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Pensions & the Self-employed

Thu, 19th Aug 2010 - Author: Resident IFA

The Treasury are toying with the limits for Pension contributions.

The current limit is £255,000 (2010/2011 tax year). This is known as the ‘Annual Allowance’. To contribute to this level, you need commensurate earnings.

£30,000 is the maximum contribution set out over the past year or so, yet it now appears that something in the region of £40,000 will eventually be settled upon.

That’s still a big drop in higher-rate tax relief, potentially affecting those with seasonal earnings or those with income that cannot be guaranteed and is prone to fluctuations.

A good example of this is the Self-employed. Whereas a Limited Company owner can make contributions based on their salary, the Self-employed make their contributions based on profits – which could be substantially different (lower).

So, if a person cannot make regular contributions with any certainty – relying on lump-sum contributions when available – this could hurt.

For example (using a £40,000 contribution ceiling), a person contributing £2,500 gross per month would see £60,000 enter their Pension in 2 years, whereas a person who had a reasonably barren year followed by a far better earnings year could only contribute £40,000 in year 2. Simplistic, but illustrative of the problems arising from such a drastic reduction in the Annual Allowance for those with varying income year on year.

Of course, the Treasury are lessening the maximum contribution levels to reduce the amount of higher-rate tax relief claimed, and thus increase the tax revenue via the 40% charge levied on those who still decide to contribute more than the Annual Allowance.

Surely there could be a work-around to this, not penalising the retirement aspirations and options of those small business owners striving for success, yet experiencing good and bad earnings years?

What do you think? Have or will you be affected by the proposed Pension contribution limit changes? Until next time...


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