‍You don’t need us to tell you that planning for the future is important, but it can also be a lot to think about. Does paying into a personal pension make sense from a tax perspective, and what are your options?

If you’re running a small business as a sole trader, you can pay money into a personal pension scheme. If you’re a director of a limited company, you can pay into a personal pension or your company can make payments on your behalf.

Whatever your business situation, there are significant tax reliefs for pension contributions available.

Making contributions to a personal pension entitles you to tax relief from the government up to the rate of Income Tax you pay. So if you’re a basic rate taxpayer in England then the government will top up your pension contribution by 20%, meaning a contribution of £80 is worth £100. The government’s contribution is automatically provided at the basic tax rate.

You’ll also get another 20% if you’re a higher rate taxpayer when you include the personal pension contributions on your annual Self Assessment. 

Anyone earning over £100,000 can use pension contributions to reduce their taxable income and help preserve their personal allowance.

If your rate of Income Tax in Scotland is 19%, then your pension provider will claim tax relief for you at a rate of 20%. You don’t need to pay the difference.

As a limited company director, you can pay into a personal pension, but you may find it’s more tax-efficient to have your limited company make the pension contributions as your employer, because it’s a business expense and reduces your company’s Corporation Tax bill.

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What are the limits?

You can get tax relief on your personal pension contributions up to the total of your gross income. If you don’t pay any Income Tax at all you will automatically receive tax relief at 20% on the first £2,880 you pay into a pension each tax year. 

The maximum annual amount on which the government will give you pension tax relief is £60,000 in the 2024/25 and 2025/26 tax years. Any contributions over this won’t benefit from tax relief – it’ll be added to your other income and you’ll pay Income Tax on it. There are certain situations where you may be able to make higher contributions, if you’re using the ‘Carry Forward’ rules to take advantage of unused tax relief from previous years.

For more information on how to handle your pensions, it’s best to speak to a financial advisor.

Detailed examples:

Example 1: Basic Rate Taxpayer

Emily earns £30,000 a year and decides to contribute £2,400 to her personal pension. As a basic rate taxpayer, she gets 20% tax relief. So, for every £80 she contributes, the government adds £20, making her total annual contribution £3,000.

• Emily's Contribution**: £2,400
• Tax Relief (20%)**: £600
• Total Contribution to Pension**: £3,000
  

Example 2: Higher Rate Taxpayer

James earns £60,000 a year and contributes £8,000 to his personal pension. As a higher rate taxpayer, he can claim 40% tax relief. The government automatically adds 20%, and James can claim an additional 20% through his tax return.

• James's Contribution**: £8,000
• Basic Rate Tax Relief (20%)**: £2,000
• Additional Tax Relief via Tax Return (20%)**: £2,000
• Total Contribution to Pension**: £12,000

Automatic enrolment

UK employers are required to provide a workplace pension for employees and must make a minimum employer contribution if they meet certain criteria. Employees can, however, choose to opt-out of this entitlement.

If you’re looking for more information on these rules, check out our article 'Pension auto-enrolment: everything SMEs need to know'.

Investments & pensions

As a freelancer, contractor or small business owner, professional financial planning helps you plan for the future. We can help you with this, whether that’s setting up a personal pension, investing in an ISA, or having a complete review of your finances. Our professional advice supports you and your personal goals.

Get in touch to see how we can help you!

Maximising your pension and tax cenefits

Paying into a personal pension offers significant tax advantages, particularly through the tax relief system, which can substantially boost your retirement savings. 

With knowledge of how your tax bracket impacts the relief you receive, you can make more informed decisions about your contributions. 

Whether you're a basic rate or higher rate taxpayer, maximising your pension contributions not only secures your financial future but also offers immediate tax benefits. 

Consult with a financial advisor to tailor your pension strategy to your personal financial situation. For more information, visit Crunch.

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