i

Student
Notes
ACCA Paper F6
Taxation (UK) FA 2011
For exams in June 2012 and December 2012
To be used with the BPP Study Text for exams in June 2012 and
December 2012 (FA 2011 edition)

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First edition 2009
Fourth edition 2012
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Introduction iii
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chapter 1
INTRODUCTION TO THE UK TAX SYSTEM
page 1
chapter 2
THE COMPUTATION OF TAXABLE INCOME AND
THE INCOME TAX LIABILITY
page 11
chapter 3
EMPLOYMENT INCOME
page 23
chapter 4
TAXABLE AND EXEMPT BENEFITS.
THE PAYE SYSTEM
page 31
chapter 5
PENSIONS
page 41
chapter 6
PROPERTY INCOME
page 49
chapter 7
COMPUTING TRADING INCOME
page 55
chapter 8
CAPITAL ALLOWANCES
page 61
chapter 9
ASSESSABLE TRADING INCOME
page 71
chapter 10
TRADING LOSSES
page 77
chapter 11
PARTNERSHIPS AND LIMITED LIABILITY
PARTNERSHIPS
page 85
chapter 12
NATIONAL INSURANCE CONTRIBUTIONS
page 91
chapter 13
COMPUTING CHARGEABLE GAINS
page 97

chapter 14
CHATTELS AND THE PRINCIPAL PRIVATE
RESIDENCE EXEMPTION
page 113
chapter 15
BUSINESS RELIEFS
page 121
chapter 16
SHARES AND SECURITIES
page 131
chapter 17
SELF-ASSESSMENT AND PAYMENT OF
TAX BY INDIVIDUALS
page 139
chapter 18
INHERITANCE TAX
page 151
chapter 19
TAXABLE TOTAL PROFITS
page 165
chapter 20
COMPUTING THE CORPORATION TAX
LIABILITY
page 177
chapter 21
CHARGEABLE GAINS FOR COMPANIES
page 183
chapter 22
LOSSES
page 193
chapter 23
GROUPS
page 199
chapter 24
OVERSEAS MATTERS FOR COMPANIES
page 205
chapter 25
SELF-ASSESSMENT AND PAYMENT OF
TAX BY COMPANIES
page 213
chapter 26
AN INTRODUCTION TO VAT
page 219
chapter 27
FURTHER ASPECTS OF VAT
page 235

iv


1
chapter 1
INTRODUCTION
TO THE UK TAX
SYSTEM
This chapter contains background knowledge which
underpins the whole of your later studies of taxation.


THE OVERALL FUNCTION AND PURPOSE OF
TAXATION IN A MODERN ECONOMY
DIFFERENT TYPES OF TAXES
PRINCIPAL SOURCES OF REVENUE LAW AND
PRACTICE
TAX AVOIDANCE AND TAX EVASION


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Tax avoidance
and tax evasion
Principal sources of
revenue law and practice
Different types
of taxes
The overall function and purpose
of taxation in a modern economy
Economic factors
Taxation represents a withdrawal from the UK economy. Tax policies can be used to encourage and
discourage certain types of activity.
5 saving
5 charitable donations
5 entrepreneurs
5 investment in plant and machinery
Encourages
4 smoking
4 alcohol
4 motoring
Discourages
Social factors
Tax policies can be used to redistribute wealth
Direct taxes tax only those who have these resources
Indirect taxes discourage spending
Progressive taxes target those who can afford to pay
Environmental factors
Taxes may be levied for environmental
reasons
Climate change levy
Landfill tax




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1: Introduction to the UK tax system 3
Context
When a government is setting its taxation policies it will consider various factors.

