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
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