

contributions.

Net incomeTotal income minus deductible interest and trade losses. Tax liability

The amount of tax charged on income.

Tax payable

The balance of the tax liability still to be paid.

BASIC

PRINCIPLES


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2: The computation of taxable income and the income tax liability 13

Context

The aim is to produce a neat and complete income tax computation in the exam. Dont forget the

basics!


Kate (aged 35) has net income of 105,000 in 2011/12.

What is the personal allowance to which Kate is entitled in 2011/12?

Solution 2.1


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Deductibleinterest

Basicprinciples

Computingincome tax

Exempt income

Types of income Income taxed at source

The main types of income for individuals are:

Profits of trades, professions and vocations

Income from employment and pensions

Property income

Savings and investment income, including interestand dividends

Many sorts of investment income are taxed at source:for every 100 of income, the individual only receives80 of interest or 90 of dividends from UK companies.The taxable income is both cases is 100, but credit isgiven for the tax suffered.

Premium bond prizes Income from Individual Savings Accounts (ISAs) Returns on National Savings Certificates

Leave exempt income out ofpersonal tax computations.

This applies to bank andbuilding society interest.

Tax credits ondividends can be offsetto reduce a tax bill butare never repaid to a

taxpayer. Tax credits onother taxed income canbe repaid.

CHA

RGEABLE/E

XEMPTINC

OME


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Context

It is important to distinguish between the different typesof income and whether the income is

even taxableor not.

Different rules and rates apply to the different types of income (as we shall see later).


Simon receives bank interest of 1,860 and building society interest of 3,420 during the year. He

also received dividends of 810.

Show how much he should include for each type of income in his income tax computation and the

tax credit for each, where relevant.

Solution 2.2


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Deductibleinterest

Basicprinciples

Computingincome tax


Deductible interest

Interest paid on a particular type of loan isdeducted from total income to compute netincome.

For purchase of an interest in a partnership, or

For purchase of plant and machinery forpartnership (purchase must be by partner), or

For purchase of plant and machinery for use inemployment (purchase must be by employee)

DEDUCTIBLE

INTEREST


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Context

Total up all income from all sources first. Then see if any deductionsare available. The only ones

you will see in the exam are deductible interestand trading losses(see later).


Jonah, aged 45, recently became a partner and received partnership trading income of 47,000.

During the year he paid 10,750 of interest on his mortgage for his home and 800 interest on a

loan he had taken out for funds he was required to provide to join the partnership.

He received no other income during the year.

What is his taxable income?

Solution 2.3


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Computing

income tax


Deductibleinterest

Basicprinciples


If non-savings income does not exceed the starting rate limit, then the savings income is taxed at the startingrate (10%) up to the starting rate limit: 2,560 for 2011/12.

Total non-savings, savings and dividend income separately.

Deduct deductible interest, losses and the personal allowancefrom non-savings income first, then savings income thendividend income.

Tax non-savings income, then savings income, then dividendincome.

There is only one set of rate bands to cover alltypes of income.

Broadly interest

At 20%, 40% and 50%

At 10%, 20%, 40% and 50%

At 10%, 32.5% and 42.5%

Computing income tax

1

2

3

The basic rate limit and higher rate limitmust be increased by the gross amount ofany gift aid donation/personal pensioncontribution (amount paid 100/80).

COMPUTINGI

NCOME

TAX


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Context

Once you have added all income together you need to be able to apply the correct tax rates.

These depend on the type of income, non savings, savings or dividends, as different rates apply to

each type.


Following on from the example of Jonah (above), how much is his tax payable?

Solution 2.4


Dennis receives interest of 14,300 and dividends of 900 during 2011/12. He has no other

income.

What is his tax payable or repayable?

Solution 2.5


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Deductibleinterest

Basicprinciples

Computingincome tax


Jointly held property

Spouses and civil partners often hold propertyjointly, sometimes in unequal proportions.

