Tax relief on pension for self employed -any ideas?

anders170

Hi I'm self employed, 57 and don't have a pension! I currently only earn 15,500 a year but I do have a few small extra income streams such as maintenance payments and a bit of tax credits. I really want to set up a pension to top up any state help I'll get. Is it right that if I set up a pension plan that is the equivalent of all the tax I currently pay (around £2k a year) that the government will pay in 25% on top and plus I'll get additional tax relief on the pension? I'm sure I must have that wrong. Also is there a plan that any self employed people could recommend. It looks like a minefield! 

QrizB

I guess the first thing to do it so check your state pension forecast and make sure that you're going to get a full one at 67.

What does your forecast say?

MallyGirl

Not my area of expertise but basically you are limited, in terms of what you can contribute, by your income. For the self employed I believe this equates to your profit - not the tax you paid

BoGoF

anders170 said:

Hi I'm self employed, 57 and don't have a pension! I currently only earn 15,500 a year but I do have a few small extra income streams such as maintenance payments and a bit of tax credits. I really want to set up a pension to top up any state help I'll get. Is it right that if I set up a pension plan that is the equivalent of all the tax I currently pay (around £2k a year) that the government will pay in 25% on top and plus I'll get additional tax relief on the pension? I'm sure I must have that wrong. Also is there a plan that any self employed people could recommend. It looks like a minefield! 

I'm not 100% sure on what you think you will get but to keep it simple, for every £80 you contribute the government will add £20 tax relief so £100 in your post costs you £80, £1000 costs you £800 and so on. But that is it, nothing to do with how much tax you paid but the maximum you can contribute is the amount of taxable profits you have each year.

Dazed_and_C0nfused

anders170 said:

Hi I'm self employed, 57 and don't have a pension! I currently only earn 15,500 a year but I do have a few small extra income streams such as maintenance payments and a bit of tax credits. I really want to set up a pension to top up any state help I'll get. Is it right that if I set up a pension plan that is the equivalent of all the tax I currently pay (around £2k a year) that the government will pay in 25% on top and plus I'll get additional tax relief on the pension? I'm sure I must have that wrong. Also is there a plan that any self employed people could recommend. It looks like a minefield! 

You can contribute to a RAS scheme (personal pension or SIPP) and for every £100 you add the pension company will add £25 in tax relief.

But on your relatively modest income you won't make any personal income tax saving.

If the £15,500 is your self employment profit then you could add £12,400 and get £3,100 in tax relief despite not paying £3,100 tax in the first place.

If the £15,500 is turnover then that is irrelevant, it's the profit which limits the amount you can contribute and get tax relief.

Marcon

anders170 said:

Hi I'm self employed, 57 and don't have a pension! I currently only earn 15,500 a year but I do have a few small extra income streams such as maintenance payments and a bit of tax credits. I really want to set up a pension to top up any state help I'll get. Is it right that if I set up a pension plan that is the equivalent of all the tax I currently pay (around £2k a year) that the government will pay in 25% on top and plus I'll get additional tax relief on the pension? I'm sure I must have that wrong. Also is there a plan that any self employed people could recommend. It looks like a minefield! 

Some basic reading would help (I suspect abbreviations like 'RAS' and 'SIPP' used in one of the answers above will mean precisely nothing to you - yet!). Try https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/personal-pensions

Checking your state pension is definitely a good move: https://www.gov.uk/check-state-pension

Also useful (although possibly not until you've actually set up a pension): https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

Looking at your other threads, I wonder if your 'earnings' are actually rental from letting a holiday home, in which case they can't be used as the basis for pension contributions (edit: unless they are qualifying holiday lets). You'd need to have earnings from other sources (not maintenance, for example) if you want to contribute more than £3,600 (gross - you'd actually pay in £2,880 and the provider would claim/add the tax relief to your pension pot) in any one tax year.

SVaz

I’m now self employed (sole trader) , I pay £500/Month into a Sipp and get £125 tax relief added.  I can pay in any amount up to my taxable profit ( but that includes the tax relief) .
You don’t mention your circumstances, whether you own a home or rent - that could make all the difference as to whether it’s sensible to save into a pension as it’s sometimes detrimental if you rent.  A small amount of private pension can make you worse off in the long run. 

Secret2ndAccount

What Dazed said is correct. You open a SIPP, and you pay in 80% of your profits. The government tops that up with the last 20% whether you've paid any tax or not. There is a problem for the self employed. You have to make the pension contribution before you know what your profits are. For example, you have until April 5th 2024 to make contributions equal to your profits for the year ending on or AFTER April 6th 2024. If you prepare your accounts to Apr 6th, that's not too bad. If you prepare them in December, then how are you supposed to know what your profits will be in November, and pay that into a pension now? Your choices are to put a bit less in the pension to be on the safe side, or to put in potentially too much. Then if it turns out you put in too much you have to get in touch with your SIPP provider and ask for some of your money back.
So knowing that you made 15,500 last year doesn't really help you. It's probably too late to put that into a pension. You need an idea of what you will make going forward. It's well worth doing though because of that 25% extra top-up. You probably pay some tax when you take the money out, but you will end up ahead. At age 57 you could get the money out any time if you really needed it, though that should be a last resort.

Don't know if you are aware, but the government is tweaking how they work out your profits starting this coming Apr 6th. So if you don't do your accounts to Apr 6th, it might be worth changing this year. It will make the maths easier every year from here on.

Marcon

Secret2ndAccount said:

What Dazed said is correct. You open a SIPP, and you pay in 80% of your profits. The government tops that up with the last 20% whether you've paid any tax or not. There is a problem for the self employed. You have to make the pension contribution before you know what your profits are. 

Few self employed people are going to be in a position to pay 80% of their profits into a pension (they need something to live on now!), so this is rarely the problem you suggest.

Secret2ndAccount

Marcon said:

Few self employed people are going to be in a position to pay 80% of their profits into a pension (they need something to live on now!), so this is rarely the problem you suggest.

I do it every year. After years of nailing it I screwed up this year and paid in £300 too much. Waiting for a letter from HMRC to drop onto the doormat. It made me wonder why there isn't just a box to tick on your tax form. At this point your profits are clear, as is the fact that you've overpaid into your pension. Why can't you just say you want to pay back the extra tax relief and add it to your tax bill?
We constantly see posts on here from people in their 50's wanting to know what's the maximum they can pay in to their pension.

Marcon

Secret2ndAccount said:

Marcon said:

Few self employed people are going to be in a position to pay 80% of their profits into a pension (they need something to live on now!), so this is rarely the problem you suggest.

I do it every year. After years of nailing it I screwed up this year and paid in £300 too much. Waiting for a letter from HMRC to drop onto the doormat. It made me wonder why there isn't just a box to tick on your tax form. At this point your profits are clear, as is the fact that you've overpaid into your pension. Why can't you just say you want to pay back the extra tax relief and add it to your tax bill?
We constantly see posts on here from people in their 50's wanting to know what's the maximum they can pay in to their pension.

We do, but it doesn't mean they can afford to actually pay that maximum... and certainly not many self-employed people can afford to live on 20% of their profits year after year, unless they have other income, in which case that could increase their net relevant earnings, depending on its source. Judging by your post in 2022, you fall into that category: https://forums.moneysavingexpert.com/discussion/6389118/self-employed-ni#latest - or at least did until 2022! If you are still an employee as well as self employed, maybe the £300 actually isn't an issue?

It really isn't a big deal for many people. The crucial point is paying something into a pension, rather than nothing.