Self-employed pension

Screaming_Flamingo

I have been tying myself in knots on this one, but I suspect you clever people might take one minute to clarify something I will otherwise spend hours trying to work out. I am a higher rate earner, happily maxing out my workplace pension with voluntary contributions. My wife is self-employed and will probably earn a little over the tax threshold this year (maybe £13k). She has a personal pension she opened at Aviva with not much in it. We want to build that up. 
Is she able to pay her full income into the pension, and get it topped up with the HMRC's 25% contribution? I am getting confused as to whether that's ok, or she can only contribute the amount she would pay normally pay tax on, or something else? 
Apols in advance if this is covered in another thread. 

Dazed_and_C0nfused

No.  Not sure exactly what you mean by "earnings" but she can pay in 80% of her taxable profit.

Which will have 25% added by the pension company.  For example she contributes £10k.  They add £2.5k.

She now has a fund of £12.5k, of which 20% (£2.5k) was the basic rate tax relief.

The fact that she will only pay Class 2 and 4 National Insurance but no tax on the profits do not alter the fact that she can get £2.5k tax relief.

dunstonh

Is she able to pay her full income into the pension, and get it topped up with the HMRC's 25% contribution?

Pensions do not get a top-up. Tax relief is a reduction in cost.    It is important to remember that when dealing with HMRC.  And that is where you have made the mistake.

Can your wife pay her full income into the pension?  Yes she can.   As the gross pension contribution is what is used.  Not the tax net contribution.  If you word it as you have, then answer is no.

Marcon

dunstonh said:

Is she able to pay her full income into the pension, and get it topped up with the HMRC's 25% contribution?

Pensions do not get a top-up. Tax relief is a reduction in cost.    It is important to remember that when dealing with HMRC.  And that is where you have made the mistake.

Can your wife pay her full income into the pension?  Yes she can.   As the gross pension contribution is what is used.  Not the tax net contribution.  If you word it as you have, then answer is no.

I was confused reading this, so not sure if OP will fare better!

OP - the maximum she can pay into her pension if she is self employed and has no other earnings is 100%  including the tax top up at basic rate which is claimed by the provider and added to the 'pot'. Therefore the maximum she can contribute is 80%. The provider then claims tax at basic rate and adds it to her pension pot - that would apply even if she hadn't paid any tax in the first place.

Might be useful: https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/self-employed-and-pensions

Marcon

dunstonh said:

Is she able to pay her full income into the pension, and get it topped up with the HMRC's 25% contribution?

Pensions do not get a top-up. Tax relief is a reduction in cost.    It is important to remember that when dealing with HMRC.  And that is where you have made the mistake.

How about all the threads on this board where people without earnings and not paying tax are eagerly advised to pay £2,880 into a personal pension and get a top up (which is surely what it is and how most normal people view/describe it) to £3,600?

Screaming_Flamingo

Perfect, thanks guys. Ok, understood about the 80% bit.

I think the bit I was confused about was whether 'the provider claiming tax at basic rate and adding to her pot' happens even for money where no tax would be paid (because it is within the personal allowance). But from what I understand the answer is "yes - they do that." Seems too good to be true really  

Dazed_and_C0nfused

Screaming_Flamingo said:

Perfect, thanks guys. Ok, understood about the 80% bit.

I think the bit I was confused about was whether 'the provider claiming tax at basic rate and adding to her pot' happens even for money where no tax would be paid (because it is within the personal allowance). But from what I understand the answer is "yes - they do that." Seems too good to be true really  

It is too good to be true really and it only works for "relief at source" contributions such as those to a SIPP or personal pension but there are plenty of people doing it.

dunstonh

Marcon said:

dunstonh said:

Is she able to pay her full income into the pension, and get it topped up with the HMRC's 25% contribution?

Pensions do not get a top-up. Tax relief is a reduction in cost.    It is important to remember that when dealing with HMRC.  And that is where you have made the mistake.

How about all the threads on this board where people without earnings and not paying tax are eagerly advised to pay £2,880 into a personal pension and get a top up (which is surely what it is and how most normal people view/describe it) to £3,600?

How about them?    Just because sometimes people describe it like that does not make it right.   It is safer to work it out the HMRC way and the way its been since 1988.  That way you avoid the mistake of paying in too much.

A £3600 pension contribution costs £2880 as it gets 20% relief.  it does not get a 25% bonus.

Marcon

dunstonh said:

Marcon said:

dunstonh said:

Is she able to pay her full income into the pension, and get it topped up with the HMRC's 25% contribution?

Pensions do not get a top-up. Tax relief is a reduction in cost.    It is important to remember that when dealing with HMRC.  And that is where you have made the mistake.

How about all the threads on this board where people without earnings and not paying tax are eagerly advised to pay £2,880 into a personal pension and get a top up (which is surely what it is and how most normal people view/describe it) to £3,600?

How about them?    Just because sometimes people describe it like that does not make it right.   It is safer to work it out the HMRC way and the way its been since 1988.  That way you avoid the mistake of paying in too much.

A £3600 pension contribution costs £2880 as it gets 20% relief.  it does not get a 25% bonus.

Get real. Those threads show time and again how real people view the world - and if you're a non-taxpayer, pompously being told to 'work it out the HMRC way' will only serve to confuse.

dunstonh

Marcon said:

dunstonh said:

Marcon said:

dunstonh said:

Is she able to pay her full income into the pension, and get it topped up with the HMRC's 25% contribution?

Pensions do not get a top-up. Tax relief is a reduction in cost.    It is important to remember that when dealing with HMRC.  And that is where you have made the mistake.

How about all the threads on this board where people without earnings and not paying tax are eagerly advised to pay £2,880 into a personal pension and get a top up (which is surely what it is and how most normal people view/describe it) to £3,600?

How about them?    Just because sometimes people describe it like that does not make it right.   It is safer to work it out the HMRC way and the way its been since 1988.  That way you avoid the mistake of paying in too much.

A £3600 pension contribution costs £2880 as it gets 20% relief.  it does not get a 25% bonus.

Get real. Those threads show time and again how real people view the world - and if you're a non-taxpayer, pompously being told to 'work it out the HMRC way' will only serve to confuse.

These threads show time and again how people get it wrong when they have seen tax relief referred to as a 25% bonus.    Just as the OP has here.   Is it not rather pompous to say that you shouldn't work it out how HMRC do it?
I suppose you are going to say that higher rate or additional rate tax payers get a bonus as well.

Screaming_Flamingo

OP here. 

If it helps, my own confusion was driven in part by things like the 'tax relief' terminology. Given that my wife may well be a non taxpayer this year, it makes no intuitive sense to me to say that she will benefit from tax relief on her pension contribution. Or even more confusing, she may owe a tiny bit of tax, so does "tax relief" refer to that, or everything, or...? You get the drift. 

Beyond that, saying "it is basically a top-up, but remember she can only use up to 80% of her income for this" or "best way to think of it is she can put her 13k income into her pension (maximum) and it only costs her 10.4k" seems equally helpful.