• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Personal and annual allowance numerical examples

E

edcvfr

Member
Chapter 5: Policyholder taxation, Pension contracts

Are the following numerical examples correct?

Individual is a 40% tax payer

Example 1
A total of £35,000 has been contributed into the individual's pension in one year. This is split as follows:
£5,000 paid by individual, £30,000 paid by employer

Tax relief (@ 40%) is received on:
£3,600 (personal allowance) + £30,000 (as have not reached annual allowance) = £33,600
And so the remaining £1,400 is taxed at 40%.

Example 2
A total of £41,000 has been contributed into the individual's pension in one year. This is split as follows:
£5,000 paid by individual, £36,000 paid by employer

Tax relief (@ 40%) is received on:
£3,600 (personal allowance) + £36,000 (as have not reached annual allowance) = £33,600
And so the remaining £1,400 is taxed at 40%.

Example 3
A total of £50,000 has been contributed into the individual's pension in one year. This is split as follows:
£3,000 paid by individual, £47,000 paid by employer

Tax relief (@ 40%) is received on:
£3,000 (less than personal allowance) + £37,000 (remaining of annual allowance) = £40,000
And so the remaining £10,000 is taxed at 40%.
 
edcvfr said:
Chapter 5: Policyholder taxation, Pension contracts

Are the following numerical examples correct?

Individual is a 40% tax payer

Example 1
A total of £35,000 has been contributed into the individual's pension in one year. This is split as follows:
£5,000 paid by individual, £30,000 paid by employer

Tax relief (@ 40%) is received on:
£3,600 (personal allowance) + £30,000 (as have not reached annual allowance) = £33,600
And so the remaining £1,400 is taxed at 40%.
Click to expand...

The first rule for pension contribution is that:
"Individuals can obtain tax relief on contributions up to £3,600 per annum or their full taxable UK earnings if higher."
Let's assume that the full earnings are higher than the total (individual and employer) annual contributions.

The relief will be on the contributions paid by the individual. Therefore they will not pay any tax on the £5,000 as their full earnings are higher.

The second rule also considers the employer's contribution - The annual allowance.
In the above example, the annual contribution is less than £40,000, so tax relief is still applicable.

edcvfr said:
Example 2
A total of £41,000 has been contributed into the individual's pension in one year. This is split as follows:
£5,000 paid by individual, £36,000 paid by employer

Tax relief (@ 40%) is received on:
£3,600 (personal allowance) + £36,000 (as have not reached annual allowance) = £33,600
And so the remaining £1,400 is taxed at 40%.
Click to expand...

As in the first example, the first rule is met (if we assume full earnings are higher than the total annual contributions).
However the second rule has not been met. This means that £1,000 (£41,000-£40,000) will not be entitled to tax relief.

edcvfr said:
Example 3
A total of £50,000 has been contributed into the individual's pension in one year. This is split as follows:
£3,000 paid by individual, £47,000 paid by employer

Tax relief (@ 40%) is received on:
£3,000 (less than personal allowance) + £37,000 (remaining of annual allowance) = £40,000
And so the remaining £10,000 is taxed at 40%.
Click to expand...

Similar, to the previous examples, £10,000 (£50,000-£40,000) will not be entitled to tax relief.

Hope this helps.

Thanks

Em
 
Em Francis said:
The first rule for pension contribution is that:
"Individuals can obtain tax relief on contributions up to £3,600 per annum or their full taxable UK earnings if higher."
Let's assume that the full earnings are higher than the total (individual and employer) annual contributions.

The relief will be on the contributions paid by the individual. Therefore they will not pay any tax on the £5,000 as their full earnings are higher.

The second rule also considers the employer's contribution - The annual allowance.
In the above example, the annual contribution is less than £40,000, so tax relief is still applicable.



As in the first example, the first rule is met (if we assume full earnings are higher than the total annual contributions).
However the second rule has not been met. This means that £1,000 (£41,000-£40,000) will not be entitled to tax relief.



Similar, to the previous examples, £10,000 (£50,000-£40,000) will not be entitled to tax relief.

Hope this helps.

Thanks

Em
Click to expand...

Thanks!!!
 
Em Francis said:
"Individuals can obtain tax relief on contributions up to £3,600 per annum or their full taxable UK earnings if higher."
Click to expand...
Hi Em
So the lower one's earnings, the lower the contribution amount on which tax relief can be obtained? I'm trying to understand the significance of the £3600.
 
Yes, that's right: the lower the amount that you earn, the lower the amount that you can pay (tax-free) into your pension. It is basically capping tax-free pension contributions at the total amount that you earn during a year. This should make sense: it is reasonable not to allow someone to invest (with tax advantage) an amount each year which is more than they actually earn (i.e. the amount that they have paid tax on).

The £3,600 cuts in at lower income levels. If you earn less than £3,600 (including earning nothing) then you are allowed to contribute up to £3,600 tax-free into a pension. For example, a parent could start a pension plan for a child and would be allowed to pay up to £3,600 a year into that pension, obtaining tax relief on that amount.
 
You must log in or register to reply here.
Back
Top