Some clients may as a result have to consider looking at tax planning tools, including pensions, but the changes do not amount to a new tax, they simply mean the companies have an obligation to provide details of sellers to HMRC.
Of course, people who are using such platforms as a business, rather than a small 'side-hustle' should already be well aware of doing their tax returns.
Self-employment pensions explained
The allowances for self-employed workers are the same as employees paying tax via PAYE (pay as you earn) in that:
- Up to £60,000 can be paid into a pension each financial year – depending on profit/earnings.
- A basic rate taxpayer, who pays 20 per cent of their salary in income tax, gets an extra £20 for every £100 they put into their pension.
- Savers who pay higher rate tax can claim additional tax relief on their self-assessment tax return: 20 per cent up to the amount of any income they have have paid 40 per cent tax on; 25 per cent up to the amount of any income they have paid 45 per cent tax on.
- Any unused annual allowance from up to the previous three tax years can be put into the pension, this is called ‘carry forward’ and is particularly useful for self-employed workers to pay into a pension.
Types of self-employed pension
What type of pension the client opts for may depend how financially proactive they are.
Some clients will want to pay regular or lump sums into their fund when they can and have little interaction with it.
Others may want to be more involved, using it as an investment vehicle, so taking more control over where the funds are saved and how.
It is important to look at how much the client plans to pay in, although this may change. Having a minimum can also act as a guide to how involved they want to be.
How near they are to retirement will also determine what type of pension is set up, as lifestyling means the nearer they are to retirement, the more weighted their fund will be towards assets such as fixed income, rather than stock market-based funds.
This is important as if they want to continue working well into their retirement years, and remain invested, a high allocation to low-risk, low-return assets could be detrimental for their longer-term portfolio performance.
The biggest decider of where their pension will sit may depend on their company set up, whether they are a sole trader paying tax via self-assessment or running their business through a limited company of which they are a director.
Most self employed workers will be suited to a personal pension, such as:
- A stakeholder pension, which will have capped charges and limited investment options.
- An ordinary personal pension with a choice of investments, such as managed funds and some other stock market listed assets.
- A self-invested personal pension. If the client already owns some shares and shows an interest in the stock market, then this type of pension is worth considering. Sipps can also include property and land and some Sipps will allow you to invest in residential property through real estate investment trusts.
Company pensions for the self employed
There is a type of pension scheme that can be set up under company pension rules; these are known small self administered schemes.
These types of schemes are more admin-heavy for some businesses – family-owned ones for example. They can be a useful financial tool, for example, if your client has a company employing 11 employees or less.
As SSAS is set up under trust rules, clients will need to go through a specialist provider.
Employer and member contributions all qualify for tax relief and investment income and gains are usually exempt from UK income tax and CGT.
How can a sole trader can pay into a pension?
Clients who are sole traders, so work for themselves and employ no other staff, will normally be submitting their tax return via self-assessment.