Learning example 1.1
Name the three factors that may affect the UK governments tax policies.
Solution 1.1


4








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1: Introduction to the UK tax system 5
Context
There are a large number of taxes in the UK. Some are collected directly from the taxpayer,
although often someone else actually pays the tax to HMRC, eg income tax and NIC on employment
income is paid directly from the employees salary to HMRC by the employer. Others, such as VAT,
are charged and collected by a middle man.
Learning example 1.2
How would you explain the difference between a direct and an indirect tax?
Solution 1.2

6

HM Revenue and Customs
Structure of the UK Tax system
Tax avoidance
and tax evasion
Principal sources of
revenue law and practice
Different types
of taxes
The overall function and purpose
of taxation in a modern economy
Treasury
Officers of Revenue and Customs
Receivables management officers
Revenue and Customs Prosecutions Office
Appeals heard by
First Tier Tribunal (most cases)
Upper Tribunal (complex cases)
Sources of revenue law and practice
Statute
Statutory instrument
Law
Statements of practice
Extra-statutory concessions
Explanatory leaflets
Business economic notes
Revenue and Customs Brief
Internal Guidance (HMRC manuals)
Working Together
Practice




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1: Introduction to the UK tax system 7
Context
There are a number of sources of tax rules. Only some of them have the force of law, while others
provide guidance, explanations and interpretations of existing law.
Learning example 1.3
Which of the following have the force of law?
(a) Extra Statutory Concessions
(b) Finance Act 2011
(c) Income Tax Act 2007
(d) HMRC manual on employment income
(e) Statement of Practice
(f) Case law
Solution 1.3


8

Tax avoidance
and tax evasion
Principal sources of
revenue law and practice
Different types
of taxes
The overall function and purpose
of taxation in a modern economy
Tax evasion Tax avoidance
Tax evasion consists of seeking to mislead HMRC
by either:
Suppressing information, or
Providing deliberately false information.
Tax avoidance includes any legal method of
reducing your tax burden, eg
Using tax shelters, or
Participating in schemes designed to minimise
tax.
Legal
Illegal




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1: Introduction to the UK tax system 9
Context
Taxpayers are allowed to organise their tax affairs in the most efficient way for themselves.
However, they need to ensure that they stay within the law.
Learning example 1.4
Which of the following is a legitimate means of minimising a taxpayers tax liability?
(a) Tax avoidance
(b) Tax evasion
Solution 1.4


10

Reinforcement

Study Text Chapter 1

Scan and note section 4 on tax avoidance and evasion. This is arguably the
most examinable part of the chapter. Note particularly the material in section
4.4 on the need for an ethical and professional approach

Attempt Quick Quiz


11
chapter 2
THE COMPUTATION OF
TAXABLE INCOME AND
THE INCOME TAX
LIABILITY
The computation of income tax is a key exam topic.
This chapter deals with the income tax computation
which draws together all of the taxpayers income. The
following chapters will cover the rules for computing
taxable income from each different source.

BASIC PRINCIPLES
CHARGEABLE/EXEMPT INCOME
DEDUCTIBLE INTEREST
COMPUTING INCOME TAX
JOINTLY HELD PROPERTY


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Personal allowance
Individual aged < 65
7,475 for 2011/12
Restrict if adjusted
net income > 100,000
by 1 for each 2 excess
(nil if > 114,950).
Individual aged > 65
9,940 age 65-74 for 2011/12
10,090 age 75+ for 2011/12
Restrict if adjusted
net income > 24,000
by 1 for each 2 excess
to minimum 7,475
(unless income > 100,000, then
restrict as for standard allowance)
Aggregation of income
Jointly held
property
Deductible
interest
Basic
principles
Computing
income tax
Chargeable/
Exempt income
A basic principle of income tax is the aggregation of
income. All of an individuals income for a tax year is
added up in a personal tax computation as total income.
An individual who is resident in the UK is taxable on his worldwide income.
Resident
An individual is resident in the UK if he:
Is present in the UK for 183 days or more, or
Makes visits to the UK averaging 91 days per year or
more over four consecutive years.
Taxable income
Net income minus personal allowance.
Adjusted net income
Net income less grossed up gift aid/personal pension
contributions.
Net income
Total income minus deductible interest and trade losses.
Tax liability
The amount of tax charged on income.
Tax payable
The balance of the tax liability still to be paid.











