Sole trader, soon LTD and SIPP tax relief planning

marcus2772

Hello everyone

I am trying to get my head around tax planning and using up my previous 3 years contributions.

Being self employed my income has grown year by year - Currently I have 0 pensions.

It's my understanding that my tax relief is based on my previous tax year earnings and not the current tax year as I am self employed?

Is my tax relief bracket based on my pre-tax income before or after business costs / SIPP contributions?

Example 1:

£40k income

£10k business costs

=£30k pre-tax takehome

=£24k takehome

=20% tax relief (for next years SIPP)?

Example 2:

£80k income

£20k business costs

£20k SIPP contribution

=£40k pre-tax takehome

=£31k takehome

=20% or 40% tax relief (for next years SIPP)?

Example 3:

£80k income

£20k business costs

£5k SIPP contribution

=£55k pre-tax takehome

=£40.5k takehome

=40% tax relief (for next years SIPP)?

And finally, if I open a SIPP this tax year I can contribute to the previous ones or only from the date the SIPP was first opened?

As always, thanks to anyone that can help answer.

Dazed_and_C0nfused

You can only ever contribute to a pension in the current tax year.

And you can only ever get tax relief for the current tax year.

Contributions to a SIPP would be under the relief at source method of contributing so you would automatically get basic rate tax relief.

For example if your pensionable earnings (usually taxable pay or profits) were say £30,000 you could pay over £24,000 and the pension company, courtesy of HMRC, would add £6,000 in basic rate tax relief.

Contributions to a personal pension or SIPP do not reduce your taxable income.  They do increase the amount of your basic rate tax band meaning you can potentially pay more tax at basic rate meaning less is paid at higher rates.

bownyboy

If you don't have an existing pension already then my understanding is that you can't use your carry over allowance (there has to be an existing pension open for the years you want to carry over any used allowance).

When you create a Ltd company, the company can pay up to £40,000 into a SIPP and this has the affect of reducing your corporation tax by 19% (so £7,600 if the company pays in the full £40,000). This is regardless of your salary taken (as most limited company directors will take a small salary and dividends), but you must have the profits in the business to be able to do this. 

Albermarle

If you don't have an existing pension already then my understanding is that you can't use your carry over allowance (there has to be an existing pension open for the years you want to carry over any used allowance).

That is correct but even if you did have a pension open in previous years , to utilise carry over allowance you need sufficient taxable income in the current tax year .

If your salary is £30K for example , you can not take advantage of any carry over , because as said above

you can only ever get tax relief for the current tax year.

Dazza1902

For my own clarity. I think there is a provision to carry over 3 years of unused allowance?
So given the situation that the self employed income was 40k a year over the last 3 yrs, a pension was in place for the 3 yrs but only 3 k was put into it. How much could be put in on the current year if 40 k earned ?? Would it be  3x 37 plus 40 ??

MX5huggy

Only 40k because you can never put in more in any tax year than you earn. 

The carry over is only useful to those that earn more than 40k. Just an example of policy being written for the benefit of the rich getting richer. 

Dazza1902

MX5huggy said:

Only 40k because you can never put in more in any tax year than you earn. 

The carry over is only useful to those that earn more than 40k. Just an example of policy being written for the benefit of the rich getting richer. 

Oh, so if you don't use , it's gone.Bit if a blow, guess it would have to go in an ISA.
So how does the carry forward work ??

MX5huggy

Taking your example but change the earning this year, so a massive pension contribution could be made

So given the situation that the self employed income was 40k a year over the last 3 yrs, a pension was in place for the 3 yrs but only 3 k was put into it. How much could be put in on the current year if 160k earned ?? Would it be  3x 37 plus 40 ??

They would be left with £9k take home this year. 

marcus2772

Thank you for the replies everyone!

After reading the comments here, along with this link it's starting to make more sense to me:

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Example

You earn £60,000 in the 2020 to 2021 tax year and pay 40% tax on £10,000. You put £15,000 into a private pension. You automatically get tax relief at source on the full £15,000.

You can claim an extra 20% tax relief on £10,000 (the same amount you paid higher rate tax on) through your Self Assessment tax return.

You do not get additional relief on the remaining £5,000 you put in your pension.

In order to get 40% on all of my SIPP deposits I will need to earn more than £50k / year before tax (but after business costs) and then deposit anything above the £50k into the SIPP.

In order to max out £40k/year SIPP at 40% an income of £82k is needed (£32k SIPP deposit+40%=£40k SIPP).

-

This was calculated with sole trader in mind - with a private LTD being the director it should be quite similar? Will need to look into LTD director salaries!