How much can the self-employed invest in a pension?

[pingu393]

I am self-employed and my profits barely cross the income tax threshold of £12,500, if at all.

I know that everyone can contribute £2880 and the Government will add tax relief to make it up to £3600.

I know that I can contribute 100% of "income" upto £40,000.



Is this 100% upto £40,000 the amount the Government will add 25% to, and I can contribute more - it just won't receive tax relief?

Can someone please confirm that my "income" is my profit (*) - it usually is, but I can't find confirmation on the various pension websites?

I don't know what my declared profit will be until after my accountant has calculated it at the end of the year. This is usually around November.

Ideally, I would contribute 100% (no more, no less) (**), is there a method to be able do this?


(*) this would seem strange, as I probably haven't paid any income tax on it.
my net income = my gross income - expenses - NI, but not - Income Tax (as I won't have paid any).

(**) Is this going to be like Shylock's pound of flesh, and it will never be exact - just a best guess?

[Mr Pointy]

There's no such thing as being "self-employed". Do you mean you operate as Sole Trader or as the director of a Personal Services Company? The allowances are different for each.

[pingu393]

Mr Pointy said:

There's no such thing as being "self-employed". Do you mean you operate as Sole Trader or as the director of a Personal Services Company? The allowances are different for each.

Sole trader.

[Monkeylegend]

Mr Pointy said:

There's no such thing as being "self-employed".

The gov.uk website would seem to disagree with you. Self employed is very much a thing.

[pingu393]

anonymous said:

[redacted]

WinnaWinna: You may be right about that, but I'm only wanting to know how I can invest between £5k and £12k, but it will be 100% of "income".

[-Pete-]

You can invest everything you earn, up to £40K, into your pension. If you're self employed as a sole trader, you'll have to estimate your net income and pay that into your pension by 5th April. As you probably won't know the exact amount until after that date, pay in too much, up to the £32K limit. Your pension provider should automatically reclaim 20% tax on that amount, effectively increasing your contribution by 25%. I've read that not all pension providers do this, so you should check - mine does.

When you, or your accountant, complete your self assessment form, you declare however much you contributed, and if it exceeds your net income then you'll have to pay back the excess and the tax relief added by the pension company.

Oddly enough, anything you expense will diminish the money you can pay in, saving you £0 in income tax, and losing you 25% in extra pension contributions. It would be wrong to not declare true business expenses, but if it's marginal then err on the side of personal use.

[pingu393]

-Pete- said:

You can invest everything you earn, up to £40K, into your pension. If you're self employed as a sole trader, you'll have to estimate your net income and pay that into your pension by 5th April. As you probably won't know the exact amount until after that date, pay in too much, up to the £32K limit. Your pension provider should automatically reclaim 20% tax on that amount, effectively increasing your contribution by 25%. I've read that not all pension providers do this, so you should check - mine does.

Thanks. I'll check that my new pension provider does this.

-Pete- said:

When you, or your accountant, complete your self assessment form, you declare however much you contributed, and if it exceeds your net income then you'll have to pay back the excess and the tax relief added by the pension company.

Who do I pay the excess to? Do I pay the excess net back to myself and the Government contribution back to the Government? Hopefully, my accountant or the pension provider will know how this is done.

-Pete- said:

Oddly enough, anything you expense will diminish the money you can pay in, saving you £0 in income tax, and losing you 25% in extra pension contributions. It would be wrong to not declare true business expenses, but if it's marginal then err on the side of personal use.

This makes sense now that you point it out. I want to maximise my net income .

[-Pete-]

pingu393 said:

Who do I pay the excess to? Do I pay the excess net back to myself and the Government contribution back to the Government? Hopefully, my accountant or the pension provider will know how this is done.

HMRC will get the excess back from you as part of your tax assessment, you & your pension provider don't need to do anything.

pingu393 said:

-Pete- said:

Oddly enough, anything you expense will diminish the money you can pay in, saving you £0 in income tax, and losing you 25% in extra pension contributions. It would be wrong to not declare true business expenses, but if it's marginal then err on the side of personal use.

This makes sense now that you point it out. I want to maximise my net income .

Great, isn't it? After trying to claim every expense I could, I now find myself trying not to claim anything. Obviously don't lie, but avoid expensing anything dual-use... you can lend/donate your personal things to the business without declaring them.

Interestingly, HMRC only talks of what you 'may claim', there's no obligation to claim expenses on their part. Where you could run into problems is if you overestimated profits when applying for a mortgage or other loan - that would be considered fraud.

[pingu393]

-Pete- said:

pingu393 said:

Who do I pay the excess to? Do I pay the excess net back to myself and the Government contribution back to the Government? Hopefully, my accountant or the pension provider will know how this is done.

HMRC will get the excess back from you as part of your tax assessment, you & your pension provider don't need to do anything.

Does any excess just stay in the pension, but without the tax relief?

For instance...

I contribute £5000 into my pension, Government adds £1000. Pension fund is £6000.
I declare £4000 as net, Government reclaims £200 via my self-assessment form.
Pension fund is still £6000, but I've effectively contributed £5,200.

