- This topic has 6 replies, 3 voices, and was last updated 1 week ago by Tax Tutor.
- November 16, 2020 at 1:11 pm #595184usamaijz
Question : 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 used it to make contribution of £42,000 (gross) into personal pension scheme in November 2019.
According to my understanding her maximum contribution for the year 19/20 would be higher of £3600 or relevant earnings of £38,650. Her input is £42000 , paying an extra £3350 would generate a tax charge when calculating tax liability but in the answer section the income tax liability is just £5,230 ( Trading income £38,650- PA £12500 =26,150 x 0.2 = £5,230 )
What am i missing here ? I have read the notes again but did i miss something ?November 18, 2020 at 11:05 am #595423Tax TutorKeymaster
Can you provide me with all the information in the question – the requirement and the answer please and I’ll try to explainNovember 18, 2020 at 11:47 am #595431geniuz999
..November 18, 2020 at 11:49 am #595432usamaijz
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 26,150
Income 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 onlyNovember 19, 2020 at 6:00 pm #595650Tax TutorKeymaster
Thank you for providing me with the additional information and it is regrettable that the answer did not provide a suitable explanation to what is a correct numerical answer.
The problem you have here is confusing what are 2 separate issues – firstly as both you and the answer correctly state only £38,650 of the total pension input will qualify for tax relief as it is restricted to the level of net relevant earnings ie HMRC will not pay into Ann’s pension scheme 20% of the gross input of £42,000 but this will be limited to 20% of the restricted figure of £38,650.
The additional tax charge you refer to is the Annual Allowance (AA) charge which applies when the gross contribution eligible for tax relief exceeds the AA limit for the tax year and as that amount of £38,650 does not exceed the AA limit of £40,000, there is no AA charge for the tax year.November 20, 2020 at 8:01 pm #595820usamaijz
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 .November 21, 2020 at 1:06 pm #595915Tax TutorKeymaster
Sorry but no, this isn’t what I am saying.
The issue of whether or not the taxpayer is a higher rate taxpayer is irrelevant as in this question he clearly is only a basic rate taxpayer.
The key point here is that there is no AA charge as the amount of the gross PPC paid that QUALIFIES for tax relief IS ONLY £38.650 – NOT £42,000.
As this amount does not exceed the AA limit of £40,000 there is therefore no AA charge.
- You must be logged in to reply to this topic.