Pension contributions for sole traders

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Pension contributions for sole traders
  • Pension contributions
  • Maximum contributions
  • Planning issues for sole traders

Pension planning should play an important part of any annual review. This is true for any personal tax clients, but for sole traders it can be especially important.

In terms of profit extraction, pension contributions are one of the main tax efficient options available to a sole trader. With sufficient planning and care, contributions provide a very flexible means of achieving tax savings at high marginal rates. Where a sole trader’s income falls with high marginal rates of tax, relief on pension contributions can be timed in order to maximise the rate of tax relief received.

Unless advisers are suitably qualified and authorised to give investment advice, it is vital that they do not give investment advice of any sort. This includes advice concerning pensions. Advice should be restricted to the tax consequences of making contributions. For further information, see the Regulated investment advice guidance note (subscription sensitive).

Pension contributions

The tax benefits of making a pension contribution into a registered pension scheme are similar to those for creating further expenditure in the year. It creates a reduction in the income tax liability that is equivalent to the saving that would arise had an allowable expense been incurred of the same amount. Although the reduction in income tax liability is ultimately the same, there is no saving in Class 4 NIC. Furthermore, the mechanism by which the relief is achieved is different, which means that there are circumstances in which the outcomes can be different.

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