Contributing to a pension offers a tax efficient approach to utilising surplus cash.
Payments made personally are topped up by the government at the basic rate of tax. Your contributions are usually limited to your relevant earning (being salary of trading income) – to a maximum of £40,000 in the tax year.
Even if you have zero earnings, this won’t bar you from benefiting from basic rate tax relief. By making the minimum pension contribution of up to £2,880, HMRC will pay in £720, giving a gross contribution of £3,600.
If you operate through a limited company you are also able to make employer’s contributions, where basic rate relief is replaced with corporation tax relief. There is no top up from HMRC and the annual £40,000 limit still needs to be accounted for across all sources of contributions. However, you are not limited to your relevant earnings, meaning those with smaller salaries can still benefit from their full yearly contributions allowance.
Remember, if you have had an active pension scheme over the last three tax years but not made any contributions, then you can still utilise them during 2017/18.
While there are tax efficiencies associated with pension contributions, appropriate pension and investment advice should be sought prior to making any payments.