Pensions for the self-employed
Here to help you get started on saving for your retirement
If you work for yourself, you can be forgiven for putting pensions in your ‘low priority’ pile. While employees have the luxury of auto-enrolment and a HR department, you have to do it yourself. And given the ups and downs of freelance life, putting your hard-earned income in a pot you can’t touch for decades doesn’t seem so appealing.
But a pension is no ordinary pot. The more you put into it, the more you get from the Government in tax relief, meaning even modest amounts could grow big by the time you retire. And managing it yourself is easier than you might think. A Self-invested personal pension, or SIPP, lets you control how much to put in and where to invest it – and you can get started with as little as £25 a month.
Read our guide on pensions for the self-employed
What are the tax benefits of a pension?
Being your own boss means that typically you won’t have an employer who’ll pay into your pension. But you’ll still qualify for the various tax perks a pension brings. And they’re very generous:
When you pay into your pension, you’ll receive basic-rate tax relief from the government. In most cases, that means a boost of 25%. So if you pay in £80, the government add £20.
Are you a higher or additional rate taxpayer? Then you can claim back even more tax relief on your self-assessment tax return. Keep in mind there are limits on the amount you can pay into your pension and receive tax relief – we’ll outline them later on this page.
Money grows tax-free
Pensions, like ISAs, are a wrapper that protects your money from tax. In a pension, you won’t pay income tax or capital gains tax on your investments, however much they might grow.
Take 25% tax-free in later life
You can access the money you save in a pension from age 55 (rising to 57 in 2028). And when you do, you can take 25% of your pot tax-free. When you access the rest, you’ll pay income tax on it at your marginal rate.
Pay profits into your pension
Own your own business? There can be tax advantages to paying your salary directly into your pension.
These benefits are twofold. Profits you’re able to pay directly into your pension as an employer contribution no longer count as profits, which reduces your business’s liability for corporation tax. And as you’re not taking the profit as income now, you’ll lower your personal liability for income tax.
How much can I pay into my pension?
How much you can pay into your pension depends on your earnings and the tax bracket you fall into. Each tax year, you can typically pay in up to 100 per cent of your earnings including any tax relief, up to £40,000. This limit, known as the ‘annual allowance’ applies to all contributions made to your pension – whether by you or by your company.
Your annual allowance will be lower than this, however, if you have earnings exceeding £200,000 a year or, usually, if you have already taken an income from your pension plan.
What counts as earnings?
For self-employed people, 'earnings' will be the profits less costs and expenses you report on your self-assessment tax return. As a rule of thumb, most earned income will be counted, but dividends and (most types of) rental income won’t be included.
Can I make employer contributions?
If your business is a limited company, you can make employer contributions to your pension. These contributions are deducted from your total profits and won’t therefore be liable to corporation tax. Just remember that employer contributions will also count towards your annual allowance.
Unlike salary payments, employer pension contributions aren't liable for employer's national insurance (of up to 13.8%). And as it is an employer contribution, you won’t be liable to income tax or national insurance on the contribution as an employee.
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