Are pension contributions tax deductible?

gerbilmore

Hmmm.

I'm a bit confused about this and realise I only have three weeks before the end of the tax year to sort it out.

I'm self-employed. By the end of this year I will have earned £50,000 - the most I've ever earned in a year, hence the questions.

After my personal allowance (say £5,000) and my business expenses (another £5,000), that leaves me with a profit of £40,000 - ie a higher rate tax payer.

This works out that I owe around £10,000 in tax and £3,000 in NI contributions.

So, in order to try and cut down this amount, I've considered starting my first pension with a lump sum of £10,000 which I gather will receive 40% tax relief (so I'll get £14,000 in my pension pot, right?)

Here are the questions:

1) As I'm now officially a higher rate tax payer - do I have to let someone know - ie the Tax Office?

2) If I make a £10,000 lump sum payment to start a pension, is this considered tax deductible? In other words, will my profit for the year then be £30,000 - thus meaning I pay less tax and NI?

3) On another note, this will be my second year as being self-employed but I've heard on the grapevine that any business expenses I made in the three years leading up to going self-employed can be considered tax deductible this year. Is this right?

Thanks...

fengirl_2

1. No. As you self assess, your higher rate liability will automatically appear in your income tax calculation.
2. Yes, you can pay up to the amount of your assessable profit into your pension (assuming you can afford it!). A pension contribution will not affect your profit, but it is an allowable deduction for tax purposes and will reduce your tax @ 40%.
3. This is not straightforward. I think what you have heard is that any losses in the first year can be carried back and offset against any other income in the first 3 yrs.

gerbilmore

Thanks.

2. Yes, you can pay up to the amount of your assessable profit into your pension (assuming you can afford it!). A pension contribution will not affect your profit, but it is an allowable deduction for tax purposes and will reduce your tax @ 40%

This answer seems to contradict itself.

A pension contribution IS an allowable deduction for tax purposes, but it WILL NOT affect my profit? Eh?

If I work out that I have made a profit of £10,000 and so pay £10,000 into a personal pension, does this mean I tell the tax man I made no profit and therefore have no tax to pay.

Do I deduct persona pension contributions in the same way as I'd deduct travel expenses or other business costs?

Thanks...

theculverhouses

not quite...pension contributions go on a separate section of the tax return.

Your self employment pages show the businesses profitability etc.

If you had employees and paid employer pension contributions then this would be an allowable deduction as part of your self employment pages.

Cheers.

harryhound

Hi,
Your pension fund is nothing to do with your business (thank goodness?)
From your business you have made a profit. That profit has made you a tax payer.
As a tax payer your have a right to put your money into a pension and if you do, you won't have to pay any tax on it. The pages in the tax return are completely different but it all comes out in the wash when the calculation is done. If your affairs are fairly simple, I would recommend signing up with HMR&C's on-line system and then you can play "what if"' games with it to get a feel of how it works.
Some people think the NI contributions are a pain in the neck, I have an even lower opinion of them. (me: So what do I get for all this money? As far as I can work out I as a semi retired bloke get sweet FA, so its just extra tax". Taxman: "I think you have understood the situation very clearly sir".)
There are several threads on here explaining the in's and out's of the tax system, just don't expect it to be logical. It is just a pile of changes upon changes made for political expediency and designed to "pluck the goose and get the maximum number of feathers for the minimum amount of squawking".

50K in your second year - I'm impressed. Capable of earning money at that rate, it would probably make sense to team up with a clever accountant, to give you more time to do what you are good at. (however if you know the basics your accountant will be better able to explain the score, and you will get better value from his fee. Beware of being too clever as you may create a situation that saves tax in year one but costs time and effort to keep going there after.)

There is still just about enough time on Easter Tuesday to make suitable payments into this year's pension. By Tuesday, you could be an expert with all the useful advice on here!

Cheers,

Harry.