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What are the tax implications of paying into a personal pension?

Posted by Tom West on Dec 2nd, 2018 | Personal finance

A contractor laying foundations | Crunch

If you’re running a small business as a sole trader, you could pay money from your own funds into a personal pension scheme.

This is a tax-efficient way of investing money because you normally get pension tax relief. You’ll get relief from the government, up to the top rate of income tax you pay. So if you’re a basic rate taxpayer in England then the government will top up your pension contribution by 20%, meaning a contribution of £80 is worth £100. You’ll also get another 20% if you’re a higher-rate taxpayer when you declare the personal pension contributions on your Self Assessment.

What are the limits?

You can get pension tax relief on your contributions as long as they don’t exceed your total gross income or the sum of £2,880 (whichever is lower). There is however a maximum annual amount on which the government will give you pension tax relief – this is currently £40,000 in a tax year.

Any contributions over this won’t benefit from tax relief – it’ll be added to your other income and you’ll pay Income Tax on it.

For more information on how to handle your pensions, it’s best to speak to a financial advisor.

Automatic enrolment

UK employers are now legally obligated to provide pension auto-enrolment for their staff if they meet certain criteria unless they choose to opt out.

If you’re looking for more information on these rules, check out our article Pension Auto-enrolment: everything SMEs need to know.

What if I run a limited company?

If you run a limited com,pany – you may find it’s more tax-efficient to make pension contributions through your limited company rather than paying them personally. You can set up an auto-enrolment scheme for yourself as described above.y

Investments & pensions

As a freelancer, contractor or small business owner, professional financial planning helps you plan for the future. We can help you with this, whether that’s setting up a personal pension, investing in an ISA, or having a complete review of your finances. We offer a free initial consultation through our partner for professional advice that supports you and your personal goals.

Get in touch to see how we could help you!

Find out more about our investments and pensions support

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