Self Employed - should I save into an ISA or a SIIP - or both?

All_the_money

I am 47, part time self employed with no work place pension or ISA in place. I do have 2 rental properties.

My small income has grown and I will need to start paying tax for the year 24-25 at 20%, and wonder, should I be squirrelling that extra into an ISA or a SIPP? ( and which would be better?), I suppose I am thinking, it's better putting it somewhere and not lose it on a tax payment....

Any advice would be very much appreciated, thank you 

dunstonh

Pension beats ISA for money you need to access in retirement.    

Dazed_and_C0nfused

All_the_money said:

I am 47, part time self employed with no work place pension or ISA in place. I do have 2 rental properties.

My small income has grown and I will need to start paying tax for the year 24-25 at 20%, and wonder, should I be squirrelling that extra into an ISA or a SIPP? ( and which would be better?), I suppose I am thinking, it's better putting it somewhere and not lose it on a tax payment....

Any advice would be very much appreciated, thank you 

Contributing to a pension will have absolutely no impact on the tax you have to pay.

But you will get pension tax relief on your pension contributions so say you pay £3,000 into a pension the pension company will add £750 in tax relief, courtesy of HMRC, giving you a pension fund of £3,750.

In fact if you can afford to contribute enough you can easily get more pension tax relief than the amount of tax you have to pay.

And as Dunstonh says a pension will beat an ISA for tax efficiency.

All_the_money

Thank you both, so in my mind both the SIPP and ISA contributions could be deducted from my income before tax is calculated, effectively reducing how much tax I would need to pay - so thats not the case? This isn't like a workplace pension where tax is calculated after pension contibutions are taken off?

All_the_money

Dazed_and_C0nfused said:

All_the_money said:

I am 47, part time self employed with no work place pension or ISA in place. I do have 2 rental properties.

My small income has grown and I will need to start paying tax for the year 24-25 at 20%, and wonder, should I be squirrelling that extra into an ISA or a SIPP? ( and which would be better?), I suppose I am thinking, it's better putting it somewhere and not lose it on a tax payment....

Any advice would be very much appreciated, thank you 

Contributing to a pension will have absolutely no impact on the tax you have to pay.

But you will get pension tax relief on your pension contributions so say you pay £3,000 into a pension the pension company will add £750 in tax relief, courtesy of HMRC, giving you a pension fund of £3,750.

In fact if you can afford to contribute enough you can easily get more pension tax relief than the amount of tax you have to pay.

And as Dunstonh says a pension will beat an ISA for tax efficiency.

Can you point me in the right direction to read more on the SIPP tax relief please....

Dazed_and_C0nfused

All_the_money said:

Thank you both, so in my mind both the SIPP and ISA contributions could be deducted from my income before tax is calculated, effectively reducing how much tax I would need to pay - so thats not the case? This isn't like a workplace pension where tax is calculated after pension contibutions are taken off?

No, you cannot deduct either.  An ISA contribution doesn't even feature on your tax return.

But all investment gains within the ISA and SIPP are exempt from tax.

Dazed_and_C0nfused

All_the_money said:

Dazed_and_C0nfused said:

All_the_money said:

I am 47, part time self employed with no work place pension or ISA in place. I do have 2 rental properties.

My small income has grown and I will need to start paying tax for the year 24-25 at 20%, and wonder, should I be squirrelling that extra into an ISA or a SIPP? ( and which would be better?), I suppose I am thinking, it's better putting it somewhere and not lose it on a tax payment....

Any advice would be very much appreciated, thank you 

Contributing to a pension will have absolutely no impact on the tax you have to pay.

But you will get pension tax relief on your pension contributions so say you pay £3,000 into a pension the pension company will add £750 in tax relief, courtesy of HMRC, giving you a pension fund of £3,750.

In fact if you can afford to contribute enough you can easily get more pension tax relief than the amount of tax you have to pay.

And as Dunstonh says a pension will beat an ISA for tax efficiency.

Can you point me in the right direction to read more on the SIPP tax relief please....

Your contributions would be made using the relief at source method.  There is no other option for someone who is self employed.

https://getpenfold.com/pension-guides/self-employed-pension-tax-relief

Albermarle

Also be clear that there are different types of ISA. The main two types are;
Cash ISA - a savings account
Stocks and shares ISA - an investment account.

Also within a pension, your money is normally invested and not kept as cash.

Investing is normally better for the long term and cash savings for the short term.

friolento

Dazed_and_C0nfused said:

All_the_money said:

Thank you both, so in my mind both the SIPP and ISA contributions could be deducted from my income before tax is calculated, effectively reducing how much tax I would need to pay - so thats not the case? This isn't like a workplace pension where tax is calculated after pension contibutions are taken off?

No, you cannot deduct either.  An ISA contribution doesn't even feature on your tax return.

But all investment gains within the ISA and SIPP are exempt from tax.

You may have to pay tax though when you eventually draw from your SIPP as anything above the 25% tax free amount will count as taxable income.