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ACCA Strategic Professional · Advanced Taxation (UK) · Taxation effects of the financial decisions made by businesses and individuals

Lena, an additional-rate taxpayer, is offered either a cash bonus or an equivalent employer pension contribution paid directly to her registered pension scheme by Norvik Ltd. Ignoring annual allowance issues, which statement is correct about the tax effect of the employer contribution compared with the bonus?

An employer contribution paid into Lena's registered pension scheme is not taxable on her and carries no employee or employer NIC, and it is normally deductible for the company. A cash bonus would suffer income tax and both employee and employer NIC.

  1. AIt is not taxable on Lena as employment income and creates no employee NIC or employer NIC, whereas the bonus attracts income tax and NICCorrect
  2. BIt is taxable on Lena as employment income but attracts no NIC
  3. CIt attracts employer NIC at 15% but no income tax
  4. DIt is taxed as a benefit with Class 1A NIC at 15%

Explanation

An employer contribution to a registered pension scheme is not taxable as employment income and does not attract NIC, and is normally deductible for the company. A cash bonus is subject to income tax, employee NIC and employer NIC. The other options invent charges that do not apply to such contributions.

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