ACCA Strategic Professional · Advanced Taxation (UK) · Income tax: the use of exemptions and reliefs in deferring and minimising income tax liabilities
Hannah is a higher rate taxpayer with an income of £150,000 in 2025/26 and no other reliefs. She is considering a pension contribution, which will be deducted in calculating her taxable income. Which statement about the interaction with the cap on income tax reliefs is correct?
Pension contributions are not subject to the cap on income tax reliefs. The cap, being the higher of £50,000 or 25% of income, applies to other reliefs. Pension relief is instead restricted by the annual allowance (including carry forward) and by relevant earnings.
- APension contributions are subject to the cap on income tax reliefs of the higher of £50,000 or 25% of income
- BThe cap would restrict her relief to £50,000 of pension contributions
- CPension contributions are not subject to the cap, but are limited by the annual allowance and earningsCorrect
- DPension contributions are subject to the cap, which is £37,500
Explanation
The cap on income tax reliefs applies to certain unlimited reliefs, such as trade loss relief and qualifying loan interest. Pension contributions are not within it, since they are controlled separately by the annual allowance and earnings limit. Hannah's contributions are therefore limited by her annual allowance (with carry forward) and her earnings, not by the higher of £50,000 or 25% of income. The £37,500 figure (25% of £150,000) is only a distractor.
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