Self employment and SIPP benefits

Deal4All

Hi

I am currently self employed and wondered how the SIPP works for self employed people.

Last year my profit was around £23,000 and I expect it to be around £35,000 for 2013-14.

So if I have profits of £35,000 can I then put £26,000 into a SIPP, and not get charged any tax on profits, as I would get the the £9440 personal tax allowance and the rest I could put in my SIPP with an extra 20% from the government? Or do I have it totally wrong.

grey_gym_sock

you can avoid paying any income tax by doing that. but you still have to pay 9% class 4 NI.

nomunnofun

grey_gym_sock wrote: »

you can avoid paying any income tax by doing that. but you still have to pay 9% class 4 NI.

I am sorry but I just cannot see how that can be the case! If the op puts £26000 into a SIPP, HMRC will add £6500 to make the gross contribution £32500. This will be the tax relief. The op will still have to pay tax on his profits. Or am I having a brain malfunction of huge proportions?

grey_gym_sock

hmmm ... i think, on OP's figures, he/she would like to get £26k into a SIPP - that being approximately the amount that projected profits will exceed the personal allowance ...

the way to achieve this is to pay 80% of £26k - i.e. £20.8k - directly into the pension. the pension company will then claim the remaining £5.2k from HMRC, and add it to the pension.

in OP's self-assessment, he/she will indeed need to pay £5.2k income tax to HMRC.

but the overall effect is that OP has paid out £26k in total. and there is a total of £26k in OP's pension. in that sense, no net income tax has been paid (... until the pension is drawn, or until OP has a huge amount in pensions and incurs a lifetime allowance charge).

nomunnofun

grey_gym_sock wrote: »

hmmm ... i think, on OP's figures, he/she would like to get £26k into a SIPP - that being approximately the amount that projected profits will exceed the personal allowance ...

the way to achieve this is to pay 80% of £26k - i.e. £20.8k - directly into the pension. the pension company will then claim the remaining £5.2k from HMRC, and add it to the pension.

in OP's self-assessment, he/she will indeed need to pay £5.2k income tax to HMRC.

but the overall effect is that OP has paid out £26k in total. and there is a total of £26k in OP's pension. in that sense, no net income tax has been paid (... until the pension is drawn, or until OP has a huge amount in pensions and incurs a lifetime allowance charge).

Fair enough - I thought I was losing it! The op was looking to avoid all tax on profits which, of course, is impossible.