For tax purposes treat the income received fromsuch property as shared equally.

If the actual interests in the property are unequal,spouses/civil partners can declare this to HMRCand income is then shared in actual proportions.

JOINTLYH

ELDP

ROP

ERTY


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Context

You may see a bank account held jointlyin the exam. You need to know how to deal with any

income (ie in this case, interest) received.


Mr and Mrs Smith receive interestof 12,000 from their bank account, which is held in both of their

names. Mrs Smith has only put a few hundred pounds into the account since the account was set up

as she does not work.

Mr Smith also receives the following income personally:

Salary of 60,000 (from which he gives his wife 500 a month towards housekeeping money)

Dividends of 1,650

How much income should Mr Smith include in his income tax computation?

Solution 2.6


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Reinforcement


Expand notes on the personal allowance, in particular the age allowance (para

6.2), and also on computing the tax payable (paras 7.1 7.3)

Attempt Quick Quiz

Attempt all examples in the chapter and then attempt Question 1 (22 mins),

Question 2 (27 mins) and Question 3 (27 mins) in the exam question bank

Read the article Finance Act 2011 written, in part, by the Paper F6 examiner,

David Harrowven, on the ACCA website at:

http://www.accaglobal.com/pubs/students/publications/student_accountant/archi

ve/sa_sept11_FA2011.pdf

David Harrowven has repeatedly said that it is vital that students read his Finance

Act article.


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chapter 3

EMPLOYMENT

INCOME

Although this exam is mainly computational you maybe asked to describe the difference between

employment and self-employment.

You also need to be aware of the final two topics in this

chapter: when employment income is assessed and the

deductions that you may be able to make in computingthe amount of assessable employment income.

EMPLOYMENT AND SELF-EMPLOYMENT

BASIS OF ASSESSMENT

ALLOWABLE DEDUCTIONS


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Allowabledeductions

Employment andself-employment

Basisof assessment

Whether a contract is a contract of service or acontract for services will depend on a number offactors.

Employed or self-employed

An employee works under a contract of service anda self-employed person under a contract for services.

The degree of control exercised over theperson doing the work

Whether he must accept further work Whether the other party must provide further work Whether he provides his own equipment Whether entitled to benefits eg pension Whether he hires his own helpers What degree of financial risk he takes

What degree of responsibility for investmentand management he has Whether he can profit from sound management Whether he can work when he chooses The wording used in any agreement between

parties

Factors

E

MPLOYMEN

TAND

SEL

F-EMPLOYMENT


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3: Employment income 25

Context

Employment income and trading income are calculated using different rules. It is therefore

essential to determine whether an individual is employed or self employed.


Jeremy has a 6 month contract with YouKnow Plc providing consultancy services.

He works on their premises from Monday to Friday but provides his own laptop.

He does not receive sickness or holiday pay. Jeremy is paid a monthly amount for his services.

Is Jeremy likely to be treated as an employee of YouKnow Plc or as self employed?

Solution 3.1


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Allowabledeductions

Employment andself-employment

Basisof assessment

Earnings are taxed in the year in which they arereceived.

Employees/directors are taxed on income from

the employment:

cash earnings benefits

Employment income

The general definition of the date of receipt isthe earlier of:

the time payment is made the time entitlement to payment arises

Directors are deemed to receive earnings on the earliestof the following:

the time given by the above general rule

the time the amount is credited in the companysaccounting records

the end of the companys period of account (if theamount has been determined by then)

when the amount is determined, if this after the endof the companys period of account

BASIS

OFASSESS

MENT


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Context

We must determine exactly when earnings are received so that we only tax earnings received in

the tax year.


Stephanie receives an annual salary of 32,000.

Stephanie has the use of a company car. Her employers payroll department has advised her that

the cash equivalent of the company car benefit is 1,275.

She also received the following performance related bonuses:

15 July 2010 5,500

15 January 2011 2,800

15 July 2011 6,200

15 January 2012 850

What are her earnings for 2011/12?

