Small Sole Trader Pension Contribution

MetaPhysical

A sanity check please?
My partner is due to make a profit of about £14000 this year on her small Etsy business.

If she diverts £14000 - 12570 = £1430 into a SIPP then that will bring her below the taxable threshold for her earnings won't it?  I know this is the case for employees but wondered if this rule still applied to sole traders?  AND she'd still get 20% added to her contribution in the SIPP?

Dazed_and_C0nfused

MetaPhysical said:

A sanity check please?
My partner is due to make a profit of about £14000 this year on her small Etsy business.

If she diverts £14000 - 12570 = £1430 into a SIPP then that will bring her below the taxable threshold for her earnings won't it?  I know this is the case for employees but wondered if this rule still applied to sole traders?  AND she'd still get 20% added to her contribution in the SIPP?

No, it won't make the slightest difference to her personal income tax liability.

She will still be taxed on £14,000.

Her basic rate band would be increased from £37,700 to £39,487.50.

And she would have basic rate relief of £357.50 added to her pension, giving a pension fund of £1,787.50.

Not sure why you think it would happen for employees, it wouldn't.

NedS

Paying into a SIPP will not reduce her taxable earnings, but she will receive tax relief on her contributions which will be automatically added to her SIPP.

If her taxable earnings are £14,000, she will pay tax of 20% on £1430 (above her personal allowance) = £286

If she contributes £1430 into a SIPP, she will automatically receive tax relief of £357.50 added to her SIPP.

MetaPhysical

Thanks folks.  Of course.....

Dazed_and_C0nfused

If the £14,000 profit is correct then she could add £11,200 and get £2,800 in pension tax relief.

Despite only paying £286 in income tax.  Or even just £271.70 if she's Scottish resident.

Marcon

Dazed_and_C0nfused said:

MetaPhysical said:

A sanity check please?
My partner is due to make a profit of about £14000 this year on her small Etsy business.

If she diverts £14000 - 12570 = £1430 into a SIPP then that will bring her below the taxable threshold for her earnings won't it?  I know this is the case for employees but wondered if this rule still applied to sole traders?  AND she'd still get 20% added to her contribution in the SIPP?

No, it won't make the slightest difference to her personal income tax liability.

She will still be taxed on £14,000.

Her basic rate band would be increased from £37,700 to £39,487.50.

And she would have basic rate relief of £357.50 added to her pension, giving a pension fund of £1,787.50.

Not sure why you think it would happen for employees, it wouldn't.

It would if the contribution was made by salary sacrifice, which I think is what OP probably has in mind?

Dazed_and_C0nfused

Marcon said:

Dazed_and_C0nfused said:

MetaPhysical said:

A sanity check please?
My partner is due to make a profit of about £14000 this year on her small Etsy business.

If she diverts £14000 - 12570 = £1430 into a SIPP then that will bring her below the taxable threshold for her earnings won't it?  I know this is the case for employees but wondered if this rule still applied to sole traders?  AND she'd still get 20% added to her contribution in the SIPP?

No, it won't make the slightest difference to her personal income tax liability.

She will still be taxed on £14,000.

Her basic rate band would be increased from £37,700 to £39,487.50.

And she would have basic rate relief of £357.50 added to her pension, giving a pension fund of £1,787.50.

Not sure why you think it would happen for employees, it wouldn't.

It would if the contribution was made by salary sacrifice, which I think is what OP probably has in mind?

Not sure how that is even possible though.

Up to now the op has referred to their spouse being a sole trader and contributions to a SIPP.

So unless the spouse has an old retirement annuity contract there isn't going to be any option (pension wise) to reduce their taxable income.

And as an employee SIPP contributions would always be made using the relief at source method.