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2: The computation of taxable income and the income tax liability 13
Context
The aim is to produce a neat and complete income tax computation in the exam. Dont forget the
basics!
Learning example 2.1
Kate (aged 35) has net income of 105,000 in 2011/12.
What is the personal allowance to which Kate is entitled in 2011/12?
Solution 2.1



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Chargeable/
Exempt income
Jointly held
property
Deductible
interest
Basic
principles
Computing
income tax
Exempt income
Types of income Income taxed at source
The main types of income for individuals are:
Profits of trades, professions and vocations
Income from employment and pensions
Property income
Savings and investment income, including interest
and dividends
Many sorts of investment income are taxed at source:
for every 100 of income, the individual only receives
80 of interest or 90 of dividends from UK companies.
The taxable income is both cases is 100, but credit is
given for the tax suffered.
Premium bond prizes
Income from Individual Savings Accounts (ISAs)
Returns on National Savings Certificates
Leave exempt income out of
personal tax computations.
This applies to bank and
building society interest.
Tax credits on
dividends can be offset
to reduce a tax bill but
are never repaid to a
taxpayer. Tax credits on
other taxed income can
be repaid.




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2: The computation of taxable income and the income tax liability 15
Context
It is important to distinguish between the different types of income and whether the income is
even taxable or not.
Different rules and rates apply to the different types of income (as we shall see later).
Learning example 2.2
Simon receives bank interest of 1,860 and building society interest of 3,420 during the year. He
also received dividends of 810.
Show how much he should include for each type of income in his income tax computation and the
tax credit for each, where relevant.
Solution 2.2



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Jointly held
property
Deductible
interest
Basic
principles
Computing
income tax
Chargeable/
Exempt income
Deductible interest
Interest paid on a particular type of loan is
deducted from total income to compute net
income.
For purchase of an interest in a partnership, or
For purchase of plant and machinery for
partnership (purchase must be by partner), or
For purchase of plant and machinery for use in
employment (purchase must be by employee)




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2: The computation of taxable income and the income tax liability 17
Context
Total up all income from all sources first. Then see if any deductions are available. The only ones
you will see in the exam are deductible interest and trading losses (see later).
Learning example 2.3
Jonah, aged 45, recently became a partner and received partnership trading income of 47,000.
During the year he paid 10,750 of interest on his mortgage for his home and 800 interest on a
loan he had taken out for funds he was required to provide to join the partnership.
He received no other income during the year.
What is his taxable income?
Solution 2.3


18

Computing
income tax
Jointly held
property
Deductible
interest
Basic
principles
Chargeable/
Exempt income
If non-savings income does not exceed the starting rate limit, then the savings income is taxed at the starting
rate (10%) up to the starting rate limit: 2,560 for 2011/12.
Total non-savings, savings and dividend income separately.
Deduct deductible interest, losses and the personal allowance
from non-savings income first, then savings income then
dividend income.
Tax non-savings income, then savings income, then dividend
income.
There is only one set of rate bands to cover all
types of income.
Broadly interest
At 20%, 40% and 50%
At 10%, 20%, 40% and 50%
At 10%, 32.5% and 42.5%
Computing income tax
1
2
3
The basic rate limit and higher rate limit
must be increased by the gross amount of
any gift aid donation/personal pension
contribution (amount paid 100/80).




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2: The computation of taxable income and the income tax liability 19
Context
Once you have added all income together you need to be able to apply the correct tax rates.
These depend on the type of income, non savings, savings or dividends, as different rates apply to
each type.
Learning example 2.4
Following on from the example of Jonah (above), how much is his tax payable?
Solution 2.4







Learning example 2.5
Dennis receives interest of 14,300 and dividends of 900 during 2011/12. He has no other
income.
What is his tax payable or repayable?
Solution 2.5



