Tax-Advantaged Pension Features

• Topic 01

  Tax-Advantaged Pension Features

  27 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A client has a salary of £180,000 and receives employer pension contributions of £90,000 in 2024/25. They make no personal contributions. Calculate their threshold income, adjusted income, and tapered Annual Allowance.

   • A
     Threshold income = £180,000; adjusted income = £270,000; tapering applies because adjusted income exceeds £260,000, reducing the AA to £55,000
   • B
     Threshold income = £180,000; this is below the £200,000 threshold income limit, so tapering does NOT apply — the full £60,000 Annual Allowance is available
     Correct answer
   • C
     Threshold income = £270,000; adjusted income = £270,000; excess above £260,000 = £10,000; tapered AA = £55,000
   • D
     Threshold income = £180,000; adjusted income = £270,000; excess above £260,000 = £10,000; tapered AA = £55,000
   Explanation

   The tapering rules require BOTH conditions to be satisfied: (1) threshold income must exceed £200,000, AND (2) adjusted income must exceed £260,000. Threshold income = net income less personal contributions = £180,000 − £0 = £180,000. This does NOT exceed £200,000, so the threshold income test fails. Where threshold income is £200,000 or below, tapering does not apply, regardless of adjusted income. The full standard Annual Allowance of £60,000 applies. This is a key point: if threshold income is at or below £200,000, no further tapered AA calculation is required.

2. A DB scheme member's pension input amount is £80,000 in 2024/25. Their standard AA is £60,000, and they have no carry forward. They ask whether they can use the scheme pays facility. What conditions apply and what is the consequence for their pension?

   • A
     Scheme pays is not available for DB scheme members — only DC scheme members can use it
   • B
     Scheme pays is available but the member's pension is only reduced by the amount of the charge, not an actuarial equivalent
   • C
     Scheme pays is only mandatory for charges above £50,000; the member must pay the £20,000 excess charge personally
   • D
     Scheme pays is available: the charge is on £20,000 excess, and the scheme will reduce the member's pension by an actuarially determined amount equivalent to the tax paid on their behalf
     Correct answer
   Explanation

   Scheme pays is available for DB schemes where the pension input exceeds the AA and the resulting charge is £2,000 or more. The £20,000 excess will generate an AA charge at the member's marginal rate (e.g., £8,000 at 40%). The scheme pays this to HMRC and reduces the member's pension entitlement by an actuarial equivalent — the reduction reflects the scheme's cost of paying the charge, which is typically larger than the charge itself to reflect the ongoing pension liability foregone.

3. A DB member's pension was £20,000 p.a. at the start of the pension input period and £22,000 p.a. at the end. CPI for the year was 3%. What is the pension input amount?

   • A
     £22,400: opening value = £20,000 × 16 × 1.03 = £329,600; closing value = £22,000 × 16 = £352,000; pension input amount = £352,000 − £329,600 = £22,400
     Correct answer
   • B
     £2,000: the pension input amount is just the annual increase in pension without any multiplication factor
   • C
     £16,000: the pension input amount equals the increase in annual pension (£2,000) for the year
   • D
     £32,000: the pension input amount is simply the increase in annual pension (£2,000) multiplied by 16
   Explanation

   Step 1 — Opening value: £20,000 × 16 = £320,000, then uprated by CPI (3%): £320,000 × 1.03 = £329,600. Step 2 — Closing value: £22,000 × 16 = £352,000 (no separate lump sum assumed). Step 3 — Pension input amount: £352,000 − £329,600 = £22,400. The key formula to apply: $PIA = (\text{closing pension} \times 16) - (\text{opening pension} \times 16 \times (1 + CPI))$.