Self Employed & Pension Contribution

Hal17

Can I please request some help regarding a pension contribution when self employed. I have never been in the high tax break, so have always contributed to my pension within the 20% tax bracket. If for example in this tax year, I have gross earnings of £51K, which would put me in the 40% tax break, less operating expenses of £10K, so leaving a net profit of £41K. Currently, I am still able to contribute £40K maximum to my pension. So, I have no idea what tax relief I could actually get on this £40K contribution. At 20% I know it would be £10K. Would I be entitled to anything different, due to the higher earnings? Really appreciate any help. Thanks.

Dazed_and_C0nfused

Hal17 said:

Can I please request some help regarding a pension contribution when self employed. I have never been in the high tax break, so have always contributed to my pension within the 20% tax bracket. If for example in this tax year, I have gross earnings of £51K, which would put me in the 40% tax break, less operating expenses of £10K, so leaving a net profit of £41K. Currently, I am still able to contribute £40K maximum to my pension. So, I have no idea what tax relief I could actually get on this £40K contribution. At 20% I know it would be £10K. Would I be entitled to anything different, due to the higher earnings? Really appreciate any help. Thanks.

Tax is based on profit not turnover so at no point are you in the higher tax bracket.  Not even if you are Scottish resident for tax purposes.  Unless you have other taxable income you haven't mentioned.

You don't get £10k tax relief on £40k.  You get £8k.  You would contribute £32k and the pension company, courtesy of HMRC, adds the basic rate tax relief of £8k to give you a pension fund of £40k.

Unless you are Scottish resident for tax purposes there will be no personal tax benefit to you.  Your Self Assesment bill will be exactly the same with or without this contribution.  So the tax relief is limited to that added to your pension fund by the pension company.

Hal17

Thank you for your reply and explanation, I really do appreciate that. I knew my thoughts were not making sense. Totally understand everything you have explained. May I just ask you one more question please? What if my total profit was £51K, how would that affect the tax relief added by my pension provider? 

Dazed_and_C0nfused

It wouldn't.  You only ever get basic rate tax relief added to the pension fund.

If that was your only taxable income in 2019:20 and you aren't Scottish resident for tax purposes you would normally be liable to higher rate tax on £1,000.

The gross pension contribution of £40k would increase your basic rate band from £37,500 to £77,500 so you would only be liable to pay 20% tax on that £1,000, not 40%.  So it would reduce your Self Assesment tax liability by £200 (£1,000 x 20%).

Hal17

Thank you again.  I fully understand now, I had no idea how the 40% relief worked. 

Dazed_and_C0nfused

Not many people do 

Plenty of posters on here are under the impression being a higher rate payer gets you an "extra 20%" relief irrespective of how much higher rate tax you pay.

stardust09

You can also input your total annual profit (so income minus expenses) into this pension relief calculator. It's very easy to understand. You declare your contributions on your tax return and then any extra higher rate tax relief is sorted out for you. https://www.hl.co.uk/pensions/tax-relief/calculator

Hal17

Thank you very much for the link, that was really helpful. It showed the exact calculation that Dazed_and_Conused confirmed for me. Totally misunderstood how the 40% rate worked, but understand now.