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Only pension contribution which Jack made previously are gross amount of 500 per month which he saves into personal pension scheme. Jack has continued to make these contributions throughout tax year 18/19. Although Jack has been saving into this scheme for previous 15 years, he is concerned that he is not saving enough for his retirement. Jack therefore wants to make max possible amount of gross ppc for 18/19 but only to extent that contribution will attract tax relief at higher rate of income tax. Jack is self employed. His trading profits is 100000 for 18/19 and previous 5 years. He expects to make same level of profits in future years.
Advise jack of amount of additional gross ppc he can make for 18/19 which will benefit from tax relief at higher rate of income tax and explain why this is efficient approach to pension saving
Sir in this question, I know that 47650 of Jack’s income is currently taxable at higher rate. I also know that total allowance available for 18/19 is 136000 (i.e 34000 for 18/19, 15/16, 16/17 and 17/18)
But I do not understand that what is asked in this question and how to proceed further in this question. Can you please explain me?
Having done the calculations you have – work through the answer given and then – if needed – tell me what part of the answer you didn’t understand
1) Here do we have to compare total available annual allowance of 136000 with amount of Jack’s income that is currently taxable at higher rate (i,e 47650)?
2) If yes then secondly after comparing what we have to do?
3) Thirdly answer says that restricting amount of personal pension contributions to the amount qualifying for tax relief at higher rate will minimize the cost of pension saving because each $100 saved will effectively only cost $60.
I do not understand meaning of this paragraphHye!
Well, I am sorry I don’t know where to post it but I wanted to say special thanks to Tax Tutor. I have given paper in the last December attempt and secured 96.
Thanks again for your exceptional teaching and I hope you get the message.Hi Noman – firstly thank you for taking the time to write and secondly many congratulations on your fantastic result – your amazing mark says a lot more about you than it does of me and I wish you every success in your future exams and in your future career!
ps you will find a forum for exam feedback through the main ACCA icon – you may well be able to give advice to other students!maxpopper
please just copy out the answer to this question and then I will seek to explain it to you
In respect of the 3rd point – it is simply saying that a higher rate taxpayer effectively gets 40% tax relief (higher rate relief) on the GROSS contribution paid. Therefore a gross contribution of £10,000 would after tax relief at 40% have a net cost to the taxpayer of £6,000.
Basic rate relief is given at source so a net payment of £8,000 would generate a gross contribution into the taxpayer’s pension fund of £10,000.
As a higher rate taxpayer the basic rate band limit would then be extended by £10,000 meaning that £10,000 of income that would have been taxed at 40% is now taxed at only 20% saving a further £2,000 of tax and thus reducing the nest cost from the amount paid of £8,000 down to £6,000Hi,
I struggled with this Q to which is also in the most recent BBP revision kit. I understand the bit about getting the higher rate relief on the gross contribution paid of 40%.
I’m struggling to understand why its the optimal amount. So for example, if Jack paid contributions that were over the amount of income that qualified for tax relief at the higher rate then what would happen in this situation?
Firstly I would adivse you to watch the lecture and read the manual chapter on pensions as it gives a clear response to your question
Thanks for the suggestion. I have read the notes and already watched the lecture but still a bit unclear. My thinking so far,
Jack has plenty remaining AA available so increasing the contribution won’t result in an AA charge
He is restricting his contribution to the amount falling into the higher rate band (saving tax at 40% – 20% at source and 20% through extension of the BRB).
So if he invests more than what falls into the higher rate band then he is no longer taking tax that would be taxed at 40% into the 20% bracket.
But what would then happen with the additional amount (assuming its still lower than the available AA)? I’m not sure what relief he would get for the additional contribution?
I hope I’m, making sense!
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