Saving into your pension is a tax-efficient way to prepare for the future. However, the way you take advantage of this varies depending on your circumstances. In this short article, we'll look at whether your pension scheme is tax-deductible.
If you work for yourself and pay into a self employed pension, these contributions aren't classed as tax-deductible. This is because pension contributions are not a business cost and therefore can’t be classified as a tax-deductible expense in the self-employed section of your tax return. However, these contributions should qualify for income tax relief.
To claim this, you'll need to add your pension contributions to the separate ‘tax relief’ section of your self-assessment tax return. You can confirm if you're eligible by visiting the government's website.
Most people will qualify for a 25% tax bonus on their contributions. Basic rate taxpayers will get £25 extra paid in by the government for every £100 paid into your pension. If you’re a higher or additional rate taxpayer, then you can claim additional tax relief in your self-assessment.
If you are the director of your own limited business, you can pay into your pension by making contributions through your company. Paying into your pension this way means that your contributions can be offset as a business expense - and therefore not eligible for corporation tax. This means you'll owe less corporation tax on your company's total earnings.
However, it's important to note that because you have not paid corporation tax on these business contributions, you will not receive the government's 25% tax top-up.
Remember, you also have the option to make personal contributions that are eligible for this tax relief bonus. You’ll need to consider which is the best approach for your circumstances.