Tx notes fa22 Final

1.1 Personal Pension Scheme 
๏
Run by a financial institution - an insurance company or a bank
๏
available to the employed, self-employed or unemployed individuals
1.2. Occupational Pension Scheme 
๏
Set up by the employer for the benefit of employees
๏
contributions can be made by the employee and/or the employer
2. Tax relief 
Regardless of the type of scheme the amount of tax relief available for the contributions is the 
same, 
but depending on the type of scheme the method of obtaining the relief is 
di
ff
erent
.
When an individual contributes into a 
personal pension scheme
, then as we saw in Chapter 2, no 
such deductions are made from income on the computation, instead tax relief is given as follows:
๏
basic rate tax relief is given at source on the 
lower
of:
‣
gross contributions paid 
‣
maximum annual amount - either £3600 or 100% of relevant earnings which ever is 
higher

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๏
this means that if a taxpayer pays £8,000 into his pension fund, this is deemed to be net of 
basic rate tax at 20%. HMRC will then pay the pension provider an amount equivalent to the 
basic rate deduction (20/80 x £8,000= £2,000). Thus the individual’s pension fund is increased 
by £10,000 in total. As the gross contribution exceeds £3,600 (see note above) then the 
taxpayer must have net relevant earnings for the tax year of at least £10,000 for tax relief to be 
fully available. 
๏
Higher rate and additional rate taxpayers achieve higher and additional rate relief by extending 
the basic and higher rate bands by the gross amount of the personal pension contribution. 
Hence in this example the higher rate and additional rate tax bands will increase by £10,000 so 
that higher and additional rate tax will only arise above taxable income figures of £47,700 and 
£160,000 respectively.
When an employee makes a contribution into an