I paid a lot of self-assessment tax in relation to my self-employment for the tax year 2017/18. A friend mentioned that I should make a pension contribution before 5 April 2019 to reduce my 2018/19 tax liability. Is there a limit on the amount I can contribute?
You can get tax relief on private pension contributions worth up to 100% of your annual earnings. There is a current annual allowance for pension contributions of £40,000 and you would usually pay tax if annual savings into your pension scheme goes above the annual allowance. If you are already paying into a pension scheme, then you may be able to carry over unused allowance from previous years.
From April 2016, you will have a reduced or tapered annual allowance if, in the tax year, your threshold income is over £110,000 and your adjusted income is over £150,000. There is also a lifetime allowance restriction and you would usually pay tax if your pension pot is worth more than the lifetime allowance. This is currently £1.03 million.
Pensions are very specific and planning with your accountant and your financial advisor is vital before considering any large contributions.
There are other ways to minimise your annual tax liability, for example, you may be able to claim tax relief for donations you have made to registered charities. If you pay tax above the basic rate, you can claim the difference between the rate you pay and the basic rate on your donation.
Alternatively, if you are intending to purchase any plant and machinery soon, you may wish to do so before the 5th April to claim Annual Investment Allowance in the current tax year. The amount available may depend on your accounting year end so it is best to talk to your accountant before any large purchases.
Finally, if you pay a lot of income tax and national insurance on your self-employment, it may be worthwhile considering the Incorporation of your sole trade business into a Limited Company. Again, planning is required for this as the advice will vary for your specific business and personal circumstances.
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