Very basic self-employment pension question

[Jennyfi]

Can someone explain this situation with pensions to me in very small words?

I have a private pension which I contribute to by direct debit each month. These payments are made after tax (my workplace takes tax out of my salary each month with PAYE, and I have a separate workplace pension). The private pension provider then adds an extra 20% of each payment into my fund, as tax relief. So I "get back" the tax I've paid on my private pension payments - so far, so good.

I've now started some side work on top of my job, and wanted to put the money made from this self-employed work directly into my private pension. I haven't paid tax on this side work money as yet - it's literally just come into my bank account. If I put this money into my pension (say, £30k) into my pension, the pension provider then automatically adds on an extra 20% to this - even though I haven't paid any tax on the side work money as yet. So I've effectively got £7.5k "free money" added to my pension. Now, obviously I have to pay that money back to HMRC! So I have to find £7.5k from my savings to pay my next tax return.

Is the above correct? Is there any way of telling the pension provider "I haven't paid tax on this money, so don't give me the extra 20%"?

All figures made up, btw - my side job is not that lucrative!

Can you not just put the money in your business account then pay the tax when your tax return is calculated and put what is left in the pension then the 20% tax relief would effectively put you back at the 30k level?

This advice assumes you are acting as a sole trader for tax purposes. You can pay into your pension as you go. You then declare your gross income on your tax return ( so including pension payment) you then also declare your pension payments on your tax return. You then pay tax on your entire income at relevant rates.
This will then account for the 20% rebate your pension provider claims on your behalf.
Sounds like you need some advice on filling in your tax return as you maybe able to claim some business expenses.

You should just put 80% of what you earn from the side employment into the pension and give the other 20% to hmrc who will then give it to your pension provider and add it to your pension.

It doesn't reduce your profits by that amount, it extends the basic rate tax band by the amount put in to the pension

You still need to pay self employed tax as normal

I would recommend speaking to your accountant

That would work, Badtimes. I was hoping I could put the money into the pension straight away and not have it hanging around in my account, but you're right, waiting until my tax return is calculated then paying tax on it and then putting the money into my pension would have the same effect.

I guess I was just hoping there was an option for "put all the side work money into my pension, and just don't pay tax on it". But obviously that doesn't work if the pension provider tops it up!

You can put the money in straight away but you have to retain 20 % (plus any extra for like accountants fees or business expenses). That’s what everyone has to do who is self employed. It doesn’t mean you need to hold onto it all until tax time though (I think you have to submit quarterly now anyway).

That's pretty much what I'm thinking, Yoba. But the calculation seems more complicated: if I keep 20% back, then I have to pay tax on that 20%, obviously. But I also have to pay back the 20% of my 80% pension contribution that the pension provider gave me. So I pay more?

BritinUS1, does that mean that, for my figures above, my basic rate tax band would be extended to £50k (the usual) + £37.5k = £87.5k? So if I somehow earnt £80k, I'd still only pay the basic rate on it? (I am speaking to an accountant tomorrow, but I'm so new to this I don't even really know whether my questions are making sense!)

@Jennyfi after you have done your first tax return you will pay your tax in advance on account. You should take advice to prepare yourself for what that first tax bill could be - the whole of your first years tax bill plus 50% of the predicted second years tax bill and then the other 50% in the July before you fill in the tax return.

The other thing that could work for you is if you use software such as quick books where you can enter expenses etc as you go, use their tax report function monthly/ quarterly and put that amoun to one side now. Place the remainder into your pension. Is it continuing side work or a one off?

As pp said if your liability is over £1000 then you will need to pay your liability plus a payment on account of half of your liability and then the remaining half on 31st July. Your accountant will explain all of his and without actual figures and tax bands it will be hard to give a proper answer.

I think I'm getting it now - thank you also mindutopia and Lonecat. I hadn't realised this "auto top-up" of 20% would happen, so obviously I do have to keep back 20% to pay that back. I'd been naively thinking I could just put it in the pension, not get any top up and not pay any tax.

I also pay tax on that 20% that I've kept back, don't I? So I end up paying HMRC bit more than just the 20%?

At least now I have some idea of what to say when I'm talking to the accountant!

You would pay the basic rate on up to 50k then 40% on anything over and up to 150k.

It's a one-off, Badtimes - I won't be doing the side work at all next year. So hopefully the predicted bill for that second year can be zero...

Bear in mind though, if you go into the higher tax bracket you get 40% tax relief, not the standard 20%.