Tax relief on personal pension contribution
Discussion
I've never made a personal pension contribution, only via company contribution in the past, and am looking for some guidance. My accountant is AWOL hence asking here.
I am a Ltd Co director, however am issuing a private invoice to a business partner for services rendered on a private basis, not via the company. I was advised to do this by my accountant, as the invoice is not related to company business.
- The payment for these services will be made (gross) in my personal bank account.
- I will contribute the full amount into pension.
- I will declare it as relevant earnings on my next Self-Assessment and will pay tax on it at my marginal rate of 40%.
- When making the personal contribution I will receive a 66.7% uplift on the amount contributed, with 33.3% coming from my SIPP provider and 33.3% from Self Assessment.
Would be grateful to anyone who could check my workings.
I am a Ltd Co director, however am issuing a private invoice to a business partner for services rendered on a private basis, not via the company. I was advised to do this by my accountant, as the invoice is not related to company business.
- The payment for these services will be made (gross) in my personal bank account.
- I will contribute the full amount into pension.
- I will declare it as relevant earnings on my next Self-Assessment and will pay tax on it at my marginal rate of 40%.
- When making the personal contribution I will receive a 66.7% uplift on the amount contributed, with 33.3% coming from my SIPP provider and 33.3% from Self Assessment.
Would be grateful to anyone who could check my workings.
Edited by plenty on Saturday 5th April 09:19
It's not possible to provide guidance on your tax relief as we would need to know your other income. However the following is true:
- If you are paid £10K for the private work and you declare it as self-employed income, you can pay this into a pension.
- You would pay in £8K and this would be grossed up to £10K with relief by the Govt.
- You would get tax relief on your tax return depending on what your marginal rate of tax is, which can be complicated by dividends as the top slice of income. However if you are a higher rate taxpayer, you will get marginal relief at a higher rate
Note you could deduct £1K off this £10K as a trading allowance if you wanted, declaring £9K gross income and putting £7,200 net into a pension.
Various caveats- size of work done versus pension allowance, no tapering of pension etc.
- If you are paid £10K for the private work and you declare it as self-employed income, you can pay this into a pension.
- You would pay in £8K and this would be grossed up to £10K with relief by the Govt.
- You would get tax relief on your tax return depending on what your marginal rate of tax is, which can be complicated by dividends as the top slice of income. However if you are a higher rate taxpayer, you will get marginal relief at a higher rate
Note you could deduct £1K off this £10K as a trading allowance if you wanted, declaring £9K gross income and putting £7,200 net into a pension.
Various caveats- size of work done versus pension allowance, no tapering of pension etc.
MaxFromage said:
It's not possible to provide guidance on your tax relief as we would need to know your other income. However the following is true:
- If you are paid £10K for the private work and you declare it as self-employed income, you can pay this into a pension.
- You would pay in £8K and this would be grossed up to £10K with relief by the Govt.
- You would get tax relief on your tax return depending on what your marginal rate of tax is, which can be complicated by dividends as the top slice of income. However if you are a higher rate taxpayer, you will get marginal relief at a higher rate
Note you could deduct £1K off this £10K as a trading allowance if you wanted, declaring £9K gross income and putting £7,200 net into a pension.
Various caveats- size of work done versus pension allowance, no tapering of pension etc.
Thank you. I have BtL income that takes me into the 40% tax bracket by itself. I have no other earned income - I do not take salary or dividends from my Ltd Co.- If you are paid £10K for the private work and you declare it as self-employed income, you can pay this into a pension.
- You would pay in £8K and this would be grossed up to £10K with relief by the Govt.
- You would get tax relief on your tax return depending on what your marginal rate of tax is, which can be complicated by dividends as the top slice of income. However if you are a higher rate taxpayer, you will get marginal relief at a higher rate
Note you could deduct £1K off this £10K as a trading allowance if you wanted, declaring £9K gross income and putting £7,200 net into a pension.
Various caveats- size of work done versus pension allowance, no tapering of pension etc.
It seems the salient point is that I can't contribute the full amount of the private work income into pension? I.e. if I've earned £10k gross from the private work I can't contribute the entire £10k, but a maximum of £8k? Is it still £8k if I'm a 40% taxpayer?
plenty said:
Thank you. I have BtL income that takes me into the 40% tax bracket by itself. I have no other earned income - I do not take salary or dividends from my Ltd Co.
It seems the salient point is that I can't contribute the full amount of the private work income into pension? I.e. if I've earned £10k gross from the private work I can't contribute the entire £10k, but a maximum of £8k? Is it still £8k if I'm a 40% taxpayer?
Then yes, in the example you will get tax relief at 20% on your return, or £2K. You contribute £8K, the Govt gross up to £10K and you get £2K back on your tax return. Net cost £6K. It seems the salient point is that I can't contribute the full amount of the private work income into pension? I.e. if I've earned £10k gross from the private work I can't contribute the entire £10k, but a maximum of £8k? Is it still £8k if I'm a 40% taxpayer?
The rate of tax you pay is irrelevant. All that's relevant in this example is you can't put more into your pension (gross) than your net relevant earnings. If you were to put the whole £10K in, your gross contribution would be £12.5K, resulting in £2.5K pension over your net relevant earnings. You would then owe £1K tax on the overpayment.
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