tax for self employed and pensions

custard82

i am self employed & forward planning for my 2009-2010 return (already 95% completed online) & my 2010-2011 return...

i am cannot get my head around how a pension works for the self employed (and therefore submitting a self assessment)... i understand if if were an employee on paye for every £80 I paid into a pension my employer would top up by £20, by claiming tax relief of 20%..

how does this work for me as self employed? i seem to have a mental block around something that i assume is staring me in the face.. any help much appreciated.

dunstonh

how does this work for me as self employed?

You agree the gross contribution with the pension provider and you pay the net (of basic rate tax) contribution. So, using your £100 example, you set up the pension with the provider for £100pm but the direct debit collects 80pm.

Hopefully, £100 was just a round figures example and not a figure you intended to pay as that is too low for a self employed person (as self employed dont get full state pensions, so you have to make greater provision for yourself).

themull1

Self employed do get full state pensions, they pay a self employed contribution every week of £2.40 and every full year that they pay, is a year towards their state pension.

timnicebutdim_2

Also if your a higher rate tax payer you can extend the basic rate (20%) band by the gross contribution....e.g. 37400 + 1000....so you don't pay tax within the 40% band.

yelf

themull1 wrote: »

Self employed do get full state pensions, they pay a self employed contribution every week of £2.40 and every full year that they pay, is a year towards their state pension.

That contributes toward the Basic state pension, self employed do not accrue any s2p benefits - so the Full State Pension that dunstonh was referring to is basic + s2p.

dunstonh

Self employed do get full state pensions, they pay a self employed contribution every week of £2.40 and every full year that they pay, is a year towards their state pension.

No they do not. As yelf says, the NI contribution for a self employed person only goes towards the basic state pension. The Self employed do not qualify for any State second pension (previously called SERPS) which an employed person paying the appropriate level of NI would get.

The loss of S2P is around a typical fund value on a personal pension of £100k-£150k. So, in that respect, a self employed person with less than £100k-£150k in their pension at retirement has got less than a typical employed person with contracted in benefits.

The lower NI and tax that the self employed pay is in part to allow the self employed to choose how they fund pensions (and other benefits which self employed do not qualify for). However, many self employed do not realise this and dont make extra provision to cover it.

chrismac1

It's also worth saying that for 40% taxpayers it's better still. You pay in the £80 and the pension provider claims back the £20, so £100 less charges gets invested for you. But you also enter the pension payment on your self-assessment tax return, this will then reduce your tax bill by a further £20.

So the impact is that for £60 net payment (£80 less the £20 tax reduction) you've had £100 invested in the pension fund - even more attractive the closer you are to 55 when you can normally start to get your hands on the money!! The tax catch is that your pensions income is taxed when you get it - but for most people, if they're a higher rate taxpayer in their pension phase of life they are laughing, certainly not worrying about whether they can afford to leave the gas fire on.

dunstonh

The tax catch is that your pensions income is taxed when you get it

Although that can be avoided somewhat.

£20k in retirement will see almost £10k not taxed and the other £10k taxed. However, if a couple share their retirement planning and end up with £10k income each (still 20k total) then the whole lot will be tax free in retirement which makes the benefit of tax relief (either at basic or higher as you say) much greater.

Also, pension contributions reduce your income for working/childrens tax credit purposes. It is possible to get up to just over 70% effective tax relief on pensions in the right circumstances (effective meaning tax relief and increase in tax credits paid).

custard82

so does that mean that the pension provider uses my NI number to claim the extra 20%?

I am a lower rate tax payer and dont recieve any credits.

custard82

and thanks for all the replies!

dunstonh

so does that mean that the pension provider uses my NI number to claim the extra 20%?

yes effectively.