Freelance self employed pension tax relief

ForestBluebells

I’ve recently become a freelance worker in addition to my regular job and for this I have to be self employed.

I’m going to keep records of what I have been paid but my full personal allowance is used in my regular job, I won’t earn enough for NI contributions in the freelance job but I will have basic rate tax to pay.

Can I pay all my self employed earnings into a private pension and claim tax relief on all my self employed earnings this way?

Or do I still pay the tax in my annual returns but it’s claimed back into the pension? So I keep 20% back to pay as tax but it will get added into my pension anyway so in theory getting full tax relief on those earnings?

Is that correct?

Albermarle

Can I pay all my self employed earnings into a private pension and claim tax relief on all my self employed earnings this way?

When you contribute to a private pension , the provider will claim back tax relief from HMRC and add it to your pension . So you get basic/20% tax relief automatically . The provider assumes you have paid enough tax to get the relief . So you do not need to claim the relief but of course you will gave to pay the tax as normal on your income.
This assumes you are a 20% taxpayer .

ForestBluebells

Ok great so I save 20% tax aside and then pay the rest into a private pension or LISA for best use of the money. That makes sense.

drumtochty

No, assuming your contributions to your day job pension and your day job employers contribution and your self employed pension contribution is not over 40k a year and your combined income of your two jobs is not not more than £110,000 per year.


You do not have to put 20% of your self employed earnings into a jam jar for the amount of money you put into your self emplyed pension.


For the rest of your self employed earnings over and above what goes into your self emplyed pension, yes you have to put what ever amount of tax you will pay which may be 20% or 40% into that jam jar for your end of tax year tax return.

ForestBluebells

So if I have paid 100% of my self employed earnings into a pension I don’t pay any Rex on my earnings when I do my return? It’s a bit confusing I couldn’t find any information online about this specific situation. I don’t need to keep 20% aside to pay as tax?

Albermarle

You do not have to put 20% of your self employed earnings into a jam jar for the amount of money you put into your self emplyed pension.

Are you sure ?
The pension provider will add tax relief automatically to his contributions, so presumably he has to pay tax on all his earnings , regardless of whether he pays them into a pension or not ? Otherwise he will get tax relief on contributions he hasn't actually paid any tax on .

ForestBluebells

That was my understanding that I need to keep 20% aside to pay as tax then the 20% get claimed back to the mortgage (or in a LISA the government top up by the equivalent) but I pay the tax annually. But to be fair this is my first time so I’m not certain how it works

Dazed_and_confused

I’m going to keep records of what I have been paid but my full personal allowance is used in my regular job, I won’t earn enough for NI contributions in the freelance job but I will have basic rate tax to pay.

In that situation contributing to a relief at source pension scheme such as a SIPP or personal pension, won't save you any personal income tax.

But you will still receive the 25% uplift added by the pension company, courtesy of HMRC.

So say you have business profits of £4,000 you will have £800 tax to pay on it. If you contribute £3,200 into a SIPP or personal pension your additional tax liability will still be £800.

But the pension company, courtesy of HMRC, will add £800 to your pension giving you a total fund of £4,000.

This assumes you are UK resident for tax purposes. It could be different if you are Scottish resident for tax purposes.

ForestBluebells

That makes sense so essentially it cancels each other out. Since I was planning to start saving in a private pension or LISA this month I thought it best to simply put all the money I earn freelance in there then any savings from my regular job go into a S&S ISA although I guess overall it makes no difference whether it’s the freelance money or money from my regular job that goes in each “pot” it’s just in my head it meant I got best value from the freelance work by pension tax relief

Albermarle

You do not mention a pension associated with your regular job . Normally you have to be auto enrolled in a pension by your employer , unless your earnings are low.

ForestBluebells

I’m already enrolled into my workplace pension and my employer is contributing the maximum they will (which is the legal minimum contributions 😂) so there’s no benefits to paying more into that scheme as if I change the fund it’s invested in the rates go up to 0.75-1% and if I invest elsewhere I can get much cheaper rates