Podcast
Questions and Answers
What is the maximum percentage charge applied to an Additional Accrual (AA) that exceeds the Annual Allowance for a higher rate taxpayer?
What is the maximum percentage charge applied to an Additional Accrual (AA) that exceeds the Annual Allowance for a higher rate taxpayer?
Which of the following correctly describes the penalty for an unauthorised payment made in respect of a sponsoring employer?
Which of the following correctly describes the penalty for an unauthorised payment made in respect of a sponsoring employer?
When can the charge from an Additional Accrual (AAC) exceeding £2,000 be paid from a pension fund?
When can the charge from an Additional Accrual (AAC) exceeding £2,000 be paid from a pension fund?
What is the surcharge rate for a lump sum taken that exceeds the Lifetime Allowance (LTA)?
What is the surcharge rate for a lump sum taken that exceeds the Lifetime Allowance (LTA)?
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Tax charges on pensions and annuities apply primarily to which party?
Tax charges on pensions and annuities apply primarily to which party?
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What must the scheme administrator declare regarding unauthorised payments?
What must the scheme administrator declare regarding unauthorised payments?
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Which tax relief is NOT available to registered pension schemes under the EET principle?
Which tax relief is NOT available to registered pension schemes under the EET principle?
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What is a potential consequence for a scheme that does not follow HMRC's tax rules?
What is a potential consequence for a scheme that does not follow HMRC's tax rules?
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Which statement accurately describes the tax implications on investment returns within registered pension schemes?
Which statement accurately describes the tax implications on investment returns within registered pension schemes?
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Under what condition can employers recover VAT on management services for a funded pension scheme?
Under what condition can employers recover VAT on management services for a funded pension scheme?
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Study Notes
Tax Charges on Pension Schemes
- Pensions and annuities incur income tax for recipients.
- Lump sums received at the start of a pension or due to serious ill health are exempt from income tax.
- For trivial lump sums under £10,000, 25% is tax-free; the remainder is taxed as income.
- Death-related lump sums face different tax treatment than those received prior to death.
Lifetime Allowance (LTA) Charge
- The LTA charge applies when the value of benefits exceeds the set threshold.
- Excess over the LTA taxed at 25% when taken as a pension, 55% as a lump sum.
Annual Allowance (AA) Charge
- Contributions exceeding the Annual Allowance incur an AA charge.
- Basic rate taxpayers face a 20% charge, 40% for higher rate taxpayers, and 45% over the additional rate threshold.
- If the AA exceeds £2,000 in a year, members can pay the charge from their pension fund through "scheme pays".
Unauthorised Payments Surcharge
- Unauthorised payments exceeding a defined proportion of benefits incur additional surcharges.
- Unauthorised payments related to sponsoring employers also attract a surcharge.
- Scheme administrators must declare that governing instruments do not allow unauthorised payments.
Registered Pension Schemes and Tax Benefits
- Governed by the "EET principle": Contributions and investment returns are tax-exempt at entry and exit, but retirement income is taxable.
- Tax advantages include:
- Income tax relief on contributions for both employers and employees.
- Employer contributions to registered schemes are exempt from income tax and NICs.
- Investment returns exempt from income tax, barring specific types (e.g., trading income).
- Capital gains from realising investments are tax-exempt.
- VAT on management services linked to funded pension schemes can be reclaimed by employers.
Death Benefits and Inheritance Tax
- If a member dies before age 75, death benefits within the LTA are tax-free to dependants or beneficiaries.
- After age 75, benefits are taxed at the recipient's marginal tax rate.
- Inheritance Tax (IHT) doesn't typically apply to pensions; however, it can apply if contributions are made when a member is aware of ill health within two years prior to death.
- IHT may apply if benefits transferred to another scheme alters the tax treatment of death benefits.
- The nil-rate band for IHT is £325,000 for the 2021/22 tax year.
Auto-Enrolment
- Since 2012, UK employers are mandated to automatically enroll eligible employees into a pension scheme, ensuring broader retirement savings.
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Description
Test your knowledge on the taxation of pensions, annuities, and lump sums. This quiz covers important details about tax charges and exemptions related to retirement benefits. Prepare to understand the nuances of retirement provision taxation effectively.