Solution 3.2


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AllowabledeductionsEmployment andself-employment Basisof assessment

Expenses specifically deductible against earnings:

Insurance premiums to cover directors and employeesliabilities (and payments to meet those liabilities)

Subscriptions to relevant professional bodies

Qualifying travel expenses costs the employee incurstravelling in the performance of his duties or/and travelling

to or from a place attended in the performance of dutiesContributions (within limits) to a registered occupationalpension scheme

Payments to charity under a payroll deductionscheme

1

2

3

4

5

Exam focus

If you have to decide whether an expenseis deductible, put yourself in HMRCsposition and try to find an argumentagainst deducting it. If you can find aspecific argument, the expense is probablynot deductible.

The strictness of this test has beenemphasised in many cases

The general rule is that expenses can only be deducted fromearnings if they are incurred wholly, exclusively and necessarily

in performing the duties of the employment.

Normal commuting does not qualify

Relief is available for expenses incurred by anemployee working at a temporary location ona secondment of 24 months or less

If a mileage allowance is paid relief isavailable for any shortfall of allowance actuallypaid over statutory mileage allowance

ALLOWABL

E

DEDUCT

IONS


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Context

Employees can only deduct expenses in very limited circumstances, which is one of the reasons why

individuals prefer to be treated as self employed where possible. Where a deduction ispossible, the

employees employment income figure in the tax computation is reduced.


Sylvia is employed as a bookkeeper by Grant Ltd. She has the following expenses:

Annual membership dues (International Association of Bookkeepers) 250

New suit for work 180

Occupational pension contribution 360

Commuting costs 1,500

Travel to clients 95

What are the total expenses that can Sylvia deduct from her employment income?

Solution 3.3


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Reinforcement


Expand notes on travel expenses (para 3.2), other expenses (para 3.3) and

mileage allowances (section 4)

Attempt Quick Quiz

Work through all the questions in the chapter and then attempt Question 4 in

the exam question bank (27 mins). Although the focus in the exam is on

computational questions, written questions may still come up as part of a

longer question.


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chapter 4

TAXABLE AND

EXEMPT BENEFITS.

THE PAYE SYSTEM

Benefits are often examined so it is vital that you areable to calculate the taxable value of benefits provided

to employees. You also need to be aware of thebenefits that are exempt from tax.

The deduction of tax from employment income through

the PAYE system is less frequently examined, but it isstill important.

TAXABLE BENEFITS

EXEMPT BENEFITS

THE PAYE SYSTEM


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Meal vouchers exemptup to 15p per dayVouchersGeneral business expenses

The PAYEsystem

Exemptbenefits

Taxablebenefits

Taxed on most employeesExcept excluded employees (earn lessthan 8,500 p.a. and not director) onlytaxable on certain benefits

P11D employees are employees who are

not excluded employees.

Cash vouchers

Credit token

Non-cash vouchers

Taxable on all employees (cost of providing benefit)

Reimbursed expenses taxable onemployees (not excluded employees).May make deduction claim.

Non-cash benefits

including excluded employees.

TAX

ABLE

BENE

FITS


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4: Taxable and exempt benefits. The PAYE system 33

Context

Whenever an employer provides something other than cash to an employee you need to think

about whether there is a taxable benefit. While P11D employeesare taxable on any benefit they

receive, apart from certain exempt benefits (see next section), excluded employeesare

generally only taxable on vouchers (which include credit cards) and living accommodation provided

by their employer.


Harvey is provided with a house by his employer, who had acquired the house at a cost of 130,000

on 1 April 2005 and spent 10,000 on extending the property on 1 September 2008. Harvey moved

into the property on 1 July 2008.

The annual value of the house for 2011/12 is 3,250. Harvey pays rent of 300 each month to his

employer for the use of the house.

What is Harveys total benefit in respect of the house for 2011/12?

