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Pension Contributions Before the Year End

I run a small grocery business and in previous years have paid higher rate tax. The recession did not seem to affect our business. My accountant has suggested I make a pension contribution before the tax year end to reduce any higher rate tax liability. Is this useful advice?

Yes it is, assuming you make your contribution before the 5th April, your contributions will almost certainly attract tax relief in the tax year they are paid.

Unfortunately you cannot carry back contributions to an earlier tax year, so it is important that you have at least an estimate of your business profits before the tax year finishes on 5th April 2010 to assess whether it is beneficial to make a pension contribution.

The legislation currently allows you to make contributions to a registered pension scheme and obtain tax relief on the lower of 100% of net relevant earnings or the annual allowance (2009/10: £245,000 rising to £255,000 in 2010/11). If you have no earnings in a year, or earnings are less than £3,600, you can pay contributions with relief up to that level.

The relief is given in two stages to a 40% higher rate tax payer. The pension provider claims basic rate relief back from HM Revenue & Customs (HMRC) at 20%. This means that for every £100 you contribute, £125 is actually added to your pension fund.

You must include details of the contribution on your self assessment tax return for the tax year the contribution is paid. This results in a further claim of the additional 20% tax relief due on pension contributions via a reduction in your tax liability for the year.

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