20











Jointly held
property
Deductible
interest
Basic
principles
Computing
income tax
Chargeable/
Exempt income
Jointly held property
Spouses and civil partners often hold property
jointly, sometimes in unequal proportions.
For tax purposes treat the income received from
such property as shared equally.
If the actual interests in the property are unequal,
spouses/civil partners can declare this to HMRC
and income is then shared in actual proportions.
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2: The computation of taxable income and the income tax liability 21
Context
You may see a bank account held jointly in the exam. You need to know how to deal with any
income (ie in this case, interest) received.
Learning example 2.6
Mr and Mrs Smith receive interest of 12,000 from their bank account, which is held in both of their
names. Mrs Smith has only put a few hundred pounds into the account since the account was set up
as she does not work.
Mr Smith also receives the following income personally:
Salary of 60,000 (from which he gives his wife 500 a month towards housekeeping money)
Dividends of 1,650
How much income should Mr Smith include in his income tax computation?
Solution 2.6


22

Reinforcement

Study Text Chapter 2

Expand notes on the personal allowance, in particular the age allowance (para
6.2), and also on computing the tax payable (paras 7.1 7.3)

Attempt Quick Quiz

Attempt all examples in the chapter and then attempt Question 1 (22 mins),
Question 2 (27 mins) and Question 3 (27 mins) in the exam question bank

Read the article Finance Act 2011 written, in part, by the Paper F6 examiner,
David Harrowven, on the ACCA website at:
http://www.accaglobal.com/pubs/students/publications/student_accountant/archi
ve/sa_sept11_FA2011.pdf

David Harrowven has repeatedly said that it is vital that students read his Finance
Act article.


23
chapter 3
EMPLOYMENT
INCOME
Although this exam is mainly computational you may
be asked to describe the difference between
employment and self-employment.

You also need to be aware of the final two topics in this
chapter: when employment income is assessed and the
deductions that you may be able to make in computing
the amount of assessable employment income.

EMPLOYMENT AND SELF-EMPLOYMENT
BASIS OF ASSESSMENT
ALLOWABLE DEDUCTIONS


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Allowable
deductions
Employment and
self-employment
Basis
of assessment
Whether a contract is a contract of service or a
contract for services will depend on a number of
factors.
Employed or self-employed
An employee works under a contract of service and
a self-employed person under a contract for services.
The degree of control exercised over the
person doing the work
Whether he must accept further work
Whether the other party must provide further work
Whether he provides his own equipment
Whether entitled to benefits eg pension
Whether he hires his own helpers
What degree of financial risk he takes
What degree of responsibility for investment
and management he has
Whether he can profit from sound management
Whether he can work when he chooses
The wording used in any agreement between
parties
Factors




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3: Employment income 25
Context
Employment income and trading income are calculated using different rules. It is therefore
essential to determine whether an individual is employed or self employed.
Learning example 3.1
Jeremy has a 6 month contract with YouKnow Plc providing consultancy services.
He works on their premises from Monday to Friday but provides his own laptop.
He does not receive sickness or holiday pay. Jeremy is paid a monthly amount for his services.
Is Jeremy likely to be treated as an employee of YouKnow Plc or as self employed?
Solution 3.1









26








Allowable
deductions
Employment and
self-employment
Basis
of assessment
Earnings are taxed in the year in which they are
received.
Employees/directors are taxed on income from
the employment:
cash earnings
benefits
Employment income
The general definition of the date of receipt is
the earlier of:
the time payment is made
the time entitlement to payment arises
Directors are deemed to receive earnings on the earliest
of the following:
the time given by the above general rule
the time the amount is credited in the companys
accounting records
the end of the companys period of account (if the
amount has been determined by then)
when the amount is determined, if this after the end
of the companys period of account
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3: Employment income 27
Context
We must determine exactly when earnings are received so that we only tax earnings received in
the tax year.
Learning example 3.2
Stephanie receives an annual salary of 32,000.
Stephanie has the use of a company car. Her employers payroll department has advised her that
the cash equivalent of the company car benefit is 1,275.
She also received the following performance related bonuses:
15 July 2010 5,500
15 January 2011 2,800
15 July 2011 6,200
15 January 2012 850
What are her earnings for 2011/12?
Solution 3.2



