Self-employed pension tax relief 2023/24

Unlike employees who usually benefit from workplace pension schemes, self-employed individuals have to take responsibility for their own retirement savings.

The world of pensions can be a daunting and complicated area and if you’re not sure of anything you should speak with a qualified pensions advisor before making any decisions.

In this article we’ll outline how tax works when it comes to typical pension contributions for the self-employed.

Your pension contributions are not a business cost and don’t affect your self-employed profits, therefore they do not get included in the self-employed section of your tax return.

Instead, you enter your personal pension contributions in a separate section of your tax return called ‘tax reliefs’.

 

 

Relief at source in your pension pot

Your pension provider will automatically claim basic rate (currently 20%) tax relief ‘at source’ – this means that when you pay personal contributions into your pension plan, some additional money is added on top of this by the government.

As an example, if you make £80 of personal pension contributions, the government adds another £20 to your pension, making it £100 in total.

The £80 (how much you pay in) is called your ‘net’ contribution – when this is combined with the £20 top up from the government the total £100 is called the ‘gross’ pension contribution.

There are limits to how much you can put into your pension:

• The tax relief on your private pension contributions is capped at 100% of your annual earnings
• You usually can’t pay in more than £60,000 per year – this is the annual allowance for 2023/24, it was increased from £40,000 in 2022/23.

If we look at an example of a self-employed individual who has taxable profits of £20,000 in 2023/24 and no other sources of income, this person would be allowed to pay in a maximum of £16,000 into their pension, as when this is added to the £4,000 that the government will top up this totals £20,000.

Higher rate tax relief

When it comes to your personal tax return, your gross pension contributions have the affect of increasing your basic rate tax band which means you will save some tax through your tax return if your earnings are in the higher tax band or above.

For example, for the 2023/24 tax year the higher tax band kicks in at £50,270 (unless you’re a Scottish resident when it is £43,662) – if you make £2,000 of net personal pension contributions, this is grossed up to £2,500 with the 20% tax credit, which means your higher tax band becomes £52,770 instead of £50,270

Lets look at an example of someone earning £55,000 of self-employed profits in the 2023/24 tax year with no other income. If we compare the scenario of them making £2,000 net personal pension contributions vs none, the below table shows the tax differences:

The tax saving in this example would be £500 – this is the net contribution of £2,000, grossed up to £2,500 (£2,000 divided by 0.8) multiplied by 20%.

On top of this the government have also topped up your pension by £500 – so by paying £2,000 into your pension scheme you have effectively gained £1,000.

 

Please note that the advice in this article relates to the self-employed – if you trade through a limited company your pension contribution options are more complicated and often employer/company pension contributions are preferable, we have an article on that here:

Company Pension Contributions for Directors 2023/24 update

Pensions are a highly complicated topic – this article is only designed as an introduction and there are various rules and issues to be aware of – we would recommend speaking to a qualified pensions advisor before making any decisions.

 

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