Solution 4.1


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Loans Cars

The PAYEsystem

Exemptbenefits

Taxablebenefits

Annual taxable benefit for the private use of a car is (price of car capital contributions) %.

Cars emitting 75g/km or less = 5%

Cars emitting CO2 between 76120g/km = 10%.

Cars emitting between 121125g/km = 15%. Percentageincreases by 1% for each 5g/km (rounded down) up to 35%.

Percentage increased by 3% for diesel engined cars (notabove max 35%).

Benefit scaled down on a time basis, if car not available allyear. Benefit then reduced by any contribution by employee forprivate use.

Fuel for private use is charged as percentage of base figure(18,800, 2011/12). Same percentage as car benefit. No

reduction for partial reimbursement by the employee.

Loans of over 5,000 giverise to taxable benefits equalto the difference between theactual interest and interest atthe official rate.

A write-off of a loan gives riseto a taxable benefit equal tothe amount written off.

1

2

Only taxed onP11D employees

Other benefits

In general, if an asset is made available for private use, theannual taxable benefit is 20% of the market value when theasset was first provided, less any employee contribution.

If the asset is subsequently givento the employee the taxablebenefit is the higher of:

(i) original MV less amountsalready taxed

(ii) market value at date of gift

less any employee contribution.

Taxable value of other benefits charged onemployees other than excluded employees

Excluded employees taxed only on second-handvalue as cash earnings

Cost of provision of benefit less anyamount made good by employee

Not used if asset is bicycle

Private use of asset

TAX

ABLE

BENE

FITS


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Context

The general rule is that the value of the benefit to include in the employees employment income is

the cost to the employer (or second hand value for excluded employees). However, there are

specific rules for certain assets, which, of course, are the most examinable!


Keith has a company car (list price 25,000) throughout the tax year. The car has CO2emissions of

188g/km. His employer pays for all of his private diesel.

What is Keiths total taxable benefit?

Solution 4.2


At 6 April 2011 a cheap loan of 30,000 was outstanding to a director, who repaid 20,000 on

6 December 2011. The remaining balance of 10,000 was outstanding at 5 April 2012. Interest paid

during the year was 200.

What is the benefit under both methods for 2011/12, assuming that the official rate of interest was

4%?

Solution 4.3


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Context

Employers can provide certain benefits to their employees with no tax (or NIC) consequences

for the employee. These are clearly a valuable part of an employees remuneration package.


Which of the following are exempt benefits?

(a) Mileage allowance paid at 55p per business mile

(b) Staff party cost 50 per head

(c) Car parking space at work

(d) 5,000 removal expenses

(e) Private medical insurance

Solution 4.4


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The PAYEsystem

Exemptbenefits

Taxablebenefits

The PAYE system collects tax from employees each payday, with the intention that over a tax year, the correcttotal of tax due will be collected.

Routine each payday Add the gross pay to the running total of gross

pay for the tax year Use the employees PAYE code to work out the

amount of cumulative gross pay which is tax free

Compute tax on the balance Deduct the tax already paid.The difference is the

tax to deduct on this payday

The employer must pay over the tax deducted upto the 5th of each month by the 19th of the month.

PAYE code numbers

Year end returns

Quarterly payment is allowed if the averagemonthly total of tax and NICs is less than 1,500

PAYE settlement agreements are arrangements underwhich employers settle employees income tax liabilitieson certain benefits and expense payments.

L: Code with basic personal allowanceP: Code with age 65-74 allowancesY: Code with age 75+ allowance

Following the year end the employer must submit:Form P14Form P35Form P11D/P9D by 6 July

By 19 May}

Payment

PAYE settlement agreements

TH

E

PAYE

SYSTEM


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Context

Employers must use the PAYE system to collect income tax(and NIC) from their employees and

pay it to HMRC. HMRC will issue each employee with a PAYE code which the employer then uses to

ensure the correct amount of tax (and NIC) is deducted throughout the year. This is quite an

administrative burden for employers. Smaller businesses may pay their PAYE quarterly.


