I expect to make a taxable profit of £150,000 in my self-employed business in the year to 5 April 2008 and I’ve also made a capital gain of £65,000 in this tax year. Can I shelter these items from tax by making pension contributions?
The bad news is you only have until 5 April 2008 to make pension contributions to reduce the tax payable on your 2007/08 taxable profits. You cannot carry back pension contributions made in a later tax year to be set against the income of an earlier tax year. You can pay pension contributions up to the limit of your taxable profits for 2007/08, subject to a cap of £225,000. The maximum you can actually pay is a net contribution of £117,000 (78% x £150,000). Your pension fund will then reclaim the basic rate tax of £33,000 (22% x £150,000), leaving a total gross contribution in your fund of £150,000. You cannot pay pension contributions to reduce the number of capital gains that are taxed in 2007/08, but a large pension contribution could ensure your gains are taxed at the basic rate of 20% rather than 40%.