The BPP 2015/16 book sets the following question, with the following answer. I don't seem to understand it, as provided by the answer I put myself. Please correct me where I am wrong:
Question: George was born in 1956. He had employment income of £45,000 for 2014/15. He paid £39,200 (net) into his personal pension scheme in 2014/15. This was the first year in which he had been a member of a registered pension scheme.
Required
Calculate George's income tax payable.
Answer:
George 2014/15
Employment income 45,000
Less personal allowance (10,000)
Taxable income 35,000
His income tax liability will be:
£35,000 ? 20% 7,000
Tutorial note
As George's earnings are only £45,000 for 2014/15 the maximum net contribution entitled to tax relief would be £45,000 x 80% = £36,000. Therefore the remaining £3,200 (£39,200 – £36,000) would not qualify for tax relief. Note the basic rate limit is increased by £45,000, but the taxable income falls below this limit.
My answer:
Employment Income 45,000
AA Charge (W1) 9,000
Total Income 54,000
Less PA (10,000)
Taxable Income 44,000
44,000 (w2) @ 20% = 8800
w1 39200 * 100/80 = 49,000
less Annual Allowance (40,000)
AA Charge 9,000
w2 Higher rate band = 31865+49000 = 80865
Can someone please explain to me why I am wrong?
Ask the Tutor ACCA TX-UK
Excess Pension contribution (Annual Allowance)
Okay I've noticed that because gross contribution is 49,000 and Income is only 45,000, that 4000 gross (or 3200 net as the answer puts it) should not qualify for tax relief.
But why is there no AA charge on the 5,000 between the qualifying 45,000 and the 40,000 Annual Allowance?
Well done for then picking up that only 45,000 of the 49,000 gross contribution would attract tax relief - this was the only mistake I think you made and hence as you have corrected it above the AA charge should be 5,000 as the 45,000 exceeds the 40,000 limit. The 40,000 limit cannot be increased for unused AA b/f as of course George had not previously been a member of a pension scheme.
I then agree with you that BPP should have shown a £5,000 AA charge (unless we've both missed something here!!).
It's possible that this is an updating error from the previous year's text where the AA would have been £50,000 and the £45,000 would have been within this limit? Is there an email address provided by BPP where you can query their answer?
Thank you for the reply, much appreciated.
I will definitely be in contact with BPP and see if they can clear up the confusion, but hopefully you are correct that it is just an updating error.
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