Making additional SIPP contribution before end of tax year, as a self employed low earner

AspiringPensioner

Hi everyone, I’ve been reading some of the threads recently and I’m learning a lot, thank you. I have several small deferred DB pension pots with different companies, which should start kicking in when I turn 60 in about 3 years’ time. I’ll probably return with more questions about those, but in the meantime I want to ask about making an additional larger contribution to my SIPP/s before the end of the 2024-25 tax year.

I’ve been a self-employed freelancer working in the arts for the last 10 years and it’s only fairly recently that I thought about making further pension contributions (basically because I was earning so little). So I opened a robo-investing SIPP with Wealthify about 4 years ago and have been paying in a small monthly contribution since. It’s barely increased in value (ethical cautious plan) but my main motivation has been the tax relief. This one now has about £3,500 in the pot. I also have a second SIPP with Hargreaves Lansdown which I opened purely to transfer some pension that I earned in 2016-17. At that time I also had a part time employed job and made pension payments into the LGPS. Because that was a 16 month fixed term contract for about 16 months, they would not let me defer as it was under the minimum two years (vesting period?). Rather than get a refund of my contributions, I received a lot more by opening the HL SIPP and transferring the sum into that (it wasn’t possible to add it to the Wealthify one). I haven’t made any more contributions to the HL plan so that’s just been sitting there for 2 or 3 (?) years, now also worth approx £3,500.

I’m thinking that it would probably be a good idea to invest a lump of cash in one or both of these SIPPs before the end of this tax year. As I said, for quite a few years I completely neglected the personal pension aspect of things, partly because my self employed earnings have been so low. I also have my DB deferred pension pots from a total of about 20 years of paying into decent company pensions, which altogether will provide a modest annual income which should be OK in our overall budget alongside my husband’s pension, our savings etc. But as I’m 57 and probably intending to retire around the age of 60, I was thinking I should probably build up some more investment in the SIPPS now – even just for the tax relief?

As I understand it, as a low earner I’m allowed to pay in as much as my annual earnings (as I’m way under the max cap). So in the case of a self employed person (sole trader), would that figure be equivalent to the net income total, once I’ve calculated my gross business income and deducted my business expenses? For instance if I'm looking at £12k gross income, £9k net business income (I have some savings interest income too). In this scenario would it be £9,000 that I would be allowed to pay into my personal pension as an additional amount? And would you split it between the two different providers?

Thanks for any advice!    

Marcon

AspiringPensioner said:

Hi everyone, I’ve been reading some of the threads recently and I’m learning a lot, thank you. I have several small deferred DB pension pots with different companies, which should start kicking in when I turn 60 in about 3 years’ time. I’ll probably return with more questions about those, but in the meantime I want to ask about making an additional larger contribution to my SIPP/s before the end of the 2024-25 tax year.

I’ve been a self-employed freelancer working in the arts for the last 10 years and it’s only fairly recently that I thought about making further pension contributions (basically because I was earning so little). So I opened a robo-investing SIPP with Wealthify about 4 years ago and have been paying in a small monthly contribution since. It’s barely increased in value (ethical cautious plan) but my main motivation has been the tax relief. This one now has about £3,500 in the pot. I also have a second SIPP with Hargreaves Lansdown which I opened purely to transfer some pension that I earned in 2016-17. At that time I also had a part time employed job and made pension payments into the LGPS. Because that was a 16 month fixed term contract for about 16 months, they would not let me defer as it was under the minimum two years (vesting period?). Rather than get a refund of my contributions, I received a lot more by opening the HL SIPP and transferring the sum into that (it wasn’t possible to add it to the Wealthify one). I haven’t made any more contributions to the HL plan so that’s just been sitting there for 2 or 3 (?) years, now also worth approx £3,500.

I’m thinking that it would probably be a good idea to invest a lump of cash in one or both of these SIPPs before the end of this tax year. As I said, for quite a few years I completely neglected the personal pension aspect of things, partly because my self employed earnings have been so low. I also have my DB deferred pension pots from a total of about 20 years of paying into decent company pensions, which altogether will provide a modest annual income which should be OK in our overall budget alongside my husband’s pension, our savings etc. But as I’m 57 and probably intending to retire around the age of 60, I was thinking I should probably build up some more investment in the SIPPS now – even just for the tax relief?

