Pensions Tax Relief: What are you being asked?

Those candidates studying towards the CII R04 exam may have noticed the rather prominent ‘be aware’ box in Chapter 2B of the study text regarding the annual allowance and money purchase annual allowance. This points out the importance of reading an exam question carefully particularly when it comes to tax relief on pension contributions. This article is relevant for anyone studying for the AF5, AF7, AF8, R04, or R06 exams.

This article is relevant to examinable tax year 2022/23 and is correct as at 31 October 2022.

Initial tax relief is not Related to the AA or the MPAA

The point being made in the study text is that the initial entitlement to tax relief on a pension contribution is not actually related to the annual allowance (AA) or the money purchase annual allowance (MPAA).

Individuals get tax relief on the contribution when it’s made based on their relevant UK earnings (or £3,600), whichever is the higher, even if the contribution is more than the MPAA or the AA.

The MPAA and AA is taken into account when the individual completes their self-assessment tax return. At this point, it can be seen if that person is able to keep all the tax relief they have been awarded or has to pay the annual allowance charge.

Example Questions

Here is an example from our R04 Calculation workbook:

James is a member of his employer’s group personal pension.  He has a salary from his job (and no other income) of £30,000 per annum, and his employer contributes 6% of his salary each month into the plan, which James is required to match. Having recently inherited a sum of money, James now wishes to make a lump sum contribution to his pension. How much of a gross contribution can James contribute to his pension and obtain tax relief on the full amount?

The answer is £28,200 gross can be contributed by James into his pension with all of it being eligible for tax relief.

James’s tax relievable contributions are limited to his relevant UK earnings (£30,000) less any existing individual or third-party contributions.  Employer contributions are ignored.

For James, he will therefore be able to make a lump sum contribution of £30,000 less his existing 6% regular contributions i.e., 94% of £30,000.

The important point is that the initial entitlement to tax relief is not related to the annual allowance.  This will be considered later to see whether he can keep all of the tax relief.  The employer contribution will count towards James’ annual allowance

Summary

So when it comes to interpreting what the exam question is asking, candidates will need to ensure they understand if they are being asked about immediate tax -relief or about the contributions that are eligible for tax relief that won’t incur an annual allowance charge.

Grab the resources you need!

If you’re studying for your CII R04 exam, and you’re wanting to feel confident on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the R04 calculation workbook taster now!

Alternatively, you can download the taster for AF5, AF7 or R06  if one of those exams is causing you some sleepless nights.