Tax Relief on Pension Contributions

Iím self-employed and looking for ways to save tax before the end of the current tax year. One suggestion I have received is to invest into a pension. Can you advise on the current savings available?

1st February 2009

The current pension rules were simplified in April 2006, and allow you to make contributions to a registered pension scheme and receive tax relief on the lower of 100% of net relevant earnings (which includes your profit from self employment) or the annual allowance (currently £235,000 in 2008/09), whichever is the lower.

The tax relief that you receive by investing into a pension depends on your tax rate. Contributions are paid net of basic rate tax, so if you are a basic rate taxpayer, you pay 80% of the gross contribution, and your pension fund receive a 20% tax relief. If you are a higher rate taxpayer, in addition to the 20% relief that you receive at source, you also receive a further 20% tax relief through submission of your Self Assessment Tax Return.

If you have no earnings in a year, or earnings are less than £3,600, you will be able to pay contributions with tax relief up to that amount.

Unfortunately there is no longer the ability to carry-back contributions paid after the end of the tax year, and also the basis year rules that allowed a contribution to be based upon the highest earnings in the preceding five years were removed. Therefore if you wish to receive tax relief in the 2008/09 tax year, you need to ensure that you make any contribution on or before the 5th April 2009.

By Jo Nockels

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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