As I understand it, as a low earner I’m allowed to pay in as much as my annual earnings (as I’m way under the max cap). So in the case of a self employed person (sole trader), would that figure be equivalent to the net income total, once I’ve calculated my gross business income and deducted my business expenses? For instance if I'm looking at £12k gross income, £9k net business income (I have some savings interest income too). In this scenario would it be £9,000 that I would be allowed to pay into my personal pension as an additional amount? And would you split it between the two different providers?

Thanks for any advice!    

If by 'net business income' you mean your profits were £9K, then you would pay in £7,200 minus any amounts you've already contributed in this current tax year (you need to think in gross terms in respect of your regular monthly contributions, rather than the net amount you've actually paid over). It's fine to split it between the two providers - entirely up to you if you choose to do that, but check the costs for each provider before making your decision. The provider(s) would add basic rate tax relief to bring the gross total for the tax year up to £9K.

You can't make pension contributions in respect of savings interest - it has to be 'relevant earnings'. 

Dazed_and_C0nfused

It is your profit which counts.

dunstonh

It’s barely increased in value (ethical cautious plan) 

1 - ethical investing has historically underperformed conventional investing.
2 - cautious means heavy in bonds and late 2021 to late 2023 was the worst period for bonds in over a 100 years. 

I’m thinking that it would probably be a good idea to invest a lump of cash in one or both of these SIPPs before the end of this tax year. 

HL offers a SIPP.  Wealthify is a robo.   I know their website uses the SIPP term, but it's not. Quite a few non-SIPP providers do this for marketing reasons.  For example, SI in SIPP stands for self-invested - Robo providers don't offer seft investing.   The reality is that there isn't really an official designation for restricted pensions that the robos offer.  But SIPPs and robo pensions are very different.

For instance if I'm looking at £12k gross income, £9k net business income (I have some savings interest income too). In this scenario would it be £9,000 that I would be allowed to pay into my personal pension as an additional amount? 

£12k gross income (before tax) means your pension contribution can be £12k.  Its always gross that you go by.

 And would you split it between the two different providers?

No.   Personally, I wouldn't us either HL or Wealthify.
HL is expensive for UT/OEICs and Wealthify is even more expensive and far too restricted.

Your question is the wrong one to ask.  You shouldn't ask what we would do because other posters here will have different knowledge and investment experience and requirements.     

There is no point you having two pensions and with both of them being expensive, neither is likely to be optimal.   Wealthify is by far the more basic of the two (which is partly the point of robos).  HL is far more advanced but are you paying for things that you don't need?   

AspiringPensioner

dunstonh said:

It’s barely increased in value (ethical cautious plan) 

1 - ethical investing has historically underperformed conventional investing.
2 - cautious means heavy in bonds and late 2021 to late 2023 was the worst period for bonds in over a 100 years. 

I’m thinking that it would probably be a good idea to invest a lump of cash in one or both of these SIPPs before the end of this tax year. 

HL offers a SIPP.  Wealthify is a robo.   I know their website uses the SIPP term, but it's not. Quite a few non-SIPP providers do this for marketing reasons.  For example, SI in SIPP stands for self-invested - Robo providers don't offer seft investing.   The reality is that there isn't really an official designation for restricted pensions that the robos offer.  But SIPPs and robo pensions are very different.

For instance if I'm looking at £12k gross income, £9k net business income (I have some savings interest income too). In this scenario would it be £9,000 that I would be allowed to pay into my personal pension as an additional amount? 

£12k gross income (before tax) means your pension contribution can be £12k.  Its always gross that you go by.

 And would you split it between the two different providers?

No.   Personally, I wouldn't us either HL or Wealthify.
HL is expensive for UT/OEICs and Wealthify is even more expensive and far too restricted.

Your question is the wrong one to ask.  You shouldn't ask what we would do because other posters here will have different knowledge and investment experience and requirements.     

There is no point you having two pensions and with both of them being expensive, neither is likely to be optimal.   Wealthify is by far the more basic of the two (which is partly the point of robos).  HL is far more advanced but are you paying for things that you don't need?   

