ACCA ATX UK Syllabus A1. Income tax - Pensions - Notes 1 / 2
Types of pension schemes
Occupational pension schemes
These are pension schemes that are run by an employer.
An employee can contribute into the scheme and an employer can contribute into the scheme on behalf of the employee.
If an employee contributes into the scheme, tax relief is given as follows:
The contribution made by the employee is deducted from their salary in arriving at taxable income.
It is basically treated as an allowable expense.
Illustration 1:
David has a salary of £20,000 for the year ended 05/04/2025.
During the year he has contributed £1,000 into his occupational pension scheme.
What is his taxable income for 24/25?
Solution:
| Salary | £20,000 |
| Less: | |
| Pension contribution | (£1,000) |
| Net income | £19,000 |
| Less: | |
| Personal allowance | (£12,570) |
| Taxable income | £6,430.00 |
Registered personal pension schemes
Any individual (whether employed or not) can join a Personal pensions scheme.
It is run by banks, insurance companies or other financial institutions.
Stakeholder pensions are a type of personal pension scheme.
They must satisfy certain rules, such as maximum level of charges and ease of transfer.
There are 3 tax benefits available for making personal pension contributions into a registered scheme.
They are exactly the same as the tax benefits available for making gift aid donations.
These are:
Pay net of 20%.
For example, if an individual wants to make a personal pension contribution of £1,000, he needs to pay 80% and HMRC will make the remaining 20% contribution on his behalf.
Therefore, he will pay £800 and HMRC will pay £200 to the fund.
Increase the basic and higher rate bands by the gross personal pension contribution.
Therefore, this same individual will increase his basic rate band to £38,700 and his higher rate band to £126,140.
This will result in an additional £1,000 being taxed at the lower rate of 20%, and an additional £1,000 being taxed at the higher rate of 40%.
Gross personal pension contributions are deducted from net income to arrive at adjusted net income.
Adjusted net income is used to determine the amount of personal allowance available.
Illustration 2:
Eli has a trading profit of £55,000 and he paid £2,400 (net) to a registered personal pension scheme in the tax year 24/25.
Show the tax benefits of this contribution.
Calculate Eli’s income tax liability for 24/25.
Solution:
Benefit 1:
| Eli paid | £2,400 (80%) |
| HMRC paid | £600 (20%) |
Benefit 2:
| Basic band extension: | £37,700 + £3,000= | £40,700 |
| Higher band extension: | £125,140 + £3,000 = | £128,140 |
Benefit 3:
| Adjusted net income = | £55,000 - £3,000= | £52,000 |
| Income tax liability | |
|---|---|
| Total income | £55,000 |
| Personal allowance | (£12,570) |
| Taxable income | £42,430 |
| £40,700 * 20% = | £8,140 |
| (£42,430 - £40,700) * 40% = | £692 |
| Total income tax liability | £8,832 |
Limitations of the tax relief available
Pensions do have the taxable benefits mentioned above.
However, there are 2 limitations under which contributions must be to qualify for the tax relief outlined.
These are:
They must be within the relevant earnings of the individual. If not, a certain amount of the contribution will be taxable.
If they are within the relevant earnings, they must be also within the annual allowances of the individual. If they are not, a certain amount of the contribution will be taxable.
What are relevant earnings?
These are the greater of
£3,600 and
100% of:
Trading income (e.g) profits from a business
Employment income (e.g.) salary
Income from furnished holiday lettings (e.g.) rental income from a FHL
For example
if an individual has trading profits of £50,000, then the greater of £3,600 and £50,000 will be chosen as relevant earnings, £50,000 will be the relevant earnings.
if an individual has trading profits of £3,000, then the greater of £3,600 and £3,000 will be chosen as relevant earnings, £3,600 will be the relevant earnings.
What is the annual allowance?
This is an allowance given to individuals every year.
The individual can use the allowance yearly, and the amount unused is carried forward for 3 years, but only if they are a member of the pension scheme in those years.
Therefore, at any particular time, an individual can use their current year allowance plus 3 years’ b/f unused annual allowances on a FIFO basis.
The gross contributions are deducted from the annual allowances.
| 2021/22 | £40,000 |
| 2022/23 | £40,000 |
| 2023/24 | £60,000 |
| 2024/25 | £60,000 |
Illustration 3:
Sally's trading income for the year ended 05/04/2025 were £80,000.
Sally made contributions of £76,000 (gross) into a personal pension scheme during the tax year 24/25.
She has made gross pension contributions of £30,000 for 21/22 and 22/23. For 23/24 she made a gross pension contribution of £50,000.
How much of the pension contribution qualifies for relief?
Solution
Sally’s relevant earnings are the higher of £3,600 and £80,000:
Therefore, Relevant earnings is £80,000.
Therefore, the pension contribution is within 100% of relevant earnings.
However, is the contribution within the annual allowance?
| Current year annual allowance | £60,000 |
| 21/22 b/f annual allowance 40,000 - 30,000 | £10,000 |
| 22/23 b/f annual allowance 40,000 - 30,000 | £10,000 |
| 23/24 b/f annual allowance 60,000 - 50,000 | £10,000 |
| Total allowance | £90,000 |
| Gross contribution | £76,000 |
| Total allowance | (£90,000) |
| The contribution is within the annual allowance, therefore £76k qualifies for the tax relief |
What happens if the gross contributions are above the relevant earnings or annual allowance available?
