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New Deal for Self-Employed
By J. H. BARRETT, A.C.I.I.
The enactment of the Finance Act, 1974, has consid-
erably improved the form of retirement provision avail-
able to persons in non-pensionable employment. Here-
tofore, self-employed persons tended to neglect the
obligation to make adequate provision for retirement
since if their enterprise was a success it was often felt
that such provision was unnecessary. In recent years we
have witnessed a pattern of rapid inflation to the extent
that it must now be accepted that the level of retire-
ment benefit which is likely to be required in future to
safeguard your standard of living would place an
inhibiting burden on most developing practices. The
generous tax concessions now available will emphasise
that it makes good business sense regularly to transfer
earnings, tax free, to a retirement annuity fund parti-
cularly when burdened by a high tax liability!
What is a retirement annuity?
The retirement annuity is a medium whereby a per-
son in non-pensionable employment may fund for a
retirement income by setting aside regular contributions
from earnings with the aid of various tax incentives.
The retirement annuity in its present form was first
introduced to this country following the enactment of
the Finance Act, 1958, and its main features at the
present time could be summarised as follows :
—Individual earnings may be transferred
tax free
to the
fund thereby earning a tax discount equivalent to the
rate payable on the top slice of taxable income.
—The earnings of the fund may be accumulated tax
free by concession, thereby enhancing the retirement
benefit released.
—It is not necessary to retire from practice before
opting for benefit.
—Section 63, Finance Act, 1974, allows 25 per cent of
the retirement pension to be exchanged for a tax free
cash gratuity on retirement.
—Retirement benefits would normally be available at
any age between 60 and 70, but for cases of ill-health
an earier retirement age is permitted.
—On death prior to retirement all premiums paid will
be refunded with or without interest depending on
the contract selected.
Tax relief on pension contributions
Section 63, Finance Act, 1974, reconfirms that pre-
mium contributions can be treated as a deductible
expense for tax purposes
but doubles the present contri-
bution thresholds.
The maximum contribution which
will rank for relief in any tax year will vary according
to the date of birth. The following table indicates the
maximum contribution now allowable which is in every
case the lesser of the two figures shown in columns
A and B.
Year of Birth
A—Maximum
%
of "Net Relevant
Earnings"
B— Overriding
Maximum
Contributions
1909 or earlier
20%
£2000
1910 or 1911
19%
£1900
1912 or 1913
18%
£1800
1914 or 1915
17%
£1700
1916 or 1917
16%
£1600
1918 or later
15%
£1500
Definition of relevant earnings
Relevant earnings are defined as being (in relation to
any individual) any income of his, chargeable to tax
for the year of assessment in which the contribution is
made, being :
(a) income arising in respect of remuneration from an
office or employment of profit held by him other
than a pensionable office or employment; or
(b) income from any property which is attached to or
forms part of the emoluments of any such office or
employment of profit held by him; or
(c) income which is immediately derived by him from
the carrying on or exercise by him of his profession
or vocation either as an individual or, in the case
of a partnership, as a partner personally acting
therein;
But does not include any remuneration as a proprietary
director of an investment company.
The relevant earnings of a married person do not
include the income of a spouse notwithstanding that
the income chargeable to tax is treated as his income.
Net relevant earnings
The net relevant earnings could be briefly described as
being the total taxable income in any particular year of
assessment less the amount of any deductions falling to
be made from the relevant earnings in computing the
total assessable income for that year.
Safeguard against fluctuating incomes
Provision is made whereby should a person's net rele-
vant earnings reduce during the currency of his policy
so that the contributions paid in any year becomes
greater than the amount for which he may claim tax
relief, any part of the contribution which does not
qualify for relief in any particular year owing to an
insufficiency of earnings may be carried forward to
qualify for relief as soon as net relevant earnings are
high enough to justify relief.
Method of funding
When this contract was first introduced in 1958 the
maximum contribution permitted for persons in the
normal age group was £500 per year or 10 per cent of
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