Self employed Sipp and government contributions

baggins11

Hi All

Just wondering if someone can advise regarding govt contributions if you are on low salary? I know you are able to pay in £2880 and get govt contributions even if not paying tax but what happens after that?

For example last Yr I earned under taxable income due to covid and this tax year I will be paying tax but only a small amount (I guess earnings will be £15-20k). So how much can I contribute and what happens if you go over what tax you have paid in? Do they reclaim the money from self assessment that they contributed to the pension?

I have a 10k pot I was thinking of adding to my pension but as I am a low earner this year should I be putting it in s&s isa instead?

MX5huggy

You can pay in 100% of your earnings, it doesn’t matter that you have not paid tax on some or even all of it.

You can’t pay in more than 100% (some people see the Annual Allowance is £40k, but that is only relevant if you earn over £40k). 

Dazed_and_C0nfused

There is no connection between the tax you have paid and the pension tax relief added to a "relief at source" pension contribution.

For example if your profits were £12,000 and you paid no tax you could pay £9,600 into a SIPP and the pension company, courtesy of HMRC, would add £2,400 in tax relief making a gross contribution of £12,000.

You would declare the £12k gross contribution on your Self Assessment return but it would have no impact on the tax (or NI) due on the sort of profits you have.

baggins11

OK that sounds great. Just so I am completely clear I can pay in up to 100% of earnings after all allowable deductions stated on self assessment before tax (eg profit) not 100% of income into the business.

Albermarle

Yes but to be clear it is 100% gross . Including the tax relief as per the calculation in the previous post .
The pension provider will add tax relief to any amount you put in , so it is up to you to not add too much . Or at least flag it up if you do.

baggins11

Great thank you I understand

dunstonh

Don't think of tax relief as an extra as it is not.  Relief means it is a reduction.    A pension contribution of £10,000 would cost you £8,000.   £2,000 being the relief.   HMRC works on gross basis and you should do the same as it makes understanding how much you can pay so much easier.