Pension contributions

This video is all about pension contributions and what you do with your UK tax return.

Pension contributions in your tax return

There are two ways that the pension goes into your tax return, and it depends on whether you’re employed or self-employed. A private pension and also a company pension have different effects on what goes into your return.

The two methods of payment are payments out of your self-employed profit that go directly into a pension pot. There’s also payments to a company pension pot out of your salary, which could be pre- or post-tax.

Pension Contributions - Performance Accountancy Knowledge Centre

Self Employed

We’re going to start off with the self-employed, dear to my heart. Payments into a pension pot is not an allowable expense against your self-employed profit. Payments into a pension pot go in a completely different section of the tax return, but accountants need to know about it, and you need to know about it. If you get a return or an advice notice from your pension provider, they should tell you how much you have paid in and how much the effective tax uplift, so how much the government pay into it.

Now it’s not an allowable expense, but what it does it increases the threshold between when you are a 20% taxpayer and a 40% taxpayer. So it might have absolutely no effect on the amount of tax you have to pay, unless you are very close to the 40% threshold, or you’ve just gone over. The same with the 45% threshold.

The government do add a contribution to your pension pot. So if you say you’ve paid in £1,000 yourself, the effect is the government will add an amount to it, and the amount you put in your tax return is the amount you’ve paid in and the government contribution. This is for normal pensions, not annuities. Annuities is different, not covered in this video.

Effects on Pension Contributions on Tax - Performance Accountancy Knowledge Centre

I have a worked example here of a person that is self-employed.

Worked example

What we’ve got here is they are a self-employed person, and they earn £56,000 of self-employed profit. Clearly that takes them above the threshold for paying 40% tax. Assuming they don’t put anything into a pension pot, what you’ll have is you’ll pay 0% on the first £12,570 because that is the threshold for the 2021-22 tax year. You will then pay 20% tax on the rest of the 37,700. That takes you up to the £50,000 or £50,270 between being a 20% taxpayer and a 40% taxpayer. Then the rest of it is taxed at 40%, so earns profit of £56,000, and you will pay tax of £9,832.

This is only income tax. It’s the only thing that pension contributions affect. That’s all I’m looking at. I’m not looking at national insurance. I’m not looking at student loan. I’m not looking at payment and account. This is the effect of income tax.

Now, if that same person decides to put £3,000 as a pension contribution, it will get uplifted by the government to 3,750. The formula, if you really want to know, take your personal contribution, multiply by 1.25. What you’ll end up getting then is you’ll still get 0% tax on the first 12,570, and you’ll see then there is an increase in the 20% threshold from 37,700 to 41,450. So, you pay 20% tax on a bigger amount, which then leaves only a small amount of money left to pay tax at 40%.

What you’ve got here then is a tax bill, again, only income tax of £9,010, so that’s a little bit better than paying a tax bill of 9,832. Obviously, you’ve got to have spent the £3,000 to get this uplift. That’s a drop in tax of income tax of £822, so it’s not money to be sniffed at. So, yes, that only really works if you are close to the 40% threshold or you’ve just gone above it, et cetera. So you will make a tax saving if you have paid into a pension pot.



What we have then is the company. Now, there are two ways at which an employee can pay into a pension pot, could be a personal pension, could be a company pension. If it comes out of pre-tax income, so that is your salary less pension contributions equals taxable pay, and then you have a pension contribution on that taxable pay, then you’ve got absolutely nothing to do in the tax return because it’s all dealt with via the payroll system and via the P60 process. You might have a salary of £56,000 and you pay £3,000 into a pension pot, employer’s pension pot. That will mean your taxable salary is 56 minus three, so you’re only going to get taxed on £53,000. So there’s absolutely nothing to do in the tax return if you contribute to a company pension, and the contributions are taken out pre-tax.

The complicated part, and the only way you’re going to know this is by looking at your monthly payslips or weekly payslips, is that some payroll schemes work on the employee paying into the pension out of post-tax income. Therefore, absolutely no benefit has been put through in the payroll system to reduce the amount of income your tax is based on. Therefore, your contributions into the company tax, I’m sorry, the company pension scheme will need to go into the tax return. All right? You could put them into the tax return, and then you will get relief, and then you’ll get potentially some money coming back to you because it was taken out of post-tax income.


What if not doing a tax return?

Now it’s likely that you don’t do a tax return because you think everything’s hunky dory and, therefore, you’re overpaying tax. Always check this about your pension contributions into an employer to see whether it is pre- and post-tax.

Now, if you don’t do a tax return and you are paying out of post-tax employment, then you need to contact HMRC, and they can adjust the tax coding in order for you to get the relief. They might put it through as an adjustment for prior years. You might have to make a claim by contacting HMRC for prior years. But please have a look at your tax bill, not tax bill, so please have a look at your payslips, and have a look and see if your gross salary is the same as your taxable salary. If they are, and you are making pension contributions, that means it’s coming out of post-tax income.

So I hope that makes sense. Feel free to drop us any questions, et cetera, et cetera, and we’ll try and answer them. Thanks. Bye-bye.


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