Paying into pension to avoid SA tax

lee1972

Hi

I’m 46 and I’m undergoing a career change. I’ve 20 years of contributions into the Teachers Pension Scheme, plus about £20k of funds in an AVC which I can take with full benefits when I’m 60. I’m shortly going to be entering the LGPS.

On the side, I’m self-employed and earn about £800 a month. In order to avoid paying as much as possible tax on my self employed earnings I’m thinking of taking out a SIPP. If my total monthly net earnings are £2200 a month (£1400 from employed and £800 from self-employment), how much extra should I pay to get the best tax relief?

Any advice much appreciated as I’m pretty ignorant.

Thanks

ColdIron

SA tax ???

Linton

If your net earnings are £2200/month then all your income above your tax allowance is at basic rate tax. In these circumstances, unless you want to get your income below the tax allowance your tax relief will be pro rata. There is no particular level you should aim at.



It doesnt matter whether you make your pension contributions from your main employment or from self employment. At the end of the year the tax would be the same.

p00hsticks

ColdIron wrote: »

SA tax ???

SA = Self assessment (presumably OP is talking about minimising tax on the self employed part of their earnings by paying into a pension)

Paul_Herring

If my total monthly net earnings are £2200 a month (£1400 from employed and £800 from self-employment), how much extra should I pay to get the best tax relief?

Technically, you could contribute £2,200 a month (total) and get 20% tax relief on the bit that goes into the SIPP, including the bit that falls into the tax-free allowance (i.e. tax relief on wages that haven't been income taxed.)

dunstonh

And dont forget that income is treated as gross and pension contributions are treated as gross. So, best not to use net figures.

lee1972

p00hsticks wrote: »

SA = Self assessment (presumably OP is talking about minimising tax on the self employed part of their earnings by paying into a pension)

Yes, exactly.

So if I earn £30k gross split between the following-

£20k from employment
£10 from self-emplyment

I enter into the LGPS and make a 5.9% contribution from my earnings from employment for the County Council. As I understand it, I'm better off paying increased contributions into LGPS rather than paying money from my self-employment into a SIPPS? This would give me a better return and make the best use of my tax code? Are there any benefits at all of me going down the SIPPS route? My plan at this time is to work until I'm 62, but this may change of course.

Finally, would I be able to transfer my teachers' Prudential AVC into the LGPS? Would it be worth while doing this, do you think?

Thanks for your answers and comments so far- very helpful. :T

Dazed_and_confused

Just to be clear in your situation any contribution to a personal pension/SIPP won't save you any personal tax, either through a new tax code or via your Self Assessment return.

Your contribution (assuming within appropriate earnings limits for you personally) will of course get the 25% uplift of basic rate tax relief at source so you have more in the pension fund.

If you increase contributions to LPGS then that is likely to save you personal tax i.e. contribution increases from 5.9% to say 10% then your taxable pay, the bit shown on your P60, will be slightly less so you will pay a bit less tax accordingly.

But it will make no difference when you come to file your Self Assessment return. You will have a slightly lower P60 pay figure and will have paid a bit less tax but on the figures you are quoting it won't alter your Self Assessment bill at all.

lee1972

Dazed_and_confused wrote: »

Just to be clear in your situation any contribution to a personal pension/SIPP won't save you any personal tax, either through a new tax code or via your Self Assessment return.

Your contribution (assuming within appropriate earnings limits for you personally) will of course get the 25% uplift of basic rate tax relief at source so you have more in the pension fund.

If you increase contributions to LPGS then that is likely to save you personal tax i.e. contribution increases from 5.9% to say 10% then your taxable pay, the bit shown on your P60, will be slightly less so you will pay a bit less tax accordingly.

But it will make no difference when you come to file your Self Assessment return. You will have a slightly lower P60 pay figure and will have paid a bit less tax but on the figures you are quoting it won't alter your Self Assessment bill at all.

OK- thanks. That's what I needed to know. I was under the impression that if I paid into a pension from my SE earnings, I could bring down my SA tax bill. I've never done a self-assessment tax return before so I'm learning. I'll pay as much as I can into the LGPS scheme I think.

Do you know if I can transfer my AVC into LGPS?

AlanP_2

You have two options with the LGPS to increase your pension provision and as a by product reduce the tax you pay whilst employed.

You can by additional annual pension by setting up an APC and / or build an AVC pot that can be taken tax free at the same time as your main scheme benefits.

So what are you trying to get - more annual pension or a lump sum?

You also need to consider when you want to access the pot. AVC / APC is linked to main scheme benefits so all taken together. A private pension of some kind would be separate and can be taken when it suits you.

What you can't do is just ask them to increase your LGPS contribution rate to 10% of salary, there would be no benefit as it is a Defined Benefit scheme not a Defined Contribution scheme.

Dazed_and_confused

You might still want to consider a personal pension/SIPP. You get the 25% uplift into the pension fund rather than any reduction in your personal tax liability and a separate pension may add some flexibility to your retirement plans.

You neeed to consider the whole situation really, not just your Self Assessment bill.