Self employed + DB pension

SVaz

Self employed sole trader. 

I will start getting a military pension in just over a year of around £7k / £ 580 a month.  The 1st payment will probably be January 2025. 

Will the pension payment be taxed at 20% before it’s paid or will it be paid in full then I declare it on my self assessment and pay the tax myself?

molerat

Paymaster will  tax at 1257LM1 for the first payment followed by whatever code HMRC tell them to.  You then just declare it on your SA.

SVaz

So the first payment of £580 will have 20% tax taken,  subsequent payments wont be taxed once they have my tax code of 1380 as the £7k a year is well under £13800? 

I just want to know in advance so I can put extra cash in my tax ‘pot’ if I have to pay it myself.
Will payments on account also include this pension income then?  

molerat

So the first payment of £580 will have 20% tax taken

No, no tax will be deducted as you will have an allowance of £1048.26 to use up on that payment.  The remaining payments are down to how HMRC view your circumstances and the code they decide to issue.

Dazed_and_C0nfused

But if you no other PAYE income you are likely to continue paying no tax under PAYE.

Any tax payable will then form part of your Self Assessment liability.

If you prefer to pay something under PAYE you could ask for a BR (basic rate) tax code to be applied from the second payment onwards.

SVaz

Oh,  fair enough thanks.  

Am I right in thinking that the pension income won’t form part of the payments on account?
There will be 3 months pension payments to account for,  for the 24-25 tax year.   

Dazed_and_C0nfused

Yes.  If you already needed to make POA from your self employment then they could be slightly higher once the tax due on the pension is factored in.

But cashflow wise that's still later than tax deducted under PAYE would be 😃

SVaz

Yes, I’ll start putting my monthly ‘tax pot’ savings in an interest bearing account rather than leaving it in my business account that pays nowt.    

This tax year is my 2nd year of trading/ 1st year that tax will be due, I had a nice £1300 refund for 22-23.  

Tax bill for this year looks likely to be around £3k - £4k.