Self employed basic to higher rate income tax

Dh6

Morning all. 

It’s looking like I’ll breach the higher rate income tax threshold this tax year. I’m a self employed sole trader. 

I remain under the VAT limit as my business is mostly labour only.

I intend to put my earnings over the higher rate threshold into my pension and was wondering all the things I would need to consider and how I would go about reclaiming the extra tax relief (I’m aware of the upcoming budget which might scupper my plans)

Would we lose child tax credits? 

My wife is a basic rate tax payer and will remain so.

Many thanks DH

Dazed_and_C0nfused

Dh6 said:

Morning all. 

It’s looking like I’ll breach the higher rate income tax threshold this tax year. I’m a self employed sole trader. 

I remain under the VAT limit as my business is mostly labour only.

I intend to put my earnings over the higher rate threshold into my pension and was wondering all the things I would need to consider and how I would go about reclaiming the extra tax relief (I’m aware of the upcoming budget which might scupper my plans)

Would we lose child tax credits? 

My wife is a basic rate tax payer and will remain so.

Many thanks DH

You would include the pension contributions on your tax return just like you would any other year.

If you check your Self Assessment calculation you will see your basic rate band is increased by the amount of the gross contribution.

For example if you paid £4,000 into the pension then the pension company will add £1,000 in basic rate tax relief giving you £5,000 in the pension.

Your Self Assessment calculation will show your basic rate band is increased to £42,700 meaning more of your income is taxed at 20% and less at 40%.

Having an increased profit would usually impact tax credits however pension contributions are something you can include when making your annual tax credit renewal declaration and these work in your favour so could offset the increased income to some degree.

Dh6

Thank you.

I have an accountant but I’m just doing some research myself so I have some knowledge on the subject before I discuss it with her.

I wasn’t sure if, as a sole trader I was able to pay into my pension to stay below the higher rate income tax and keep the child tax credits. 

If so that would be my strategy going forward..

Dazed_and_C0nfused

Dh6 said:

Thank you.

I have an accountant but I’m just doing some research myself so I have some knowledge on the subject before I discuss it with her.

I wasn’t sure if, as a sole trader I was able to pay into my pension to stay below the higher rate income tax and keep the child tax credits. 

If so that would be my strategy going forward..

You can, you cannot contribute more than your profit and if that was more than £60k you would need to have unused annual allowance to go above the £60k (and have been in a pension scheme in the prior years).

But nothing unusual in making pension contributions to remain in the basic rate band.  There can be additional benefits as well such as retaining eligibility for Marriage Allowance (if that's relevant).

Don't know quite how it would impact child tax credit but pension contributions are definitely going to work in your favour with having a pretty high income when it comes to tax credits.

Dh6

No it wouldn’t be more than my profit, it’d be around 20k into my pension per year to remain in the basic rate band.

We do use the marriage allowance as my wife is a basic rate tax payer and some years doesn't use her full personal allowance.

So child tax credits and marriage allowance are benefits of being in the basic rate band. Am I missing anything else?

Many thanks Dazed and Confused 

Dazed_and_C0nfused

Dh6 said:

No it wouldn’t be more than my profit, it’d be around 20k into my pension per year to remain in the basic rate band.

We do use the marriage allowance as my wife is a basic rate tax payer and some years doesn't use her full personal allowance.

So child tax credits and marriage allowance are benefits of being in the basic rate band. Am I missing anything else?

Many thanks Dazed and Confused 

How much help it will be with tax credits given your, in tax credit terms, relatively high income in the first place I honestly don't know but it's definitely something that is factored in so can only help increase your award.

It might be totally different once you move onto Universal Credit 🤔

Another potential benefit is you might retain the £1,000 savings nil rate band (aka Personal Savings Allowance), instead of just £500.

Dh6

Couple of further questions,

As I am a self employed sole trader ( not limited company ) I believe I pay into my pension which is classed as relief at source, am I correct in saying my pension contributions won’t count and I will lose the child benefit and £1000 personal saving allowance?

Also, I have several regular savers and other unsheltered higher rate savings accounts. I’ve designed these so as to remain below the £1000 savings allowance. However if I lose this and only get £500 does this become a bit of an administrative headache calculating what I will need to pay extra tax on?

kind regards

TheSpectator

For child benefit, it is based on your 'adjusted net income' which would be your self-employed profits + interest + any other taxable income minus your gross pension contributions. Do remember the child benefit threshold is £60,000 for 24/25.

To retain the full £1000 savings allowance you will have to pay sufficient pension contributions to ensure none of your taxable income falls into the higher rate tax bracket.

Dh6

To be honest I’ve been trying to research the ins and outs of it but have become rather confused! 

If the above statement you made is correct that makes perfect sense to me and will be able to work around that. 

Among other things, I’ve become confused about whether my pension contributions as a self employed sole trader enabled me to remain in the basic rate band and be eligible for the aforementioned benefits that the higher rate would remove!

Sarahspangles

Dh6 said:

To be honest I’ve been trying to research the ins and outs of it but have become rather confused! 

If the above statement you made is correct that makes perfect sense to me and will be able to work around that. 

Among other things, I’ve become confused about whether my pension contributions as a self employed sole trader enabled me to remain in the basic rate band and be eligible for the aforementioned benefits that the higher rate would remove!

In your original query you were referring to Child Tax Credit rather than Child Benefit. So earlier answers may not have been relevant.

Banks and Building Societies report interest paid on savings to HMRC but as you need to give a figure in Self Assessment you need your own records. Particularly if you have online only accounts that ‘vanish’ from banking apps when they mature and you close them.

Dazed_and_C0nfused

Dh6 said:

Couple of further questions,

As I am a self employed sole trader ( not limited company ) I believe I pay into my pension which is classed as relief at source, am I correct in saying my pension contributions won’t count and I will lose the child benefit and £1000 personal saving allowance?

Also, I have several regular savers and other unsheltered higher rate savings accounts. I’ve designed these so as to remain below the £1000 savings allowance. However if I lose this and only get £500 does this become a bit of an administrative headache calculating what I will need to pay extra tax on?

kind regards

Your pension contributions have to be included on your Self Assessment return and are taken into account in your Self Assessment calculation.

As previously explained they increase your basic rate band (by the amount of the gross contribution) which means more income can be taxed at 20% and less at 40%.  

This can also mean you remain eligible for Marriage Allowance and have a savings nil rate band of £1,000 (rather than £500).

You haven't previously mentioned Child Benefit but the gross contribution also reduces your "adjusted net income", which is used to determine and High Income Child Benefit Charge.

I think you are somewhat confused regarding the interest, it doesn't matter whether your interest is £500, £1,000 or £1,000,000, as you file a Self Assessment return you need to calculate your total untaxed interest and include that (as a single figure of the total amount) on your return.  This is then included in your Self Assessment calculation and any tax due included automatically.  You just need to report the correct figure, nothing more complicated than that.

Just to be clear, you don't get an "allowance" for interest.  You declare ALL taxable income on your tax return and the first £500 or £1,000 is taxed at 0%.