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Save yourself – how to boost your pension when self-employed

James Watkins - Law on the Web

  1. 10 September 2015
  2. Employment
  3. 0 comments
Money in a jar

The UK has seen a boom in the number of people working for themselves in recent years. However, if you are one of the new army of self-employed, statistics suggest you are unlikely to be paying into a pension.

According to a recent report, only 500,000 of the UK’s 4.5m self-employed are paying into a pension – an eye-wateringly low share of 11%.

The number of self-employed pension savers halved from 2001/2002 to 2011/2012, despite the overall increase in people working for themselves in that time. A lot of this is believed to be due to low earnings, but even among those who have other employees (and are thus likely to be earning more), fewer than half are contributing to a pension.

However, if you are self-employed, a pension is as important a source of security for the future as it is for your average employee, even if you are planning to work beyond state retirement age. Here are a few ways a self-employed individual can get the most out of a pension.

Boosting your pension

Backdated tax relief allowance

Tax relief is only available for pension contributions up to £40,000 a year – any additional contribution above this amount will have tax levied against it.

However, if that yearly tax relief allowance goes unused, it can be carried forward up to 3 years. For example, if you recently started a new business, it is unlikely that you would have made sufficient profits to start contributing to a pension. However, if the business becomes profitable and nets you a sizable income a couple of years later, you could use the previous years’ allowance to contribute up to £120,000 of those earnings to your pension, while still enjoy that tax relief.

This is also a useful way to increase your contributions if the nature of your work means you are paid less frequently than once a year in the form of a lump sum (for example, if you are paid an advance).

Buying your business premises

If you have a Self-Invested Personal Pension (SIPP), you can use it to invest in commercial property – by doing this, you can avoid corporation and income tax (as well as capital gains tax when you sell it) and increase your pension contributions at the same time.

You can borrow up to 50% of the value of the property to fund the sale, but your pension will need to be worth enough to cover the other half of the purchase – for example, if you are purchasing an office worth £200,000, you will need a SIPP worth at least £100,000. If the pension is worth £150,000, you would borrow £50,000 to make up the difference.

Once the purchase is completed, the SIPP becomes the “landlord” of the property, and you will need to pay “rent” into the SIPP at market value.

Keeping up these rent payments is important – late payments will come with a 55% tax on them. Setting up this sort of arrangement is complicated, and proceeding without the guidance of a financial advisor is ill-advised. However, if it is practical for you and your business, it can reap rewards.

Employing your spouse

If your partner works for your business, a crafty way to build your joint retirement income is by paying their whole salary into a pension – you can adjust your income to provide for the both of you, and increase the amount going into their pension. By doing this, they can get tax relief of up to 40% on those contributions.

While this is a perfectly legal arrangement, it is only allowed if your spouse has a legitimate role in the company. If they are taking a salary simply as a cover for this arrangement, it would be considered tax evasion. HMRC run checks for this sort of thing, and will prosecute you if you are found to be doing it.

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