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ACCA Strategic Professional · Advanced Taxation (UK) · Income tax: income from employment

Priya is an employee of Dalton Ltd and is a higher rate taxpayer. Dalton Ltd offers her a choice: a cash bonus of £10,000 or an employer pension contribution of £10,000 paid into her registered pension scheme. Her earnings are well below the threshold income limit and her pension input is well within her annual allowance. Which statement about the tax and NIC treatment is correct?

An employer contribution to a registered pension scheme, within the annual allowance, is not taxable on the employee and is free of both employee and employer Class 1 NIC. A cash bonus bears income tax and NIC, so the pension contribution is more tax-efficient.

  1. AThe employer contribution is not taxable on Priya and does not attract employee or employer Class 1 NIC, whereas the bonus attracts income tax and NICCorrect
  2. BThe employer contribution is taxable on Priya at 40% but is exempt from NIC
  3. CThe employer contribution attracts employer Class 1 NIC at 15% but no income tax
  4. DBoth the bonus and the employer contribution are taxed identically, but only the bonus is deductible for Dalton Ltd

Explanation

An employer contribution to a registered pension scheme is not a taxable benefit and is outside Class 1 and Class 1A NIC, provided it is within the annual allowance. The bonus is taxable earnings and attracts income tax, employee NIC and employer NIC at 15%. The option claiming employer NIC on the contribution is wrong because no NIC arises.

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