ACCA Advanced Taxation (ATX) Practice Exam

Does the annual allowance for pensions include contributions made by both the employee and the employer?

1. No, only employer contributions are included

2. Yes, it includes contributions from both parties

3. Yes, but only up to a certain limit

4. No, only employee contributions are allowed

The correct answer is: Yes, it includes contributions from both parties

The correct response highlights that the annual allowance for pensions encompasses contributions made by both the employee and the employer. This is significant because the annual allowance is a key feature in the UK pension tax relief system, which aims to encourage saving for retirement. In the context of pension schemes, both employer and employee contributions are vital as they contribute to the overall pension pot that can grow tax-free until retirement. Including both contributions underlines the total amount that can be tax-relieved up to a specified threshold, known as the annual allowance. For the tax year, there is a limit to the total contributions that receive tax relief, but both parties' contributions are considered when calculating this total. Understanding this concept is essential for tax planning purposes, as exceeding the annual allowance could lead to tax charges, impacting the retirement planning strategies of both employees and employers. Hence, recognizing the inclusion of both contributions in the annual allowance is crucial for effective pension management and compliance with tax regulations.