28


Allowable
deductions
Employment and
self-employment
Basis
of assessment
Expenses specifically deductible against earnings:
Insurance premiums to cover directors and employees
liabilities (and payments to meet those liabilities)
Subscriptions to relevant professional bodies
Qualifying travel expenses costs the employee incurs
travelling in the performance of his duties or/and travelling
to or from a place attended in the performance of duties
Contributions (within limits) to a registered occupational
pension scheme
Payments to charity under a payroll deduction
scheme
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4
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Exam focus
If you have to decide whether an expense
is deductible, put yourself in HMRCs
position and try to find an argument
against deducting it. If you can find a
specific argument, the expense is probably
not deductible.
The strictness of this test has been
emphasised in many cases
The general rule is that expenses can only be deducted from
earnings if they are incurred wholly, exclusively and necessarily
in performing the duties of the employment.
Normal commuting does not qualify
Relief is available for expenses incurred by an
employee working at a temporary location on
a secondment of 24 months or less
If a mileage allowance is paid relief is
available for any shortfall of allowance actually
paid over statutory mileage allowance




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3: Employment income 29
Context
Employees can only deduct expenses in very limited circumstances, which is one of the reasons why
individuals prefer to be treated as self employed where possible. Where a deduction is possible, the
employees employment income figure in the tax computation is reduced.
Learning example 3.3
Sylvia is employed as a bookkeeper by Grant Ltd. She has the following expenses:

Annual membership dues (International Association of Bookkeepers) 250
New suit for work 180
Occupational pension contribution 360
Commuting costs 1,500
Travel to clients 95
What are the total expenses that can Sylvia deduct from her employment income?
Solution 3.3

30

Reinforcement

Study Text Chapter 3

Expand notes on travel expenses (para 3.2), other expenses (para 3.3) and
mileage allowances (section 4)

Attempt Quick Quiz

Work through all the questions in the chapter and then attempt Question 4 in
the exam question bank (27 mins). Although the focus in the exam is on
computational questions, written questions may still come up as part of a
longer question.


31
chapter 4
TAXABLE AND
EXEMPT BENEFITS.
THE PAYE SYSTEM
Benefits are often examined so it is vital that you are
able to calculate the taxable value of benefits provided
to employees. You also need to be aware of the
benefits that are exempt from tax.

The deduction of tax from employment income through
the PAYE system is less frequently examined, but it is
still important.

TAXABLE BENEFITS
EXEMPT BENEFITS
THE PAYE SYSTEM


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Meal vouchers exempt
up to 15p per day
Vouchers
General business expenses
The PAYE
system
Exempt
benefits
Taxable
benefits
Taxed on most employees
Except excluded employees (earn less
than 8,500 p.a. and not director) only
taxable on certain benefits
P11D employees are employees who are
not excluded employees.
Cash vouchers
Credit token
Non-cash vouchers
Taxable on all employees (cost of providing benefit)
Reimbursed expenses taxable on
employees (not excluded employees).
May make deduction claim.
Non-cash benefits
including excluded employees.




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4: Taxable and exempt benefits. The PAYE system 33
Context
Whenever an employer provides something other than cash to an employee you need to think
about whether there is a taxable benefit. While P11D employees are taxable on any benefit they
receive, apart from certain exempt benefits (see next section), excluded employees are
generally only taxable on vouchers (which include credit cards) and living accommodation provided
by their employer.
Learning example 4.1
Harvey is provided with a house by his employer, who had acquired the house at a cost of 130,000
on 1 April 2005 and spent 10,000 on extending the property on 1 September 2008. Harvey moved
into the property on 1 July 2008.
The annual value of the house for 2011/12 is 3,250. Harvey pays rent of 300 each month to his
employer for the use of the house.
What is Harveys total benefit in respect of the house for 2011/12?
Solution 4.1