[-Pete-]

pingu393 said:

Does any excess just stay in the pension, but without the tax relief?
For instance...
I contribute £5000 into my pension, Government adds £1000. Pension fund is £6000.
I declare £4000 as net, Government reclaims £200 via my self-assessment form.
Pension fund is still £6000, but I've effectively contributed £5,200.

If I transfer £5K into my pension with L&G, they will reclaim £1.25K of income tax (at 20%) even though I didn't pay it. My pension will increase by £6.25K in total. If my SA shows I only made £4K then I've overpaid £1K and L&G have wrongly added £250.

The 'excess' money will remain in my pension, but I'll have to repay £1.25K which will be included in my tax statement. You can pay as much as you want into a pension, there's no limit... the limit is the tax relief you can claim per year and over your lifetime.

[pingu393]

-Pete- said:

pingu393 said:

Does any excess just stay in the pension, but without the tax relief?
For instance...
I contribute £5000 into my pension, Government adds £1000. Pension fund is £6000.
I declare £4000 as net, Government reclaims £200 via my self-assessment form.
Pension fund is still £6000, but I've effectively contributed £5,200.

If I transfer £5K into my pension with L&G, they will reclaim £1.25K of income tax (at 20%) even though I didn't pay it. My pension will increase by £6.25K in total. If my SA shows I only made £4K then I've overpaid £1K and L&G have wrongly added £250.

The 'excess' money will remain in my pension, but I'll have to repay £1.25K which will be included in my tax statement. You can pay as much as you want into a pension, there's no limit... the limit is the tax relief you can claim per year and over your lifetime.

I'm a bit confused by why you repay £1.25K and not just the £250 overpayment, but I think it is because I am thinking in terms of the tax due and you are thinking in terms of taxable income.

If I interpret you correctly, your tax details will be something like...

Profits £4k
Pensions overpayment £1.25k

Tax to pay on Profits = £0 (below £12,500 limit)
Tax to pay on Pensions overpayment = £250 (20% of overpayment)
Total tax to pay = £250

[Eric Mc]

Monkeylegend said:

Mr Pointy said:

There's no such thing as being "self-employed".

The gov.uk website would seem to disagree with you. Self employed is very much a thing.

Monkey legend is correct. HMRC uses the expression "self employed" a lot but they are wrong to do so. They adopted it as a phrase when self assessment came into being.

The tax legislation itself never really refers to "self employment" as it actually does not make any sense. The correct legal term is "sole trading" - as Monkey Legend correctly pointed out.

[GliderRider]

If you haven't used up all of your previous three years worth of pension allowances you may be able to use make use of them with this year's contribution: unused annual allowances on your pension savings

Edited by GliderRider on Sunday 6th December 23:13

[trickywoo]

Eric Mc said:

Monkey legend is correct. HMRC uses the expression "self employed" a lot but they are wrong to do so. They adopted it as a phrase when self assessment came into being.

The tax legislation itself never really refers to "self employment" as it actually does not make any sense. The correct legal term is "sole trading" - as Monkey Legend correctly pointed out.

This is going OT but on a recent mortgage application HSBC insisted on describing me as self employed despite being employed by a limited company. I gave up very quickly trying to tell them they were wrong on the description because they simply didn’t care.

[Mr Pointy]

pingu393 said:

WinnaWinna: You may be right about that, but I'm only wanting to know how I can invest between £5k and £12k, but it will be 100% of "income".

I believe there is a way to do it: don't have your accounts tax year aligned with the fiscal tax year. If your tax year ends on January 31st you can get your accounts prepared & know how much you can contribute before the April 5th deadline. As said above, don't forget the three years carry forward rule.

[Mr Pointy]

Eric Mc said:

Monkeylegend said:

Mr Pointy said:

There's no such thing as being "self-employed".

The gov.uk website would seem to disagree with you. Self employed is very much a thing.

Monkey legend is correct. HMRC uses the expression "self employed" a lot but they are wrong to do so. They adopted it as a phrase when self assessment came into being.
The tax legislation itself never really refers to "self employment" as it actually does not make any sense. The correct legal term is "sole trading" - as Monkey Legend correctly pointed out.

I did check & see that they do indeed use the term but it's unclear what they are referring to - Sole Trading or a PSC operation. In the OP's (& many other) case it was an important distinction beacuse as an ST he can only contribute up to his net earnings (income minus claimed expenses, to a maximum of £40k) whereas if he were a PSC his company could contribute up to £40k.

Anyway, we seem to have cleared up how much he can contribute & now he just needs to get the calculation right.

[pingu393]

Many thanks for the above.

The three year's rule is something that I hadn't expected. Good news. It also means that I have much more flexibilty in the figures (for the first payment, at least ).

[Simpo Two]

General question as I don't know the answer - if you don't earn enough to pay income tax, do pension contributions get the 20% uplift? If not then it's not such a great deal IMHO.

[chip*]

Low income/non tax payer still get 20% uplift capped to £3,600

Both my girls (3.5 and nearly 2 = both non tax payer!) received £720 from Rishi into their pension this year!

https://www.pensionsadvisoryservice.org.uk/about-p...

[pingu393]

Simpo Two said:

General question as I don't know the answer - if you don't earn enough to pay income tax, do pension contributions get the 20% uplift? If not then it's not such a great deal IMHO.

I'll have this question answered in the next few days .