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Jack, aged 44, is a widower following the recent death of his wife. He has just cashed in a substantial share portfolio and is now considering what to do with the proceeds.
Personal pension contribution:
The only pension contributions which Jack has made previously is the gross amount of £500 per month which he saves into a personal pension scheme. Jack has continued to make these contributions throughout the tax year 2022-23Although Jack has been saving into this scheme for the previous 15 years, he is concerned that he is not saving enough for his retirement.
Jack therefore wants to make the maximum possible amount of additional gross personal pension contribution for the tax year 2022-23, but only to the extent that the contribution will attract tax relief at the higher rate of income tax.
Jack is self-employed, and his trading profit for the tax year 2022-23 is £100,000. He does not have any other income and expects to make the same level of profit in future years.
Q:
(i) Advise Jack of the amount of additional gross personal pension contribution which he can make for the tax year 2022-23 which will benefit from tax relief at the higher rate of income tax, and explain why this is a tax efficient approach to pension saving.Please advise me on how to proceed with this question because what I understand is that we can bring foward unused Annual Allowances from the past 3 tax years which amounts to 102000((40000-6000)×3) and 34000 from the current year as well which gives a total of 136000. But the answer given in the rev kit shows an answer of 43,730. How did they arrive at this answer,please explain ma’am as I do not understand the answer provided by the rev kit.
Many thanks.
Hi
You are right about bring in the AA.
You also need to remove the amount he has contributed into the scheme every year.
I cannot see how the answer is 43,730.
What explanation came with the answer?
And where did you get the question from?I got it from the current edition BPP Revision Kit mock exam 3, question 31.(Dec 2016 exam updated to FA 2022)
Explanation provided:
“For 2022/23 , (100000-12570-(37700+(500*12)))=43730 of Jack’s income is currently taxed at the higher rate of income tax.
This is less than the available annual allowance of (40000*4-(500*12)*4)= 136000 for 2022/23Restricting the amount of personal pension contributions to the amount qualifying for tax relief the higher rate will minimize the cost of pension saving because each 100 saved will only effectively cost 60( 100 less 40% tax relief)”
So we worked out the AA to be 136,000 which is correct and answers the first part of the question. But the question actually asks……
“the amount of additional gross personal pension contribution which he can make for the tax year 2022-23 which will benefit from tax relief at the higher rate of income tax, and explain why this is a tax efficient approach to pension saving.”
And thats why they calculated £43,730 – i.e. the amount which qualify for relief at HR
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