Self-employed - pension tax relief?

[MimiThePink]

Long story short, my husband seems to have been advised by his accountant that there's no tax relief on pension contributions into a self-employed person's pension if you're earning under £50k p/a.

From what I can see, there's 25% tax relief if you're a 20% taxpayer (up to total contributions, Inc tax relief, of £60k p/a). What am I missing??

The pension provider claims the basic rate tax relief from HMRC and adds it to your pension.

Higher rate relief is claimed on your self assessment tax return.
If you aren't a higher/additional rate tax payer, there isn’t any extra tax to reclaim.

Thanks @Chasingsquirrels - but you do get that 25% tax relief from the government, crucially, as a basic rate tax payer? He seems to think there's literally no reason to start a pension as a self-employed person. I think there is!!

Is he definitely self employed?
Or is he employed by his own limited company, and paying employer contributions from the company?

No he's definitely self-employed (sole trader).

As a self employed person, if you put £80 in your pension, the government put in £20. This is true if you pay basic rate income tax or don't meet the threshold to pay any income tax.

The difference between being self employed and am employee is there are obviously no employer contributions.

That was my understanding, @CheeseWineFigs, but I was starting to feel like an I was missing something very obvious 😳

I think there must have been some miscommunication in his convo with his accountant. Which doesn't bode well.

Either he's misunderstood what he was told or he needs a better accountant.

I think it is likely that your husband has misunderstood what the accountant was telling him.

I suspect that the accountant is working on the basis that pension contributions made from his sole trader activities are deducted from his income before his tax liability is calculated, and so as no tax is paid there is none to reclaim by him or the pension provider. But, that tax has still been saved by the husband, as his taxable income from sole trader activities has been reduced. And I think that the husband has misunderstood the impact of this, or the accountant hasn’t explained it clearly.

In simple terms, if his turnover is a £50k as a sole trader and he contributes £10k to a pension that £10k is an allowable expense from a sole trader tax comp perspective. He’s left with £40k on which tax is paid. Ignoring the personal allowance for ease that means 20% tax on £40k, which is £8k. He’s left with £32k and £10k in a pension.

Or, the £50k is all paid to him through payroll, generating a tax liability of £10k (again, ignoring the personal allowance), and the pension contribution of £8k paid to the pension and grossed up by them by £2k to £10k by them reclaiming the tax from HMRC. He’s left with £32k, with £8k plus £2k of tax relief = £10k in the pension. That’s my guess of what’s happened anyway!

I think @Chasingsquirrels and @CheeseWineFigs are absolutely spot on. I'm no pensions expert, but you put in £8k, the government adds £2k.
If you are a 40% taxpayer, you can go through HMRC's website to claim the additional back as private pension tax relief, but you have to do this, it doesn't happen automatically. Some people may say "what is the point", I guess there are a few "points", the first is just the maths of putting £8k into something and receiving £10k of benefit (albeit at the risk of funds gong up and down), the second point is that some people will benefit from the additional tax relief if they are 40% tax payers, the third is that child benefit has an impact for some (i,e if your earnings are over the amount that is eligible for child benefit, paying a lump into your pension can reduce these to below the threshold for child benefit not to be taken away, this can mean an additional £1352 for some per child) and finally, if you are close to pension age, you have, at the moment the ability to take 25% tax free as soon as you draw down your pension. So ignoring the child benefit angle, and using a very simple calculation where there is nothing in my pension, if I pay £8k into my pension in July (and govt pays £2k) so £10k in the funds, then I retire in August, I can immediately draw down £2.5k tax free, leaving £7.5k in the fund. This is a ridiculously simple and unrealistic example, and there are some real banana skins out there (one is the limit that you can take tax free which is currently quite high at £268k and probably doesn't affect most people) Another is if you take more than the 25% tax free, even £10 more, then you are limited to what you can pay into a pension pot in the future (to £10kpa), not a problem for people who are "retiring forever" maybe, but for those who maybe go back to work after "retiring" this is a hard lesson to learn. As ever with pensions, you are never going to get "personal advice on your exact situation" unless you pay someone to provide it. Schemes are different, rules are different. You can go to Pensionwise (for free) and they will help you understand the general guidelines and how it works, and there may be scenario based situations used that can help your understanding, Also ringing your pension provider and talking can help. Forums like this can help too, but you do have to do your own research. If pension planning is used well, it can hugely improve financial outcomes later in life, and can, sometimes, help your tax bill now, but it is a bit of a minefield. I hope this helps x

Thanks so much everyone 👍👍👍 and to @avignon1234 for your particularly detailed post, much appreciated!

This is my point to him, basically - that he needs to pay a specialist for advice, but he seems to think that the accountants advice means there's essentially no point 🙄

I agree with posters above that putting money in a pension still broadly means you're not getting taxed on it (with caveats - and as there likely won't be much in it at retirement age, the tax-free lump sum limit is a loooon way off) and I think it's daft to think he doesn't need one.

I imagine that the accountant has told him that there is no tax relief to be claimed on his self assessment return if his income is under £50k, ie the pension contribution won’t affect his tax bill. This is correct. However as everyone has said he gets the tax relief directly in to his pension, so there is a benefit in making it.