The additional amount is added to the total income, on top of other income, therefore it is chargeable to income tax at the highest rate that the individual pays.
This is called the annual allowance charge.
Annual allowances only start to accumulate in the first year that an individual makes a contribution.
Illustration 4:
Sally is self employed.
Her trading income for the year ended 05/04/2025 were £95,000.
Sally made contributions of £76,000 (gross) into a personal pension scheme during the tax year 24/25.
She has made gross pension contributions of £39,000 for 21/22 and 22/23. For 23/24 she made a gross pension contribution of £59,000.
How much of the pension contribution qualifies for relief?
How much will result in an annual allowance charge?
What is the income tax liability of Sally?
Solution:
Sally's relevant earnings are the higher of £3,600 and £95,000:
Relevant earnings: £95,000
Therefore, the pension contribution is within 100% of relevant earnings.
However, is the contribution within the annual allowance?
| Current year annual allowance | £60,000 |
| 21/22 b/f annual allowance 40,000 - 39,000 | £1,000 |
| 22/23 b/f annual allowance 40,000 - 39,000 | £1,000 |
| 23/24 b/f annual allowance 60,000 - 59,000 | £1,000 |
| Total allowance | £63,000 |
| Gross contribution | £76,000 |
| Total allowance | (£63,000) |
| Annual allowance charge | £13,000 |
| Total income | |
|---|---|
| Trading income | £95,000 |
| Annual allowance charge | £13,000 |
| Total income | £108,000 |
Basic Band extension: £37,700 + £76,000 = £113,700
Income tax liability:
Total income £108,000
Less P.A. (£12,570)
Taxable income £95,430
£95,430 * 20% = £19,086
Total income tax liability £19,086
Tapered annual allowance
If AI (Adjusted Income) is more than £260,000 then the CURRENT year Allowance is a tapered allowance
It means that the normal annual allowance of £60,000 is reduced by £1 for every £2 by which a person’s adjusted income exceeds £260,000, down to a minimum tapered annual allowance of £10,000.
This is similar to how personal allowances are reduced, except the adjusted income, in this case, needs to be £260,000 to reduce, not £100,000.
Therefore, a person with the adjusted income of £360,000 or more will only be entitled to an annual allowance of £10,000 (£60,000 – ((£360,000 – £260,000)/2) = £10,000).
Tapering applies on a tax year basis, so a taxpayer with variable income might find themselves entitled to the full £60,000 annual allowance for some years, and a tapered annual allowance in other years.
For example if the taxpayer only has adjusted income of £100,000 then they will be entitled to the full £60,000 but if the taxpayer has adjusted income of £280,000 - then they will be entitled to (£280,000 - £260,000) = £20,000/2 = £10,000;
A.A. £60,000 - £10,000 = £50,000 annual allowance available.A.I. for self employed = Net income
A.I. for employed = Net income + Employer contributions to pension scheme + Employee contributions to pension scheme
If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused allowance for up to three years on a FIFO basis.
For this exam, you will be carrying forward annual allowances from 2021/22 onwards based on the £40,000 that was applicable in that year.
If there is any annual allowance remaining from 2024/25, after the tapering has been done to the allowance, this can also be carried forward in the normal way.
General rule carry forward is only possible if a person is a member of a pension scheme for a particular tax year.
Therefore, for any year in which a person is not a member of a pension scheme the annual allowance is lost.
Illustration AI < £260,000
Peter has made the following gross personal pension contributions:
2021/22 £32,000
2022/23 £31,000
2023/24 £39,000
2024/25 £68,000
Peter's adjusted income for the tax year 2024/25 is £140,000.
Will Peter be subject to an annual allowance charge?
Solution
No, Peter will not be subject to an annual allowance charge.
The pension contribution of £68,000 for 2024/25 has used all of Peter’s annual allowance of £60,000 for 2024/25 and £8,000 (68,000 – 60,000) of the unused allowance of £8,000 (40,000 – 32,000) from 2021/22.
Unused allowances to carry forward to 2025/26: £9,000 (40,000 – 31,000) from 2022/23 £21,000 (60,000 – 39,000) from 2023/24
Illustration AI>£260,000
Chirag has made the following gross personal pension contributions:
2021/22 £32,000
2022/23 £31,000
2023/24 £39,000
2024/25 £9,000
His adjusted income for the year is £370,000. This is the first time that his AI has been above £260,000.
Will Chirag be subject to an annual allowance charge?
Solution
No.
Chirag’s tapered annual allowance for 2024/25 is the minimum of £10,000 because his adjusted income exceeds £360,000.
His contribution this year is only £9,000 - therefore it is within the tapered annual allowance of £10,000 and he will have £1,000 to carry forward to 2025/26.
Unused allowances to carry forward to 2025/26:
of £9,000 (40,000 – 31,000) from 2022/23,
£21,000 (60,000 – 39,000) from 2023/24
£1,000 (£10,000 – £9,000) from 2024/25.