Maximum contributions for the self-employed (etc)

wary · 3 November 2009 at 9:41PM

My wife runs her own business as a sole trader. Her expected gross profit for this tax year once she has deducted operating expenses will be in the order of £10,000. What would be the maximum that she could pay into a pension and receive full tax relief for this year? Would 10000 be her effective gross salary and would the limit be her effective net salary? She's also a part-time student with a grant of £2700 and receives dividends from my company, if that's relevant?

I'm a director of my own limited company and a similar question applies. Is it correct that if I make personal contributions then the limit for receiving full tax relief is my net salary, whereas if I pay direct from the company hence offsetting against corporation tax then there's technically no limit?

One final question. When making a personal contribution, I believe that the pension company add 20% which they presumably get back from the government. The full 120% would be declared on your PTR. For a basic rate tax payer, would they receive any further benefit from having made the contribution? For a higher rate tax payer, presumably they would gain some extra benefit. Would this be in the form of an additional 20% of the net contribution being deducted from their tax liability?

dunstonh · 4 November 2009 at 10:14AM

What would be the maximum that she could pay into a pension and receive full tax relief for this year?

£10,000. Although a discussion with the accountant may lead to that figure being able to be revised slightly.

I'm a director of my own limited company and a similar question applies. Is it correct that if I make personal contributions then the limit for receiving full tax relief is my net salary, whereas if I pay direct from the company hence offsetting against corporation tax then there's technically no limit?

Personal contributions will be limited to your salary. However, company contributions may be more efficient and allow a greater amount. There is still a limit though.

One final question. When making a personal contribution, I believe that the pension company add 20% which they presumably get back from the government. The full 120% would be declared on your PTR.

Almost. You pay 80% and the tax relief is 20% making 100%. It isnt 120%.

For a basic rate tax payer, would they receive any further benefit from having made the contribution?

Not in tax but they could find their childrens/working tax credits increased as "personal" pension contributions reduce your income.

For a higher rate tax payer, presumably they would gain some extra benefit. Would this be in the form of an additional 20% of the net contribution being deducted from their tax liability?

Yes. Up to a cap.

wary · 4 November 2009 at 2:15PM

Thanks dunstonh.

Just a few points for clarification:
1) I thought it is the net salary rather than the gross salary that the limit is based on? Is that not true? Or is it different for the self-employed bacause its technically a gross profit rather than a gross salary?
2) Regardless, if her maximum if £1000, then I presume that the maximum she can actually contribute is £8000, as this would be grossed up to £10000 and the limit is based on the gross figure?

MikeJones_2 · 4 November 2009 at 2:35PM

Hi wary,

When dunstonh talks about a limit or cap he is referring to the fact that this applies for tax relief purposes. You can actually put as much into a pension as you like - it's just that there is a ceiling for tax relief.

wary wrote: »

1) I thought it is the net salary rather than the gross salary that the limit is based on?

The ceiling is gross.

wary wrote: »

2) Regardless, if her maximum if £1000, then I presume that the maximum she can actually contribute is £8000, as this would be grossed up to £10000 and the limit is based on the gross figure?

For maximum tax relief purposes yes, £8,000 would be her contribution to receive the maximum tax reflif based upon her £10,000 profit if everything is as you described originally.

As dunstonh says, a quick chat with the accountant would be advisable.

Useful link:

- RPSM05200000 - Member Pages: Contributions and tax relief: Contents (HMRC)

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Maximum contributions for the self-employed (etc)

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