Terry, age 35, is married to Fiona. He earns a salary of 18,000 and receives benefits with a

taxable value of 345. He had underpaid tax of 33 to be collected through his PAYE code.

What is Terrys PAYE code for 2011/12?

Solution 4.5


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Reinforcement


Expand notes on the list price of a company car (para 3.3.3), reductions in car

and fuel benefit (paras 3.3.4 and 3.4.3), vans (para 3.5), qualifying beneficial

loans (para 3.6.4), exempt benefits (section 4), P11D dispensations (section 5)and PAYE penalties (para 6.6)

Attempt Quick Quiz

Attempt all examples in the chapter and then attempt Question 5 in the exam

question bank (27 mins)


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chapter 5

PENSIONS

A single regime applies to all pensions, whetheroccupational or personal. However, there are different

methods of giving tax relief.

Pension contributions are a tax efficient way of savingfor retirement.

TYPES OF PENSION SCHEME

CONTRIBUTIONS TO PENSION SCHEMES

RECEIVING BENEFITS FROM PENSION

ARRANGEMENTS


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42

Contributions to

pension schemes

Receiving benefits from

pension arrangements

Types of

pension scheme

Pension Schemes

Occupational Pension Scheme Personal Pension Scheme

Employees only All individuals

Defined Benefits Money Purchase

Pension based onearnings andlength of service

No guarantee of amountof pension. Investmentsare used to 'build up' fund

TY

PESO

F

PE

NSIONS

CH

EME


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5: Pensions 43

Context

A pension is a tax efficientway of saving for the future as there many tax reliefs associated

with investing in a pension.

Many employers run their own pension scheme for their employees, who can contribute to

that as well as, or instead of, contributing to a personal pension.

Self employedindividuals (and those with no earnings) obviously cannot contribute to anoccupational pension. Instead they may pay into a personal pension.


Franks wife works for Planted Ltd, which runs its own occupational pension scheme. Frank runs his

own business.

To which of the following pension schemes can Frank contribute?

(a) Planted Ltds occupational pension scheme.

(b) Bongley Bank Personal Pension scheme.

Solution 5.1


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44

Contributions topension schemes

Receiving benefits frompension arrangements

Types ofpension scheme

Maximum contribution attracting taxrelief is higher of:

relevant earnings

3,600 pa

1,800,000 is maximum value for pension fund.

Employment income, trading income andfurnished holiday lettings income

50,000 for 2011/12 c/f unused allowance max 3 years tax charge on excess treat as

additional non-savings income

Employer contributions:

Count towards allowances (annual & lifetime) Trade deduction for employer Tax free benefit for employee No NIC for employer or employee

Annual limit Lifetime allowance

Annual allowance

CONTRIBUTIONST

OP

EN

SIONS

CHE

MES


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5: Pensions 45

Context

A pension is such a tax efficient investment, not only because investments grow and income is

received by the pension free of tax, but also because there is tax reliefwhen contributions are paid

to the pension. How the tax relief is given depends on the type of pension but the overall effect is

exactly the same.


Samantha is employed by Hart Ltd, earning a salary of 60,000. She pays 5% of her salary into her

pension each year and Hart Ltd matches this (ie also puts 5% into her pension). She has no other

income during the year.

Calculate Samanthas income tax liability assuming the pension is:

(a) An occupational pension run by Hart Ltd

(b) A personal pension.

Solution 5.2


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Contributions topension schemes

Receiving benefits frompension arrangements

Types ofpension scheme

Pension fundat retirement

Taxable annualpension (usually)

Tax-free lump sum

If fund exceeds lifetime allowance1.8m then tax charge on excess

25% if excesstaken as pension

55% if excesstaken as lump sum

Maximum 1/4 of fund

EIVINGB

EN

EFITSF

ROM

PENSIONA

RRANGEMEN

TS

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