Pension Tax Relief
Use it or lose it
I'm not quite sure how this happened, but we have suddenly arrived in the month of October! With the tax deadline now only one month away.
I've often noticed that many sole traders fail to realise that the pensions tax relief system for them operates on a 'Use it or lose it' basis!
What does this mean?
It's very important, because people need to realise they will lose the tax relief on their pension contribution forever, if they don't claim it.
A wee example
Let's say you are a 45-year-old sole trader. You are entitled to make a pension contribution of up to 25% of your Net Relevant Earnings for income tax relief purposes. Meaning you can claim tax relief on contributions to your pension of up to 25 % of your earning. That is either 20% or 40% tax relief depending on the tax band I am in. So, a 20% or 40% return straight away.
However, you chose to contribute only 10% of your Net Relevant Earnings for 2017. You may not realise that the 15% which you fail to claim (as per the example) is now lost forever.
Next year, you start over again with an allowance of 25%, and you cannot add on the 15% from the previous year that you decided not to claim, because it has now been lost, with no way to retrieve it.
When you think about it, the above example is the exact opposite to the way the pension system operates for Company Directors/Employees, who effectively can carry forward on a year to year basis any employer contributions not claimed under the Maximum Funding rules.
This often results in Company Directors being allowed to make significant employer pension contributions, the closer they get to Normal Retirement Age, effectively carrying forward any allowances not claimed from previous years.
So, in summary I believe that it is important to point out to sole traders that the income tax relief system on pension contributions operates on a 'use it or lose it' basis, so you think twice about wasting it
How does a pension work?
This video is a bit vague, we reccomend getting advice, but it does give you a wee idea.
Happy to help
Why not take advantage of our Pension Review, this review will give you a professional assessment on how well your existing arrangements meet your needs.
The above is for information purposes only and does not constitute financial advice in any, we recommend you speck with us before making any financial decisions. We recommend a holistic approach to financial planning and we can help you put your plans in place.