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Employee to partner - pension contributions and tax considerations

Most self-employed partners are aware of their self-assessment filing responsibilities. What’s less clear is the responsibility to arrange savings for retirement and the restrictions on how much can be saved. Here, we cover the key points you should be aware of. 
Pension contributions - employee vs partner

Pension contributions – employee vs partner

Pension contributions remain a tax efficient method to save for retirement, with one of the major incentives being the Income Tax relief available on the contributions made. Generally, as an employee or salaried partner (who is deemed to be an employee and taxed via PAYE) pension contributions will be made automatically via the firm’s workplace pension scheme. This will be the case for any UK employee over the age of 21 who earns at least £10,000 from their employment.

As a self-employed partner, you are no longer treated as an employee, and the firm is no longer obliged to operate a pension scheme on your behalf, nor make employer contributions towards your pension. Should you wish to save by way of a pension, you’re therefore required to set up a private pension and make contributions yourself. It is possible to arrange payments to be made through the firm, but to be considered a personal contribution, the amounts will be treated as additional drawings from the individual’s profits. 

Depending on the occupational pension scheme used, many employees will receive full tax relief on their contributions at source. For private pensions, when the contribution is made, tax relief is only given at source for the basic rate of tax, with the amount contributed to the pension being increased by this amount. Higher and additional rate taxpayers will therefore need to claim the additional relief via their Self-Assessment Tax Returns.

About the author

Howard Ledingham

+44 (0)20 7556 1206
ledinghamh@buzzacott.co.uk
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Pension contributions – employee vs partner

Pension contributions remain a tax efficient method to save for retirement, with one of the major incentives being the Income Tax relief available on the contributions made. Generally, as an employee or salaried partner (who is deemed to be an employee and taxed via PAYE) pension contributions will be made automatically via the firm’s workplace pension scheme. This will be the case for any UK employee over the age of 21 who earns at least £10,000 from their employment.

As a self-employed partner, you are no longer treated as an employee, and the firm is no longer obliged to operate a pension scheme on your behalf, nor make employer contributions towards your pension. Should you wish to save by way of a pension, you’re therefore required to set up a private pension and make contributions yourself. It is possible to arrange payments to be made through the firm, but to be considered a personal contribution, the amounts will be treated as additional drawings from the individual’s profits. 

Depending on the occupational pension scheme used, many employees will receive full tax relief on their contributions at source. For private pensions, when the contribution is made, tax relief is only given at source for the basic rate of tax, with the amount contributed to the pension being increased by this amount. Higher and additional rate taxpayers will therefore need to claim the additional relief via their Self-Assessment Tax Returns.

Limits on contributions

Limits on contributions

Given the attractive tax incentives attached to pension savings, HMRC have placed restrictions on how much can be contributed in each tax year. The limit is currently £40,000 gross, or 100% of your income if you earn less than £40,000. This annual allowance is reduced when your total income is over a certain threshold.

Effective from 6 April 2020 (the 2020/21 tax year), there have been changes to the limits for the tapering of the pension annual allowance. 

The threshold for pension tapering was previously £150,000. Therefore, if your income was above £150,000, your allowance was reduced by £1 for every £2 of income over the threshold. This threshold has now been increased to £240,000.

In addition, the annual allowance could previously be tapered down to a minimum allowance of £10,000 gross, but from 6 April 2020 the minimum annual allowance is now £4,000 gross.

The changes have been welcomed by some, and unfortunate for others. 

Are you better or worse off?

Are you better or worse off?

If your income is between £150,000 and £300,000 annually, you will have seen an increase in your annual allowance from 2020/21 onwards. You may therefore be able to make additional pension contributions annually which attract tax relief.

If your income exceeds £300,000 annually, you will now be able to contribute less into your pension fund each tax year before maximising your allowances. Where your income reaches £312,000, the annual allowance is reduced to a minimum of £4,000.

Where your pension contributions do exceed the available annual allowance for a tax year, the tax relief given on the excess contributions is reclaimed via your self-assessment tax return.

What action do you need to take?

What action do you need to take?

It is possible to carry forward your unused allowances to the following three tax years only. Buzzacott can assist with estimating your current year pension allowance and calculating your unused allowances brought forward. This would allow you to alter the level of your pension contributions to align with your reduced or increased annual allowance. 

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