Sole trader pension contributions
Discussion
I'm just starting life as a sole trader at 55 years old after being on PAYE as part of my own business for over 20 years. I started in March a month before the end of the financial year and I'm trying to understand how much and when I can make contributions to my personal pension.
I'm currently working as a consultant for the new owners and combined with other work I expect to gross around £70-80K this financial year. My plan is to put all of this income up to the annual allowance directly into my pension. I'd continue to do this for the next couple of years and then take my 25%. I'd also like to top up unused allowance from previous years.
As a sole trader do I use the gross income or income after costs/expenses? Also can income from interest count towards the £60K limit? Is it then just a case of paying either the grossed amount or the net each month to my pension provider?
As for the previous years I understand I can only contribute upto to my PAYE amount for those years excluding any contributions already made but how do I go about doing this. If I make a lump sump payment of say £60K to cover the unused allowance for 21/22, 22/23 and 23/24 do I need to let my pension provider know that its unused allowance to ensure its not taxed?
I'm currently working as a consultant for the new owners and combined with other work I expect to gross around £70-80K this financial year. My plan is to put all of this income up to the annual allowance directly into my pension. I'd continue to do this for the next couple of years and then take my 25%. I'd also like to top up unused allowance from previous years.
As a sole trader do I use the gross income or income after costs/expenses? Also can income from interest count towards the £60K limit? Is it then just a case of paying either the grossed amount or the net each month to my pension provider?
As for the previous years I understand I can only contribute upto to my PAYE amount for those years excluding any contributions already made but how do I go about doing this. If I make a lump sump payment of say £60K to cover the unused allowance for 21/22, 22/23 and 23/24 do I need to let my pension provider know that its unused allowance to ensure its not taxed?
A - get an accountant
B - get an accountant
C - sole traders pay two types of NI - Class 2 and Class 4.
Class 2 is a fixed amount - £179.40 per annum. If your net trading profit is under £6,725 (the Small Profits Threshold) you do not need to pay Class 2.
These are the 2024/25 rates.
Class 4 is calculated at 6% on net trading profits between £12,570 and £50,270. Profits over £50,270 are charged at 2%.
It was announced a few Budgets ago that Class 2 NI is going to be abolished and Class 4 increased. That hasn't happened yet.
Arriving at the correct "NI'able" profit is the tricky part as it basically means you need to know -
how to put together compliant accounts for a sole trader
what business expenses are (and are not) allowed
how and when to claim Capital Allowances
what is the treatment of Pension Contributions (for sole traders these are usually outside the business profit calculation)
That's why accountants are useful. They tend to know this stuff.
B - get an accountant
C - sole traders pay two types of NI - Class 2 and Class 4.
Class 2 is a fixed amount - £179.40 per annum. If your net trading profit is under £6,725 (the Small Profits Threshold) you do not need to pay Class 2.
These are the 2024/25 rates.
Class 4 is calculated at 6% on net trading profits between £12,570 and £50,270. Profits over £50,270 are charged at 2%.
It was announced a few Budgets ago that Class 2 NI is going to be abolished and Class 4 increased. That hasn't happened yet.
Arriving at the correct "NI'able" profit is the tricky part as it basically means you need to know -
how to put together compliant accounts for a sole trader
what business expenses are (and are not) allowed
how and when to claim Capital Allowances
what is the treatment of Pension Contributions (for sole traders these are usually outside the business profit calculation)
That's why accountants are useful. They tend to know this stuff.
Edited by Eric Mc on Thursday 2nd May 08:43
Eric Mc said:
A - get an accountant
B - get an accountant
C - sole traders pay two types of NI - Class 2 and Class 4.
Class 2 is a fixed amount - £179.40 per annum. If your net trading profit is under £6,725 (the Small Profits Threshold) you do not need to pay Class 2.
These are the 2024/25 rates.
Class 4 is calculated at 6% on net trading profits between £12,570 and £50,270. Profits over £50,270 are charged at 2%.
It was announced a few Budgets ago that Class 2 NI is going to be abolished and Class 4 increased. That hasn't happened yet.
Arriving at the correct "NI'able" profit is the tricky part as it basically means you need to know -
how to put together compliant accounts for a sole trader
what business expenses are (and are not) allowed
how and when to claim Capital Allowances
what is the treatment of Pension Contributions (for sole traders these are usually outside the business profit calculation)
That's why accountants are useful. They tend to know this stuff.
I'm currently speaking to the accountancy who looked after the business before it was sold. They are a large "corporate" organisation and my thoughts are to let them manage the 23/24 tax year and then speak to someone else about subsequent years. I was perhaps being a bit stingy and looking to avoid speaking to different depts each with £150 PH bills.B - get an accountant
C - sole traders pay two types of NI - Class 2 and Class 4.
Class 2 is a fixed amount - £179.40 per annum. If your net trading profit is under £6,725 (the Small Profits Threshold) you do not need to pay Class 2.
These are the 2024/25 rates.
Class 4 is calculated at 6% on net trading profits between £12,570 and £50,270. Profits over £50,270 are charged at 2%.
It was announced a few Budgets ago that Class 2 NI is going to be abolished and Class 4 increased. That hasn't happened yet.
Arriving at the correct "NI'able" profit is the tricky part as it basically means you need to know -
how to put together compliant accounts for a sole trader
what business expenses are (and are not) allowed
how and when to claim Capital Allowances
what is the treatment of Pension Contributions (for sole traders these are usually outside the business profit calculation)
That's why accountants are useful. They tend to know this stuff.
Edited by Eric Mc on Thursday 2nd May 08:43
Mr Pointy said:
You can pay in £60k in this tax year so that leaves you £10-20k available to top up 2021-22, 2022/23 & 2023/24. How much unused allowance do you have in each of those three years, noting that the allowance was not the same in all years.
I was hoping to use part of the sale proceeds to top up past allowances. My unused allowance for the 3 years is around £60K.moonigan said:
Mr Pointy said:
You can pay in £60k in this tax year so that leaves you £10-20k available to top up 2021-22, 2022/23 & 2023/24. How much unused allowance do you have in each of those three years, noting that the allowance was not the same in all years.
I was hoping to use part of the sale proceeds to top up past allowances. My unused allowance for the 3 years is around £60K.Find a small local accountant as Mr Eric has suggested.
Eric Mc said:
Class 2 is a fixed amount - £179.40 per annum. If your net trading profit is under £6,725 (the Small Profits Threshold) you do not need to pay Class 2.
Where do his Class 2 NI contributions stand if he earns less than £6,275? Does he get them credited 'for free' or will it leave a gap in his NI record that can only be filled by Class 3 which are more expensive?Gassing Station | Finance | Top of Page | What's New | My Stuff