If you’re self-employed, you may be working out how to make use of any of your remaining allowances before tax year end.
Income can be a bit unpredictable when you work for yourself, so it can be difficult to make regular contributions to things like a pension for instance. You may not want to commit to regular contributions.
Instead, as the clock ticks down to midnight on 5 April you might be considering whether you’ve got the room in your budget for a one-off lump sum payment to your pension instead.
This article isn’t personal advice. Pension, ISA, and tax rules can change, and benefits depend on your circumstances. You can normally access the money in a pension from age 55 (rising to 57 in 2028). If you’re not sure if an action is right for you, ask for financial advice.
How much can I contribute to my pension?
As a reminder you can usually contribute up to 100% of your annual earnings or £60,000 – whichever is lower – to a pension and still benefit from tax relief. If you’ve had a particularly good year, you could also use a process called carry forward to turbo charge your contribution. This lets you make use of unused allowances from the previous three tax years too.
If you own or run a limited company and are employed by it, you can make personal contributions like the above but you also have the option of paying employer pension contributions via the business.
In this case, the contribution would come from pre-tax profits, reducing your corporation tax bill and saving on National Insurance compared to taking the money as salary.
There’s also the added benefit that these contributions aren’t subject to the same earnings restriction. So you can pay in up to £60,000, or more using carry forward, regardless of your own earnings. But the contribution would only benefit from corporation tax relief if it meets the “wholly and exclusively” test.
What is the “wholly and exclusively” test?
Contributions must comply with company pension rules for allowable deductions so HMRC will need to see the employer pension contribution is “wholly and exclusively” for their trade or profession.
For instance, HMRC might look for evidence like whether other employees are getting comparable remuneration for doing similar work. It’s important to take advice from either a financial adviser or accountant to ensure you remain on the right side of the rules.
How can a LISA work for the self-employed?
Lifetime ISAs (LISA) can be opened by anyone aged between 18-39 and were introduced to help people save for retirement or buy their first home.
A LISA lets you contribute up to £4,000 a year and the government will give you 25% as a bonus. It’s the same effect as basic rate tax relief on a pension. But the added points for a LISA are that, unlike a pension, if there’s an emergency you can still access the money.
However, it’s important to know, if you do access it for reasons other than an eligible first home purchase, after age 60 or serious ill health there will be a 25% withdrawal charge. This won’t just remove the bonus but also some of your own hard-earned savings too.
Now the LISA is due to be replaced but we’re still awaiting details on the new product. We do know that it will be to help save for first homes only, not retirement, which is a shame. However, if you already hold and contribute to a LISA you will be able to continue to do so under current terms.
How can other accounts help?
There are other types of ISAs which offer another tax efficient way to grow your money.
You can contribute up to £20,000 a year across all your ISAs, including Stocks and Shares ISAs, Cash ISAs and LISAs and it will be protected from UK capital gains and income tax. Money can also be taken from an ISA tax free so it can play an important role in managing your tax bill.
But change is coming, at least to Cash ISAs, as from April 2027 people aged under 65 will be restricted to paying in just £12,000 per year into their Cash ISAs. As a result, people may want to make the most of this allowance while they can.
If you have shares outside an ISA that may be at risk of incurring taxes like capital gains tax (CGT) or dividend tax, then it can be a good idea to make use of your ISA allowance to sell and then buy them back within an ISA. This is called Share Exchange (sometimes called Bed and ISA). While CGT may be due when you sell them and there are other factors to check before going ahead too, once in the ISA you never need to worry about capital gains or UK dividend tax on those assets again.
Remember that investments can go up and down in value, so you could get back less than you put in.