Tax return and pension

enkara

Hello, I'm part-time self-employed and I've private pension. Can I deduct the full amount that I've paid into my pension from my gross income or how does it work?

kidmugsy

enkara wrote: »

Hello, I'm part-time self-employed and I've private pension. Can I deduct the full amount that I've paid into my pension from my gross income or how does it work?

You "gross up" your pension contribution i.e. multiply it by 1.25. That's what you report on your self assessment form. HMRC will subtract that from your earnings before it calculates the tax due.

Linton

If you as a private person pay into a pension scheme it will be assumed that the money comes from net income and the pension company reclaims standard rate tax from HMRC to increment that contribution, so your actual contribution is 20% higher than the one you made directly.

For example if you paid £1K in pension the pension company would recover £250 from HMRC making a total increase in the pension pot of £1250. Assuming you had no spare tax allowance and had made a gross income of £5K you would subtract the £1250 from the £5K giving £3750 and pay 20% tax on that (£750). £750 + £250 = £1000, the amount you would have paid in tax had you not paid into your pension.

Things get more complex if you pay higher rate tax, but so I wont give an example calculation for that unless you need it.

It works differently for many employer pensions in that the employer is likely to have agreement from HMRC to pay your pension contribution from Gross Income before deducting tax.

kidmugsy

Linton wrote: »

so your actual contribution is 20% higher than the one you made directly.

Typo, Linton? Did you mean 25%?