Chapter 5: Pensions



Pensions are there to sustain one when they hit a certain old age.
Pension contributions are either deducted from your salary of which your employer also pays a
certain percentage or individuals may make their own provision through a personal pension
provider e.g. an insurance company.
Automatic enrolment is being introduced so that employers must automatically enroll most
employees into a workplace pension scheme (although employees can then opt out of the
scheme). Under automatic enrolment, there are minimum contributions to the workplace
pension scheme required by law (up to April 2019 usually equal to 8% of earnings of which a
minimum amount equal to 3% of earnings must be contributed by the employer).
1. Pension Arrangements
1.1.
Occupational Pension Scheme
I.
Earnings Related (Defined Benefits Arrangements)
The contribution is deducted from the employees’ earnings either at retirement (a final salary
scheme) or throughout their employment (a career average scheme) and linked to the number
of years they have worked for the employer.
II.
Money-Purchase Pension (Defined Contribution Scheme)
It does not provide any guarantee regarding the level of pension which will be available. The
individual invests in the pension scheme and the amount invested builds up the pension.
1.2.

Personal Pensions
These are money purchase schemes which are provided by banks, insurance companies and
other financial institutions and are available to all.
2. Contributing to a Pension Scheme



Anyone below 75 years can make a tax relievable pension contribution.
The maximum amount of contributions attracting tax relief made by an individual in a tax year
is the higher of:a) The individual’s relevant UK earnings (employment income, trading income and
income from furnished holiday lettings) chargeable to income tax.
b) The basic amount (£3600) if the individual has no UK relevant earnings in a tax year.
These figures are gross contributions.

Where one contributes to more than one scheme, his contribution will be aggregated to get the
total amount of tax relief.
3. Methods of Giving Tax Relief
3.1.


Pension Tax Relief Given at Source (Personal pension- Expand band
rates by gross amount)
It is gotten through the usage of personal pensions. The relief is given net of basic rate tax.
Further tax relief is given if the individual is a higher rate or additional rate taxpayer by
increasing the basic rate limit and higher rate limit by the gross amount of the contributions.
QUESTION
Mary earns £69000 and pays a personal pension contribution of £7200 (Net). What is her tax liability for
2022/23?
REMINDER: Gross personal pension contributions are used to compute adjusted net income.
3.2.

Net Pay Arrangements (Occupational Pension Contributiondeducted from your salary)
Works with an occupational scheme where the employer will deduct the gross contributions
from the individual’s earnings before operating PAYE.
QUESTION
Peter has taxable earnings of £69000. He paid pension contributions of £9000 towards his occupation
scheme. Calculate his tax liability for the tax year 2022/23?
4. Employer Pension Contributions





This is made by an employer to an employee’s pension scheme where at least minimum
contributions, required by law, are made.
They are exempt benefits for the employee.
There is no limit on the amount to be contributed by the employer though the contributions
always count towards the annual allowance and lifetime allowance.
All contributions made by an employer are made gross
Tax relief is obtained by deducting it as an expense from the employer’s trade profits.
5. Annual Allowance- This ALLOWS you to contribute a certain
amount towards your pension without being taxed (it restricts the
amount that you can contribute)


This restricts the amount of tax relievable contributions that can be made in a year to an
individual’s pension scheme.
The annual allowance for:
2019/20, 2020/21, 2021/22, 2022/23 - £40000 per tax year
Question
5.1.



From 2022/23, any individual who has an adjusted income in excess of £240000 will have their
annual allowance reduced by 1 for every 2 that the adjusted income exceeds £240000, subject
to a minimum allowance of £4000 (any adjusted income above £312000)
Adjusted income for the self-employed is the same as their net income.
Adjusted income for employees is net income plus employee contribution to occupational
pension contributions plus employer contributions to any pension schemes.
5.2.


Reduced Annual Allowance
Carry Forward of Unused Annual Allowance
If an individual is a member of a registered pension scheme but does not make contributions of
at least the annual allowance in a tax year, he can carry forward the unused amount to up to 3
years, though in any year for which the person is not a member of a scheme, the allowance does
not apply and there will be no carry forward.
The annual allowance in the current year is used first, and then any unused allowance,
starting with the earliest tax year first, is used next.
QUESTION
Ben makes gross contributions of £26000 for 2019/20, £36000 for 2020/21 and £25000 for 2021/22. In
2022/23, he wants to make a large contribution in January 2023, due to good business.
a) What are the maximum gross contributions he can make in January 2023, remembering any
brought forward allowance?
b) If he makes a gross contribution of £46000 in January 2023, what will be carried forward to
2023/24?
5.3.

Contributions In Excess of Annual Allowance
If tax relievable pension contributions exceed the annual allowance (including any brought
forward), then he is charged to income tax on the excess based on the individuals marginal
rates.
QUESTION
Reuben had a salary of 290000 in 2022/23. He made a gross personal pension contribution of 70000 in
December 2021. What is his tax liability for 2022/23?
6. Pension Benefits
7. The Lifetime Allowance



This is £ 1,073,100 for 2022/23. This applies to all pensions in a fund.
If it exceeds this allowance, an income tax charge will arise on the excess when the individual
receives pension benefits from the fund.
If the excess value is taken as a lump sum the charge is 55% or 25% if the funds are used to
provide a pension income.