Self Employed Contributions

Introduction

In this article we will be looking at contributions and the self employed to ensure that when payments are made hey are made from the correct party and are made within the specific members limits.

What is a pension contribution:

HMRC does not impose limits on the level of contributions that members can pay into personal pension. However, there is a limit on the amount that can benefit fully from tax relief.

If certain conditions are satisfied, tax relief on member contributions is available on up to 100% of their relevant UK earnings  or £3,6000, whichever ii the greater to the higher of £3,600 or 100% of relevant UK earnings (Tax on your private pension contributions: Overview - GOV.UK (www.gov.uk)).

Tax relief is only given in the tax year the contribution is paid.

When contributions are made by a company on behalf of a member these are called employer contributions and are not restricted, however they must satisfy the 'wholly and exclusively' requirement to receive tax relief.

Company/Employer contributions count towards the annual allowance.

Self Employed

Self-employment is earning income without being employed and paid by someone else. 

Self-employed persons may be involved in a variety of occupations but generally are highly skilled at a particular kind of work. Writers, tradespeople, traders/investors, lawyers, salespeople, and insurance agents all may be self-employed. 

Being self-employed is often confused with owning a business, but the two concepts aren't necessarily the same. A self-employed person is usually the business itself, whereas a business owner may own the company but not be involved in operating or managing it.

This differentiation has an impact on the payment of pension contributions, and it is important to know the structure of the member/clients business when determining how contributions should be keyed.

Please note that if a self-employed person sets up their business as a limited liability company, they are then employees of that company rather than defined as the company itself.

Sole Trader & Contributions:

A sole trader can’t deduct their own pension contributions as an expense of the business. They must pay their contributions from the after-tax drawings they take. This is paid using the relief at source system, so the pension provider grosses up the net contribution at basic rate. 

The member then has to claim any higher or additional rate tax relief they’re entitled to through their tax return.

If the Sole Trader employs someone to work with then, they make contributions on their behalf and treat these as a business expense.

Partnerships & Contributions:

Please note there are many different types of Partnership that can be established but the same rules will apply in relation to pension Contributions.

Like a sole trader there is no distinction between the Partners and the business as such contributions will be treated in the same manner as the payments from Sole Traders, as personal contributions.

A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits. There are many types of partnership, but the general principles remain the same.

The same rules will apply if they employ anyone in the course of their business.

Limited Liability Company

A business can be set up as a limited liability company. It’s owned by shareholders who, if the company fails may see the value of their shares reduced, possibly down to nothing. 

The shareholders’ personal assets aren’t at risk however.

This creates a separate legal identity to the owner as the business is registered at Companies house.

A sole trader can convert their business to a limited company, owning 100% of the shares. They are no longer self-employed, but they are in now employed by the company they’ve set up.

As they are now classed as employees the business can make contributions on their behalf.

Key Points:

• Self Employed make contributions from their own accounts
• They are not treated as employer contributions
• If the sole trader or partnership employ additional staff employer contributions can be made on their behalf