Are You Taking Full Advantage of the Tax Savings that Pensions Offer?

Well done if you’re reading this article. According to statistics, self-employed individuals have an unfortunate habit of ignoring their future retirement. Apparently, less than one third of self-employed people save into a private pension. Given the UK’s self-employment rate is booming, and we currently have 4.8 million self-employed in the country, that’s a scary number of individuals missing out on how to save on their tax bill, if nothing else. Self-employed, freelancers and contractors: you may be missing out.

Self-Assessment season will soon be on us, now’s the time to get savvy and make the most of the 2016/17 tax allowances and get you pension in gear.


Thinking Ahead Matters

It’s all too tempting when you’re self-employed to put off your pension into the “do tomorrow” category. After all, it’s tempting to take that holiday now rather than an imaginary one when you’re 60. However, you are likely going to be missing a trick and possibly big money, if you head down this road.

You’re allowed to put a maximum allowance of £40,000 per annum into a pension. So if you are waiting for your earnings to soar before you start to contribute, you’re may miss out due to contribution limits.

However, the government does allow you to “carry over” your allowance for one year to the next (for up to 3 previous tax years), so if you do have an exceptional year, you could use your allowance for the last 3 tax years, making a total of £120,000, before you reach your limit.

If your total income is more than £110,000 per annum (including savings and investment income), you may be subject to a gradual tapering of your annual allowance. The maximum reduction for those with the highest incomes will be £30,000, leaving a minimum annual allowance of £10,000 in a tax year.

Regardless of whether you are subject to the tapered annual allowance or not, you are normally able to carry forward any unused allowance from the last three tax years to increase your allowance.


You Know it Matters But There’s More

We’re not here to lecture you on saving for your retirement, as you’ve probably heard it all before. However, what you might not have realised is why having a pension and using the allowance system can make savings on your tax bill whilst increasing your savings for retirement.


Tax Relief on Pensions for Self-Employed

Every time you pay into your pension pot you get money back in the form of tax relief. The government want you saving for a pension, so there are some good financial incentives to do so.

This means, if you are a basic rate tax payer, for every £80 you put in your pension, this will be topped up to £100 with your 20% tax relief allowance. Have we got your attention yet? You’re not going to find any other form of savings that pays interest rates even close to that.

If you are in the higher tax rate with taxable earnings over £32,001, the tax relief allowance is 40%, so you only need to pay £60 into your pension to receive a contribution of £40, therefore £100 goes into your pension pot.


Other Food for the Pot

When you’re self-employed, making savvy decisions about your finances can make the difference between success and disappointment. If you have a spouse that is employed by you, you can build up a retirement pot for them too, gaining extra tax relief whilst boosting your retirement income for both of you.

It is also possible for you to purchase a commercial property through your pension scheme. If you have enough money in your SIPP (self-invested personal pension) you can purchase a property in which you can operate your business, keeping it inside of your pension. There are many tax advantages in doing so but that’s a whole other blog.


Where do I Start?

With January Self-Assessment soon on us, now is a good time to review your pension contributions. Speak with your accountant or financial adviser to ensure you are taking full advantage of all the allowances available to you. Take some action, you’ll be glad you did.

We have many years’ experience of tax planning, this is where we really add true value. If you’d like advice on anything we have discussed here, please call our office on 01253 899989, we’d be happy to talk through how this affects you.




Please note, the information in this blog is for your guidance only. We always advise you seek professional advice from an accountant relating to your own personal circumstances.


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