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Correct me please if I am wrong , So what you are saying is that if he was a higher rate tax payer but his relevant earnings were only £38,650 then the Basic rate band extension would be limited to £38,650 ? if he had a relevant earnings of lets assume £50,000 then AA charge would have been applied on additional £2000 ?
I always thought that there is an AA charge if the pension input amount goes above the amount qualifying for tax relief , have done so many questions in regards to calculating the maximum available pension input for the latest years & always got the correct answers mainly because in majority cases the relevant earnings were above £40,000 and it was just a simple case of carry forwarding the unused input amount of preceding 3 years unused out of £40,000 or dealing with taper relief if Adjusted income was above £150,000 .
Question is : You are a trainee accountant and your manager has asked for your help regarding three taxpayers who have all made Personal Pension contributions during tax year 19/20.
Ann Peach: Ann is self employed as an estate agent.Her trading profit for the year ended 5 april 2020 was £38,650. Ann received an inheritance from her aunt in October 2019 and she used it to make contribution of £42,000 (gross) into personal pension scheme in November 2019.
Requirement : For each of the tax payers Ann peach , Basil Plum & Chloe Pear , state , giving reasons , the amount of Personal Pension contributions that will have qualified for tax relief for the tax year 2019/20 , and calculate their income tax liabilities for that year.
Answer is : Ann can obtain relief for the lower of : (1) Gross contributions of 42000 (2) Higher of: (i) 3600 (ii) Relevant earnings of 38650 therefore 38,650 qualifies for tax relief .
Income tax liability
Trading Profit 38,650
less pa -12500
taxable income 26,150Income tax liability ( 26,150 x 0.2 ) = 5230
So my issue is that i don’t understand why there is no income tax charge on additional pension input , the examination kit answer clearly states that the pension of 38,650 will qualify for tax relief but his input is 42,000 . There is no additional information for this tax payer.
I have no issues dealing with the other 2 tax payers Pensions that’s why I just provided information of Ann only