34
Loans
Cars
The PAYE
system
Exempt
benefits
Taxable
benefits
Annual taxable benefit for the private use of a car is (price of car
capital contributions) %.
Cars emitting 75g/km or less = 5%
Cars emitting CO
2
between 76120g/km = 10%.
Cars emitting between 121125g/km = 15%. Percentage
increases by 1% for each 5g/km (rounded down) up to 35%.
Percentage increased by 3% for diesel engined cars (not
above max 35%).
Benefit scaled down on a time basis, if car not available all
year. Benefit then reduced by any contribution by employee for
private use.
Fuel for private use is charged as percentage of base figure
(18,800, 2011/12). Same percentage as car benefit. No
reduction for partial reimbursement by the employee.
Loans of over 5,000 give
rise to taxable benefits equal
to the difference between the
actual interest and interest at
the official rate.
A write-off of a loan gives rise
to a taxable benefit equal to
the amount written off.
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Only taxed on
P11D employees
Other benefits
In general, if an asset is made available for private use, the
annual taxable benefit is 20% of the market value when the
asset was first provided, less any employee contribution.
If the asset is subsequently given
to the employee the taxable
benefit is the higher of:
(i) original MV less amounts
already taxed
(ii) market value at date of gift
less any employee contribution.
Taxable value of other benefits charged on
employees other than excluded employees
Excluded employees taxed only on second-hand
value as cash earnings
Cost of provision of benefit less any
amount made good by employee
Not used if asset is bicycle
Private use of asset




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4: Taxable and exempt benefits. The PAYE system 35
Context
The general rule is that the value of the benefit to include in the employees employment income is
the cost to the employer (or second hand value for excluded employees). However, there are
specific rules for certain assets, which, of course, are the most examinable!
Learning example 4.2
Keith has a company car (list price 25,000) throughout the tax year. The car has CO
2
emissions of
188g/km. His employer pays for all of his private diesel.
What is Keiths total taxable benefit?
Solution 4.2







Learning example 4.3
At 6 April 2011 a cheap loan of 30,000 was outstanding to a director, who repaid 20,000 on
6 December 2011. The remaining balance of 10,000 was outstanding at 5 April 2012. Interest paid
during the year was 200.
What is the benefit under both methods for 2011/12, assuming that the official rate of interest was
4%?
Solution 4.3


36


The PAYE
system
Exempt
benefits
Taxable
benefits
Exempt benefits
Loans of up to 5,000
Meal vouchers of up to 15p per day
Entertainment and gifts provided by a third party for an employee
by reason of his employment
Long service awards of up to 50 per year of service
Job related accommodation
Workplace nurseries
Other childcare provided by employer
Recreational/sporting facilities available to employees generally
Works buses and mini-buses
Bicycles provided for cycling to work
Parking places at or near work
The cost of gifts from any one source
must not exceed 250 per tax year
The award must be a non-cash award and
the employee must have worked at least
20 years
Limited to 55/28/22 per week for
basic/higher/additional rate employee
A minibus must have a seating capacity of
9 or more. A works bus must have a
seating capacity of 12 or more




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4: Taxable and exempt benefits. The PAYE system 37
Context
Employers can provide certain benefits to their employees with no tax (or NIC) consequences
for the employee. These are clearly a valuable part of an employees remuneration package.
Learning example 4.4
Which of the following are exempt benefits?
(a) Mileage allowance paid at 55p per business mile
(b) Staff party cost 50 per head
(c) Car parking space at work
(d) 5,000 removal expenses
(e) Private medical insurance
Solution 4.4

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The PAYE
system
Exempt
benefits
Taxable
benefits
The PAYE system collects tax from employees each payday, with the intention that over a tax year, the correct
total of tax due will be collected.
Routine each payday
Add the gross pay to the running total of gross
pay for the tax year
Use the employees PAYE code to work out the
amount of cumulative gross pay which is tax free
Compute tax on the balance
Deduct the tax already paid. The difference is the
tax to deduct on this payday
The employer must pay over the tax deducted up
to the 5th of each month by the 19th of the month.
PAYE code numbers
Year end returns
Quarterly payment is allowed if the average
monthly total of tax and NICs is less than 1,500
PAYE settlement agreements are arrangements under
which employers settle employees income tax liabilities
on certain benefits and expense payments.
L: Code with basic personal allowance
P: Code with age 65-74 allowances
Y: Code with age 75+ allowance
Following the year end the employer must submit:
Form P14
Form P35
Form P11D/P9D by 6 July
By 19 May
}
Payment
PAYE settlement agreements




