Pensions are a popular area in the tax exams. An individual can either contribute into an occupational pension scheme or a personal pension scheme.

The maximum contributions each tax year are based on relevant earnings which consist of employment income, self-employed profits, and furnished holiday lettings.

This is subject to an annual allowance of £40,000. The annual allowance applies to total pension inputs (both employer and employee contributions)

Any unused contributions can be carried forward 3 tax years but is consumed on a FIFO basis. (first in, first out). Unused relief can only be carried forward if the individual was a member of the pension scheme for that tax year.

You can only use up unused relief after consuming the current year allowance of £40,000.

If an individual has high income, the annual allowance of £40,000 is restricted.

First: find the threshold income (income less gross personal pension contributions by employee) and compare with £200,000. If less than £200,000, there is no restriction.

Second: Find adjusted income (income plus employee contributions into an occupational pension scheme and any employer contributions to either pension scheme) and compare with £240,000. If less than £240,000, there is no restriction.

Thirdly, restrict the £40,000 using the formula 50% (Adjusted income – 240,000).

Fourthly, ensure the minimum allowance is at least £4,000.

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