Avoiding higher rate tax

kinger101

Personally, based on what you've said, my first solution would be to reduce the drawdown.  Appreciate there may be timing issues at play.

Dazed_and_C0nfused

concernedpharmacist said:

Dazed_and_C0nfused said:

Grumpy_chap said:

When considering the £10k of self employment, I assume this will be as Sole-Trader, not own Ltd Co.

I understand that a Sole-Trader would need to make personal pension contributions, not employer contributions.

Personal SIPP contributions are usually paid from taxed income and then the SIPP claims back the tax-relief uplift which is added to the pension fund.  When £8k is paid into the pension, the SIPP grosses this up to £10k in the fund.  That does not avoid paying the tax in the first place.  That is how it would work for an employee on PAYE.

If the self-employment is via own Ltd Co., then the £10k can be made as employer contributions to the pension and, hence, avoid the tax being incurred in the first place.

I am not aware that a Sole-Trader can make employer pension contributions.

I hope that helps and I am sure someone will be along shortly to clarify and correct me if my understanding with regard to Sole-Trader making employer contributions is incorrect.

You are correct as, in the scenario the op outlined, there is no employer who could make contributions.

Someone who is self employed would normally have to make relief at source contributions and the gross contribution would increase the basic rate band.

Whether the op can contribute £10k is a different matter.  They have referred to the potential to "earn" upto £10k.  If they mean they had profits of at least £10k then from what they have posted they could pay £10k gross (£8k net plus £2k basic rate relief).

If profits were only say £8k then they could only contribute £8k gross (£6.4k net plus £1.6k in basic rate relief).

For the purpose of this discussion assume that Simon earns the full £10K profit. Would it then be the case that when the self assessment return is completed giving details of £10k earned and £10 pension contribution, HR tax will be avoided?

Assuming you haven't omitted any sources of taxable income like untaxed interest and dividends and he isn't Scottish resident for tax purposes then yes.

Albermarle

Isthisforreal99 said:

concernedpharmacist said:

Dazed_and_C0nfused said:

Grumpy_chap said:

When considering the £10k of self employment, I assume this will be as Sole-Trader, not own Ltd Co.

I understand that a Sole-Trader would need to make personal pension contributions, not employer contributions.

Personal SIPP contributions are usually paid from taxed income and then the SIPP claims back the tax-relief uplift which is added to the pension fund.  When £8k is paid into the pension, the SIPP grosses this up to £10k in the fund.  That does not avoid paying the tax in the first place.  That is how it would work for an employee on PAYE.

If the self-employment is via own Ltd Co., then the £10k can be made as employer contributions to the pension and, hence, avoid the tax being incurred in the first place.

I am not aware that a Sole-Trader can make employer pension contributions.

I hope that helps and I am sure someone will be along shortly to clarify and correct me if my understanding with regard to Sole-Trader making employer contributions is incorrect.

You are correct as, in the scenario the op outlined, there is no employer who could make contributions.

Someone who is self employed would normally have to make relief at source contributions and the gross contribution would increase the basic rate band.

Whether the op can contribute £10k is a different matter.  They have referred to the potential to "earn" upto £10k.  If they mean they had profits of at least £10k then from what they have posted they could pay £10k gross (£8k net plus £2k basic rate relief).

If profits were only say £8k then they could only contribute £8k gross (£6.4k net plus £1.6k in basic rate relief).

For the purpose of this discussion assume that Simon earns the full £10K profit. Would it then be the case that when the self assessment return is completed giving details of £10k earned and £10 pension contribution, HR tax will be avoided?

Yes, £8k net contribution will eliminate any HR liability in this scenario.

From a practical point of view, Simon will pay some HR tax , but will get at back as a rebate after the self assessment is submitted.
HMRC will then assume the same scenario will apply in the next tax year, and will adjust his tax code accordingly.
This will mean he will pay no HR tax at all, but of course will get no later rebate.
If Simon intends to pay less or more into his pension in the following tax year, his tax will still be incorrect and he may again get a rebate or be asked to pay extra. 
Or he could inform HMRC in advance of any significant deviation from paying in £10K gross contributions. 

concernedpharmacist

kinger101 said:

Personally, based on what you've said, my first solution would be to reduce the drawdown.  Appreciate there may be timing issues at play.

Yes there are timing issues. 

Marcon

concernedpharmacist said:

For the purpose of this discussion assume that Simon earns the full £10K profit. Would it then be the case that when the self assessment return is completed giving details of £10k earned and £10 pension contribution, HR tax will be avoided?

Make sure you have the correct number of noughts on your return... You'd be surprised how many people don't!