SIPP - Self Employed low income/Trading Allowance - non tax payer question

afmfifgh

Hi,

I understand that if you have no earnings or earn less than £3,600 a year, you can still pay into a SIPP and qualify to have tax relief added to your contributions. The maximum you can pay in is £2,880 a year. Tax relief is then added to your contribution so if you pay £2,880, a total of £3,600 a year will be paid into your pension scheme, even if you earn less than this or have no income at all (Source: https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions).

If you are self employed and a non tax payer and were to have income from self employment before costs/allowances of £5,000 a year but claimed the £1,000 Trading Allowance rather than listing costs of Self Employment individually on your tax return you would have an earned income of £4,000 for tax return purposes.

With regards to a SIPP are you allowed to pay in to the SIPP and get tax relief on:

1.
£5,000 (the amount of self employment income before taking off the £1,000 Trading Allowance). Getting Tax Relief of £1,250. Giving a total into the SIPP of £6,250.
This though would be more than the income from self employment both pre/post Trading Allowance.

2.
£4,000 (the amount of earned income having taken off the £1,000 Trading Allowance). Getting Tax Relief of £1,000. Giving a total into the SIPP of £5,000.
This would be equal to the income from self employment pre Trading Allowance but more than the income from self employment post Trading Allowance.

3.
£3,200. Getting Tax Relief of £800. Giving a total into the SIPP of £4000.
This would be less than the income from self employment pre Trading Allowance and equal to the income from self employment post Trading Allowance.

4.
£2,880. Getting Tax Relief of £720. Giving a total into the SIPP of £3,600.
This would be less than the income from self employment pre/post Trading Allowance. And equal to the £3,600 that people with no earnings or who earn less than £3,600 a year are allowed to pay into a SIPP as discussed in the opening paragraph of my post.

5.
Another amount.

I am unsure which of the above is the correct amount and would really appreciate some advice. The amounts are too small to justify spending money asking an accountant as I have been told the meeting would cost a couple of hundred pounds.

My thoughts are that it isn't option 1 as this would mean the total going into the SIPP of £6,250 would be more than both the income pre costs/allowances of £5,000 and the post costs/allowances of £4,000.

I am then unsure which of the options; 2, 3 or 4 is correct or if I have not covered the correct answer.

If I was not claiming the Trading Allowance of £1,000 so had earned income from Self Employment of £5,000 I think the answer would be point 2. But the fact I claim the Trading Allowance has complicated the issue in my mind as to if option 2 or 3 is correct.

I don't think option 4 is correct.

Thank you to anyone who can help.

Albermarle

My thoughts are that it isn't option 1 as this would mean the total going into the SIPP of £6,250 would be more than both the income pre costs/allowances of £5,000 and the post costs/allowances of £4,000.

This part I can answer. If we put the trading allowance question to one side ( as I am not familiar with that ) and said simply that you earned £5,000. The max you could add to your SIPP would be £4000 Then + tax relief £1000. 

afmfifgh

Thank you Albermarle for taking the time to reply. Your thoughts are the same as mine if the trading allowance is disregarded.

The trading allowance is basically another way of accounting for your expenses. It allows you to account for £1,000 of expenses against your self employment income regardless of what your expenses actually are. It removes the need also to account for them individually. Also it allows for £1,000 regardless if you have expenses under this figure.

Another way to frame the question I have posed would be if instead of the £1,000 Trading Allowance I instead had a total of £1,000 of expenses, for example for renting an office, tools, insurance etc. The net earned income from Self Employment would be £5,000 (income) - £1,000 (Expenses) = £4,000 (Net Income).

Re-framing the question this way makes me fairly sure the answer would be 3, £3,200. Getting Tax Relief of £800. Giving a total into the SIPP of £4000. As I don't imagine the government would give you a kind of double tax relief on your expenses, once by being able to offset expenses against income and then again when paying it into the SIPP.

Dazed_and_C0nfused

The correct answer is £4,000 (£3,200 from you plus £800 basic rate tax relief added by the pension company).

The trading allowance is a red herring really, it is your profit which matters.  This may be after deduction of the trading allowance or expenses or for some people neither.

There are some generous pension tax relief situations, being able to get upto £2,500 tax relief without paying any tax in the first place is not a bad deal if you can afford to pay the net contribution on the first place.

afmfifgh

Thank you for replying Dazed_and_C0nfused.

Dazed_and_C0nfused said:

There are some generous pension tax relief situations, being able to get upto £2,500 tax relief without paying any tax in the first place is not a bad deal if you can afford to pay the net contribution on the first place.

I assume by this you are meaning if you had earned income of £12,500 you would not pay any tax on that as it would be within the £12,500 personal allowance. You could then pay into a SIPP £10,000 and get £2,500 added by the government via your provider? Effectively giving you £15,000. Though if liable for National Insurance Contributions (NIC) you would of course have to pay these. In the case of someone self employed you would have to pay NIC Class 2 and Class 4.

Bank interest and rental income don't count as earned income from memory so you can't include these income sources when calculating your annual SIPP allowance.

Dazed_and_C0nfused

afmfifgh said:

Thank you for replying Dazed_and_C0nfused.

Dazed_and_C0nfused said:

There are some generous pension tax relief situations, being able to get upto £2,500 tax relief without paying any tax in the first place is not a bad deal if you can afford to pay the net contribution on the first place.

I assume by this you are meaning if you had earned income of £12,500 you would not pay any tax on that as it would be within the £12,500 personal allowance. You could then pay into a SIPP £10,000 and get £2,500 added by the government via your provider? Effectively giving you £15,000. Though if liable for National Insurance Contributions (NIC) you would of course have to pay these. In the case of someone self employed you would have to pay NIC Class 2 and Class 4.

Bank interest and rental income don't count as earned income from memory so you can't include these income sources when calculating your annual SIPP allowance.

£10,000 plus £2,500 is only £12,500 not £15,000.

On self employed profits of £12,500 then yes there would be class 2 and 4 National Insurance payable and Class 2 itself can be effectively earning you £4.81/week pension for each year you pay it providing you have a minimum of 10 years contributions.

Correct, bank interest and rental income aren't relevant when working out how much you can contribute to a pension.

afmfifgh

Dazed_and_C0nfused said:

£10,000 plus £2,500 is only £12,500 not £15,000.

But you would have had £12,500 of earned income.

So you pay £10,000 of the £12,500 into a SIPP the Government via your SIPP provider adds £2,500 = £15,000 more net worth for the year. (£12,500 of earned income of which you pay £10,000 into the SIPP and have £2,500 left and £2,500 from the Government paid into your SIPP = £15,000).

Dazed_and_C0nfused

I see what you mean.  Don't recollect anyone putting it like that before