Hi dunstonh, 

I realise that neither of these providers is doing very well for me, and I guess I should look at this whole thing more carefully and open a new plan with a better provider, but given the fact that I've only left myself a fortnight before the end of the tax year, I thought perhaps the priority would be to whack that money in and secure the tax relief, and then look at moving it once into April? Or perhaps you'd recommend opening another better plan with this contribution - but that will require putting time and effort into research which I'm not sure I'll be able to sort out in time. 

Your comment that I could contribute £12k (equivalent to my gross earnings) seems to be at odds with the other comments so far, so I'm still a bit confused on that front. 

Thanks for taking the time to reply. 

QrizB

AspiringPensioner said:

Your comment that I could contribute £12k (equivalent to my gross earnings) seems to be at odds with the other comments so far, so I'm still a bit confused on that front. 

While I pretty much never disagree with dunstonh, I think he's misinterpreted your "gross earnings" to mean "net profits before tax" rather than "gross revenue before deducting costs".

Marcon

AspiringPensioner said:

Your comment that I could contribute £12k (equivalent to my gross earnings) seems to be at odds with the other comments so far, so I'm still a bit confused on that front. 

Would it be accurate to say that your turnover was £12K and your profit from your self employment was £9K?

dunstonh

QrizB said:

AspiringPensioner said:

Your comment that I could contribute £12k (equivalent to my gross earnings) seems to be at odds with the other comments so far, so I'm still a bit confused on that front. 

While I pretty much never disagree with dunstonh, I think he's misinterpreted your "gross earnings" to mean "net profits before tax" rather than "gross revenue before deducting costs".

I was indeed interpreting "gross earnings" of £12k as profit before tax—certainly not turnover.    Earnings usually refers to profit, not turnover.

If the turnover was £12k and the profit before tax was £9k then £9k is the maximum contribution for the pension.

AspiringPensioner

Marcon said:

AspiringPensioner said:

Your comment that I could contribute £12k (equivalent to my gross earnings) seems to be at odds with the other comments so far, so I'm still a bit confused on that front. 

Would it be accurate to say that your turnover was £12K and your profit from your self employment was £9K?

Yes, approximately (I haven't gone through it all 100% yet, but pretty much). 

AspiringPensioner

dunstonh said:

QrizB said:

AspiringPensioner said:

Your comment that I could contribute £12k (equivalent to my gross earnings) seems to be at odds with the other comments so far, so I'm still a bit confused on that front. 

While I pretty much never disagree with dunstonh, I think he's misinterpreted your "gross earnings" to mean "net profits before tax" rather than "gross revenue before deducting costs".

I was indeed interpreting "gross earnings" of £12k as profit before tax—certainly not turnover.    Earnings usually refers to profit, not turnover.

If the turnover was £12k and the profit before tax was £9k then £9k is the maximum contribution for the pension.

Right, thank you. Sorry if I wasn't clear in my language! Yes, that's what I meant. 

AspiringPensioner

Hello again - just a follow up question. 

Do I get the tax relief on my contributions if I'm under the personal allowance threshold and don't pay any income tax on my self-employed earnings?

As in the example discussed above, if my self employed turnover was £12k and profit before tax was £9k, therefore I'm permitted to contribute a maximum of £9k into my personal pension in this tax year - but do I get tax relief on that entire amount? My other half is asking how it can be possible to get tax relief on this, if I'm not paying any income tax in the same year. I didn't ask that question directly in my OP, but I did mention that this is my main motivation for putting a larger amount into my pension rather than into a savings account. 

A while ago I found the following info on the Moneyhelper.org website:

You can get tax relief on your pension savings up to the lower of the annual allowance, which is currently £60,000 for most people, or 100% of your earnings. If you exceed your allowance, a tax charge is made which claws back any tax relief that was given at source. If you earn less than £3,600, you can contribute up to £2,880 to a personal pension and still get tax relief.

But I guess this doesn't explicitly lay out that the "100% of your earnings" applies to those who earn above £3,600 but below the personal allowance. Thanks for your patience and for any further insight!