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Chloe lets out unfurnished property and has a property business profit of 26630. Also made personal pension contributions of 8200 gross amount.
Why is letting out unfurnished property not considered relevant earnings? The exam kit answer says it.
And why is the maximum personal pension contribution 3600?
And that 3600 × 80% being payed at source? Whyre we paying net of tax on 3600?
🙁 🙁 🙁Hi gothrogue,
The study text confirms that for relevant earnings, it will include taxable trading profits, employment income and furnished holiday lettings but not investment income. Things which aren’t included will be income like dividend income, or property income.
With property income, the only way it is included as relevant earnings, is if it meets the criteria for a commercially let Furnished Holiday Letting (FHA).
If it does qualify as an FHA, it remains assessable as property income, but the profits are treated as arising from a seperate trade, and is calculated seperately from other rental properties. Another advantage is that it will be treated as relevant earnings, unlike the income from other properties.
Chloe will only receive tax relief on contributions, which are the the lower of:
(1) Total gross pension contributions paid (for Chloe this is £8,200)
(2) Maximum annual amount**The maximum annual amount is the higher of:
– £3,600
– 100% of the individual’s ‘relevant earnings’, chargeable to income tax in the tax year.I see from the question that Chloe doesn’t have any other income (therefore no income for relevant earnings) so 100% of her relevant earnings is 0. The figure of £3,600 is higher than this, so £3,600 is used.
Comparing (1) £8,200 to (2) £3,600, Chloe can only claim relief on the lower of this, so she can only claim for £3,600.
£3,600 is not what she paid net of tax. £3,600 is what she can claim tax relief for, after making a contribution of £8,200, and then assessing her maximum relied using the above rules.
The textbook mentions that basic rate tax relief is automatically given by deduction at source when contributions are paid, as an individual makes contributions net of the basic rate of income tax (20%)
HMRC pay the 20% tax relief to the personal pension scheme.
I hope this has helped you a bit 🙂
@sapphire16 said:
Hi gothrogue,The study text confirms that for relevant earnings, it will include taxable trading profits, employment income and furnished holiday lettings but not investment income. Things which aren’t included will be income like dividend income, or property income.
With property income, the only way it is included as relevant earnings, is if it meets the criteria for a commercially let Furnished Holiday Letting (FHA).
If it does qualify as an FHA, it remains assessable as property income, but the profits are treated as arising from a seperate trade, and is calculated seperately from other rental properties. Another advantage is that it will be treated as relevant earnings, unlike the income from other properties.
Chloe will only receive tax relief on contributions, which are the the lower of:
(1) Total gross pension contributions paid (for Chloe this is £8,200)
(2) Maximum annual amount**The maximum annual amount is the higher of:
– £3,600
– 100% of the individual’s ‘relevant earnings’, chargeable to income tax in the tax year.I see from the question that Chloe doesn’t have any other income (therefore no income for relevant earnings) so 100% of her relevant earnings is 0. The figure of £3,600 is higher than this, so £3,600 is used.
Comparing (1) £8,200 to (2) £3,600, Chloe can only claim relief on the lower of this, so she can only claim for £3,600.
£3,600 is not what she paid net of tax. £3,600 is what she can claim tax relief for, after making a contribution of £8,200, and then assessing her maximum relied using the above rules.
The textbook mentions that basic rate tax relief is automatically given by deduction at source when contributions are paid, as an individual makes contributions net of the basic rate of income tax (20%)
HMRC pay the 20% tax relief to the personal pension scheme.
I hope this has helped you a bit 🙂
Omg thank you so much for taking the time to explain it thoroughly! You wrote out quite a bit sorry. But yes it has clarified some muddled bits up. 🙂
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