What are the tax implications of paying into a personal pension?

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.

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 2023/24 tax year (was £40,000 in 2022/23). 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.

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!