Pension Contributions

Personal pension contributions offer a tax efficient way of saving for the future. In essence, the contributions you make to a pension scheme are tax-free and the value of the pension fund grows, also free of tax. This is a very tax efficient way of saving for your retirement.

As a sole trader you only need to focus on personal pension contributions and not consider the rules regarding occupational pension schemes.

Pension Simplification

Legislation surrounding pension contributions changed significantly in April 2006. This was known as “Pension Simplification” or commonly “A-Day”. This legislation is not necessarily ‘simple’ though.

The purpose of the new legislation was to bring all types of pension vehicles under one “simplified” regime. 

It means that within the same tax year it is possible to contribute to any mixture of different types of pension arrangement as you like, knowing the rules surrounding contribution limits (and eventual benefits) are effectively the same.

Contribution levels are subject to strict limits.

Annual Allowance

The total of all contributions (either personal, company or third party) that can be contributed within each tax-year is limited by an “annual allowance”. For the 2014/15 tax-year this is £40,000. If you have unused annual allowances for the previous three years you are able to use these should you wish to contribute more than £40,000 in any one tax year.

It is possible to pay more than the annual allowance but there is a tax charge on the excess contribution. This is payable by the individual whose pension the money went into, irrespective of who made the contribution. It is not recommended that you pay more than the annual allowance each year.

Lifetime Allowance

This is the total amount that an individual can hold within pension funds in their lifetime. For the 2014/15 tax-year this is £1.25 million.

It is important to keep an eye on funding if you feel you may potentially reach the lifetime limit.

In addition to the allowances detailed above, contributions into a personal pension scheme are limited by your net relevant earnings for the tax-year. Net relevant earnings are broadly speaking the profits you make from your sole trader business (plus any other earnings you may have had in the year e.g. employment income).

Within each tax year, up to 100% of the net relevant earnings (NRE) can be made and receive tax relief. 

You should note that if you pay in to your pension more than your NRE, the overpaid contributions will be refunded to you. This can happen automatically  through the pension provider, when HMRC notify them that there is a mis-match of earnings against relief claimed. Alternatively, you can contact your pension provider directly, advising that you have overpaid and they will arrange a refund of the net overpaid contributions.

Tax Relief

Personal pension contributions are normally made net of basic rate tax. Higher rate tax relief can be claimed through your self-assessment tax return.

If there are no relevant earnings a gross amount of £3,600 can still be contributed and receive tax relief. More than 100% of NRE can be contributed but no tax relief will be given.

Ignoring any other income sources, you can personally contribute a gross amount equal to your net relevant earnings (business profits and/or salary) and obtain tax relief at your highest rate(s).

Other issues

The personal pension contributions are invested within the pension scheme and profits are accumulated free of tax. While you are able to take a proportion of the pension fund tax-free when you retire, the income paid out to you on retirement will be subject to Income Tax.

If you wish to consider pension planning further, please contact Brookson Financial Services on 01228 550 055 or email advice@brooksonfs.co.uk.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income will depend on the size of the fund at retirement, future interest rates and tax legislation.

For more information on BFS and its range of financial services for freelancers, contractors and self-employed professionals, visit www.brooksonfs.co.uk, or call them today on 01228 550 055.

Brookson Financial Services is a trading style of Innova Financial Solutions Ltd, who are an appointed representative of TenetConnect Ltd, which is authorised and regulated by the Financial Conduct Authority. TenetConnect is entered on the Financial Services Register (www.fca.org.uk/register) under reference 149826.

Registered in England and Wales under reference 3909395.

Registered office address: 7 Clifford Court, Cooper Way, Parkhouse, Carlisle, CA3 0JG.

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