Need advice on SIPP (Self-invested personal pensions) for self-employed

oredentist16

I wanted advice on SIPP (Self-invested personal pensions) for self-employed people, let's say if a self-employed person earns £20K with an expense of 5K then they pay Income tax and NI of £1,154 for 2020/21

My question is, as one of the option to save tax - can I start SIPP and what is the max I can pay? Also, while doing self-assessment do I put that as one of the expense ? Or is it in a different category? 

Also, can I put lumpsum lets see £4000 into SIPP thereby making total exp as £9000, so my payable tax as per calc will be £294.

Am I right or completely wrong in my calc? 

Thank you in advance for any advice.

Dazed_and_C0nfused

Completely wrong I'm afraid.

In the circumstances described contributing to a SIPP will have no bearing on your personal income tax liability.

The amount of tax paid also no bearing on what you can contribute to a SIPP.

In your example you could contribute £15k to a SIPP (assuming no other pensionable earnings in the same tax year).  This is £12k you pay to the pension company and £3k basic rate tax relief the pension company add (courtesy of HMRC).

You cannot claim it is a business expense as it isn't a business expense, it is personal expenditure.

You do include the gross contribution in the pension relief part of a Self Assessment return.  But in your scenario it won't save you any personal income tax.

But you have immediately turned £12k into a £15k pension fund.

If you pay £4k it will be £5k in your pension with the basic rate tax relief added.

Albermarle

In case it is not clear , the pension provider will automatically add basic rate tax relief. They assume you are not adding more to the pension than you should be . 

NottinghamKnight

OP just to confirm are you a sole trader or do you trade through a limited company, this will make a difference and the advice above is for a sole trader.

oredentist16

Dazed_and_C0nfused said:

Completely wrong I'm afraid.

In the circumstances described contributing to a SIPP will have no bearing on your personal income tax liability.

The amount of tax paid also no bearing on what you can contribute to a SIPP.

In your example you could contribute £15k to a SIPP (assuming no other pensionable earnings in the same tax year).  This is £12k you pay to the pension company and £3k basic rate tax relief the pension company add (courtesy of HMRC).

You cannot claim it is a business expense as it isn't a business expense, it is personal expenditure.

You do include the gross contribution in the pension relief part of a Self Assessment return.  But in your scenario it won't save you any personal income tax.

But you have immediately turned £12k into a £15k pension fund.

If you pay £4k it will be £5k in your pension with the basic rate tax relief added.

Thanks for the detailed explanation. 

oredentist16

NottinghamKnight said:

OP just to confirm are you a sole trader or do you trade through a limited company, this will make a difference and the advice above is for a sole trader.

Sole trader. 

oredentist16

Thank you all.