Pension contribution question from new sole trader

AERobson

I am a new sole trader and do not expect to earn more than my personal allowance in the 2019/20 tax year. I wondered if I didn't have any business expenses, would I be allowed to pay all my earnings into a personal pension that year?

Eg: if I earn £6000 in the next financial year and have zero business expenses, could I pay £6000 into my personal pension which would then get 20% tax relief taking it to £7200?

If I can't manage to operate with zero business expenses i hope to make them as low as possible so my earnings are as big as possible (but still under the personal allowance threshold) so i can pay as much into my pension as possible.

I feel quite new to all of this so your advice would be appreciated.

xylophone

You would pay 80% of your relevant earnings into a personal pension and the provider would claim the tax relief and add it to your pot.

If relevant earnings are £6000, you pay £4,800 into the pension and the provider will claim and add £1,200.

https://www.hl.co.uk/pensions/tax-relief/calculator

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/tax-relief-members-contributions/

https://monevator.com/index-investing/

AERobson

ah thanks - so the max I can pay in is including the tax relief

pramsay13

Do you also earn elsewhere?
You cannot get tax relief on £6000 if you are not paying tax anywhere else, but if you have a 'normal' job and are paying tax on earnings you can get tax relief on £6000 earnings.

Dazed_and_confused

You cannot get tax relief on £6000 if you are not paying tax anywhere else,

Can you explain why not?

Doing this will not save the op any money when it comes to their Self Assessment return but why wouldn't they receive basic rate relief at source from the pension provider?

Marcon

pramsay13 wrote: »

Do you also earn elsewhere?
You cannot get tax relief on £6000 if you are not paying tax anywhere else,

You can if the scheme gives relief at source - and if OP has a personal pension in mind, that will give relief at source.

Dazed_and_confused

Can't see anyone suggesting £7,500 gross.

pramsay13

Marcon wrote: »

You can if the scheme gives relief at source - and if OP has a personal pension in mind, that will give relief at source.

Only up to a certain amount. From https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
"If you do not pay Income Tax
You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you:

you do not pay Income Tax, for example, because you’re on a low income
your pension provider claims tax relief for you at a rate of 20% (relief at source)"

Dazed_and_confused

That isn't the whole story.

The first sentence on the page you linked to refers,

You can get tax relief on private pension contributions worth up to 100% of your annual earnings.

Linton

pramsay13 wrote: »

Only up to a certain amount. From https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
"If you do not pay Income Tax
You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you:

you do not pay Income Tax, for example, because you’re on a low income
your pension provider claims tax relief for you at a rate of 20% (relief at source)"

In practice I think you will find you do get tax relief on the full amount, even though you did not pay any tax. HMRC documentation tends to ignore this situation. The £2880/£3500 allowance applies more for people who do not earn anything. Without it they would not be able to contribute to a pension at all, which is seen to be an undesirable uninteded effect.


This is not such a good deal as it sounds as you will probably be paying tax when you withdraw the money especially after SP age. This would discourage low earners from paying into a pension, since they would have be better off just saving the money.