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4: Taxable and exempt benefits. The PAYE system 39
Context
Employers must use the PAYE system to collect income tax (and NIC) from their employees and
pay it to HMRC. HMRC will issue each employee with a PAYE code which the employer then uses to
ensure the correct amount of tax (and NIC) is deducted throughout the year. This is quite an
administrative burden for employers. Smaller businesses may pay their PAYE quarterly.
Learning example 4.5
Terry, age 35, is married to Fiona. He earns a salary of 18,000 and receives benefits with a
taxable value of 345. He had underpaid tax of 33 to be collected through his PAYE code.
What is Terrys PAYE code for 2011/12?
Solution 4.5

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Reinforcement

Study Text Chapter 4

Expand notes on the list price of a company car (para 3.3.3), reductions in car
and fuel benefit (paras 3.3.4 and 3.4.3), vans (para 3.5), qualifying beneficial
loans (para 3.6.4), exempt benefits (section 4), P11D dispensations (section 5)
and PAYE penalties (para 6.6)

Attempt Quick Quiz

Attempt all examples in the chapter and then attempt Question 5 in the exam
question bank (27 mins)


41
chapter 5
PENSIONS
A single regime applies to all pensions, whether
occupational or personal. However, there are different
methods of giving tax relief.
Pension contributions are a tax efficient way of saving
for retirement.

TYPES OF PENSION SCHEME
CONTRIBUTIONS TO PENSION SCHEMES
RECEIVING BENEFITS FROM PENSION
ARRANGEMENTS


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Contributions to
pension schemes
Receiving benefits from
pension arrangements
Types of
pension scheme
Pension Schemes
Occupational Pension Scheme Personal Pension Scheme
Employees only
All individuals
Defined Benefits Money Purchase
Pension based on
earnings and
length of service
No guarantee of amount
of pension. Investments
are used to 'build up' fund




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5: Pensions 43
Context
A pension is a tax efficient way of saving for the future as there many tax reliefs associated
with investing in a pension.
Many employers run their own pension scheme for their employees, who can contribute to
that as well as, or instead of, contributing to a personal pension.
Self employed individuals (and those with no earnings) obviously cannot contribute to an
occupational pension. Instead they may pay into a personal pension.
Learning example 5.1
Franks wife works for Planted Ltd, which runs its own occupational pension scheme. Frank runs his
own business.
To which of the following pension schemes can Frank contribute?
(a) Planted Ltds occupational pension scheme.
(b) Bongley Bank Personal Pension scheme.
Solution 5.1


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Contributions to
pension schemes
Receiving benefits from
pension arrangements
Types of
pension scheme
Maximum contribution attracting tax
relief is higher of:
relevant earnings
3,600 pa
1,800,000 is maximum value for pension fund.
Employment income, trading income and
furnished holiday lettings income
50,000 for 2011/12
c/f unused allowance max 3 years
tax charge on excess treat as
additional non-savings income
Employer contributions:
Count towards allowances (annual & lifetime)
Trade deduction for employer
Tax free benefit for employee
No NIC for employer or employee
Annual limit Lifetime allowance
Annual allowance







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5: Pensions 45
Context
A pension is such a tax efficient investment, not only because investments grow and income is
received by the pension free of tax, but also because there is tax relief when contributions are paid
to the pension. How the tax relief is given depends on the type of pension but the overall effect is
exactly the same.
Learning example 5.2
Samantha is employed by Hart Ltd, earning a salary of 60,000. She pays 5% of her salary into her
pension each year and Hart Ltd matches this (ie also puts 5% into her pension). She has no other
income during the year.
Calculate Samanthas income tax liability assuming the pension is:
(a) An occupational pension run by Hart Ltd
(b) A personal pension.
Solution 5.2

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Contributions to
pension schemes
Receiving benefits from
pension arrangements
Types of
pension scheme
Pension fund
at retirement
Taxable annual
pension (usually)
Tax-free lump sum
If fund exceeds lifetime allowance
1.8m then tax charge on excess
25% if excess
taken as pension
55% if excess
taken as lump sum
Maximum 1/4 of fund







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