Making extra pension contribution to reduce tax liability when both employed and self-employed

unachance

Hi there, first time poster so sorry if this is a very dumb question! I am full-time employed (42.5K taxable income after 5% salary sacrifice), but I am also self-employed and for the tax year that's about to end, I made 12.5K in income. I usually just use the £1000 trading allowance rather than expenses.

Because I made more than usual from my side job this year, it will push me (slightly!) into paying the higher rate for the first time. Given what I've already paid via PAYE, I'd guess I am on track to pay about 3.5K in tax (some at what is left in my basic rate bracket, the rest higher) when I do my self-assessment for my self-employed income.

My question is around pension relief on my self-employed income. Someone said to me in passing it would be beneficial for me to pay pension contributions from my self-employed income, which never occurred to me. After a lot of googling, I just cannot wrap my head around how much it would make sense to put into my pension given my rough tax liability as most guides and calculators don't take into account being both employed and self-employed? Is anyone able to explain like I'm five how tax relief on personal pension contributions works, and give me a rough idea on how much would make sense to contribute?

Marcon

unachance said:

Hi there, first time poster so sorry if this is a very dumb question! I am full-time employed (42.5K taxable income after 5% salary sacrifice), but I am also self-employed and for the tax year that's about to end, I made 12.5K in income. I usually just use the £1000 trading allowance rather than expenses.

Because I made more than usual from my side job this year, it will push me (slightly!) into paying the higher rate for the first time. Given what I've already paid via PAYE, I'd guess I am on track to pay about 3.5K in tax (some at what is left in my basic rate bracket, the rest higher) when I do my self-assessment for my self-employed income.

My question is around pension relief on my self-employed income. Someone said to me in passing it would be beneficial for me to pay pension contributions from my self-employed income, which never occurred to me. After a lot of googling, I just cannot wrap my head around how much it would make sense to put into my pension given my rough tax liability as most guides and calculators don't take into account being both employed and self-employed? Is anyone able to explain like I'm five how tax relief on personal pension contributions works, and give me a rough idea on how much would make sense to contribute?

Doesn't matter whether you pay pension contributions from your self employed income or your PAYE income - it all qualifies for tax relief provided your total contributions for the year are within certain limits. 

If you want to make the contribution in this tax year (ie by Friday), it'll need to be a personal contribution. How much of your income will be subject to higher rate tax? Rather than worrying about fine tuning things at this very late stage, make a contribution of that amount to a personal pension (your workplace pension might be a personal pension, otherwise you'll need to open one fast) and the provider will add 20% tax relief and you reclaim the further relief through your self assessment tax return.

Loads of recent threads on just this topic, so have a browse through those eg https://forums.moneysavingexpert.com/discussion/6517930/no-pension-at-nearly-50/p1

unachance

Brill, I have a personal pension already set up that I am ready to pay a payment into right away. So theoretically, just so I can make sure I am understanding it correctly, if £5000 of my income falls into the higher tax band and I made a £5000 payment into my pension, what would happen?

The reason I am trying to figure out what makes sense to input is that I only have so much cash liquid to make a pension payment with right now (I have about 2K from savings I could comfortably put away in pension, and then 4K set aside for my tax bill). What I am trying to figure out is if my tax bill is going to be reduced by making a payment, how much of the 4K I can afford to pop into a pension pot now rather than save to pay my self-assessment bill, if that makes sense?

Marcon

unachance said:

Brill, I have a personal pension already set up that I am ready to pay a payment into right away. So theoretically, just so I can make sure I am understanding it correctly, if £5000 of my income falls into the higher tax band and I made a £5000 payment into my pension, what would happen?

The reason I am trying to figure out what makes sense to input is that I only have so much cash liquid to make a pension payment with right now (I have about 2K from savings I could comfortably put away in pension, and then 4K set aside for my tax bill). What I am trying to figure out is if my tax bill is going to be reduced by making a payment, how much of the 4K I can afford to pop into a pension pot now rather than save to pay my self-assessment bill, if that makes sense?

The pension provider would claim basic rate tax on your behalf on £5,000 and add that to your pension pot. You'd claim higher rate relief via your self assessment tax return - it isn't added to your pot.

This might make useful reading (and hopefully not confuse you further!): https://community.hmrc.gov.uk/customerforums/pt/05c324e6-f44b-ee11-a81c-0022481b6490

MX5huggy

Do you have children and get Child Benefit? If so you want to dip under £50k this tax year not just the higher 40% threshold. 

Will this be your first Self Assessment tax return? Tax is not due till 31st of Jan if it is but unless income falls dramatically back you will have to pay this tax bill and half the expected bill for 24-25. So £3500 plus £1750 on account can you rebuild your tax payment pot by then if you put it into pension now?

Secret2ndAccount

if you are £5000 over, then just pay £4,000 into your pension. The pension will add 25% making a £5,000 contribution. Then when you do your tax form, HMRC will increase your tax thresholds by £5,000 so instead of falling into higher rate tax at 50k, you do so at 55k. In other words you avoid higher rate tax, and save £1,000 on your tax bill. So, eventually, you have only spent £3,000 but there is £5,000 in your pension.
However, have you already paid some pension contributions already - maybe in your employment?  If so, you can subtract those payments (yours, not your employer's) from the amount you need to contribute. The tax might be handled slightly differently with your company pension, but you should be able to figure out what you have personally contributed to your pension already this year.