Self Employed Pensions

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Why a Self Employed Pension?

If you’re self-employed then naturally you won’t have an employer to arrange a pension for you, so it’s very important that you make your own arrangements.

Whether you’re employed or self-employed there are great tax benefits of paying into an approved pension arrangement, so naturally they are a very popular means of saving for retirement.

Our 2016 Money Survey found that 20% of people were unsure how they were going to fund their retirement and this figure rose to 46% for self employed individuals.

Don’t let yourself be one of the 46% and start planning for your retirement now. This guide should help set you on your way by covering off the key points you should consider whilst providing some information specific to whether you’re a Sole Trader or a Contractor working through your own limited company.

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Can I get the State Pension if I’m Self-Employed?

If you’re self-employed then you’re entitled to the basic State Pension in the same way as anyone else as long as you’ve built up adequate National Insurance credits. National Insurance contributions for Sole Traders are usually paid through Self-Assessment (you can find out more on the HMRC website here).

government pension for self employed

Even if you are eligible for the State Pension, whether this will be enough to fund your retirement is another matter. The new full State Pension stands at £159.55 a week.

This won’t be enough for most people to survive on – so you’ll typically need a private pension too.


Am I at a Disadvantage Because I’m Self-Employed?

Yes and no. Employees who are members of workplace pension schemes will benefit from employer contributions into their pot. Being self-employed you will miss out on employer contributions and will need to establish your own personal pension arrangements.

However, the self-employed still benefit from the same tax advantages associated to pensions as an employed individual. Pensions are extremely tax efficient as they qualify for tax relief at your marginal rate of income tax.

For example, if you’re a sole trader paying basic rate tax of 20%, if you made a pension contribution of £800 the pension provider would automatically gross this up to £1,000 (you would still need to declare this on your Self Assessment).

For a director of a limited company you could set it up so your company pays into your pension and those contributions are treated as a business expense for tax purposes.

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How Much Can I Save in a Pension?

You can save as much as you like in your pension each year but you’ll only get tax relief up to £40,000 of contributions or your annual earnings, whichever is lower. This is known as the “annual allowance”. You can carry forward unused annual allowance from the previous three years.

Self-employed workers will often find their income varies significantly from year to year so you can use the carry forward rule to maximise your pension savings in years when your income is high.

Tax relief on pension contributions made by a sole-trader operate in the same way as for employees. The pension scheme claims back basic rate tax, and any further pension tax relief is claimed through the self-assessment tax return.


Am I Saving Enough into My Pension?

There are several things you need to consider when working out how much you should save into your pension:

  • The age you want to retire.
  • How much State Pension you will receive and when this is payable. You can get a forecast of this from the Government here.
  • Your expenses and lifestyle in retirement. Will you still have a mortgage or dependent children? Do you plan to travel the world?
  • Other assets or investments you have and whether you expect to receive an inheritance.
  • How much you have saved in pensions so far and how your investments are performing.
  • Whether you will continue to work part-time in retirement.

In our 2016 Personal Finance Survey 27% of people (or over 1 in 4) believe they only need to save 5% or less of their income in order to fund retirement. However to maintain your standard of living into retirement the figure that needs is closer to 15%(1).

(1) Workers need to put 15% of income into pension, report says…


Key Considerations for a Self Employed Pension

Sole traders and company directors have different options available to them when it comes to saving into a pension. Below we have compared some of the key differences between the two.

What is my State Pension Eligibility?

Sole Trader

Yes, provided you have sufficient National Insurance credits. National Insurance contributions are usually paid via your Self-Assessments.

In 2017/18, the state pension stands at only £159.55 per week, so it’s important to consider if this level of income will be enough to support your retirement.

state pension for self employed
Company Director

Even if you pay yourself a very small basic salary below the level at which you need to pay National Insurance (and the remainder in dividends), you may still qualify for pension credits and therefore be eligible for the State Pension.

Double check with your accountant given your particular circumstances.

Your Personal Pension Options

Sole Trader

As a sole trader you have a number of pension options, the four most common are detailed below:

  • Personal pension
  • Stakeholder pension
  • Self-Invested Personal Pension (SIPP)
  • National Employment Savings Trust (NEST)
Company Director

In addition to having the same options as a self employed individual a company director also has the option to make pension contributions through their limited company (limits apply).


This guide provides a general overview however you are best to double check with your accountant with regards to your personal circumstances.

When reviewing a clients existing pension arrangements we often work closely with their accountant to ensure we are providing the most appropriate advice.

Neil Adams
Pension & Investment Specialist at Drewberry

Self Employed Pension Tax Relief

Sole Trader

Yes, pension contributions qualify for tax relief at your marginal rate of income tax.

pension tax relief for soletrader

For example, a lower rate tax payer would only need to pay £800 to get £1,000 in their pension (the pension provider would automatically gross up your contribution).

Company Director

Yes, pension contributions qualify for tax relief at your marginal rate of income tax.

Contributions made through your limited company would usually qualify as a tax-deductible business expense.

To calculate how much pension tax relief self-employed people are entitled to, why not try our Pension Tax Relief Calculator?

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What about existing pensions?


Yes, I have existing pension arrangements.

Some self-employed workers will have been employed at some point and it’s likely they will have set up and paid into different workplace pensions over the years from different employers.

consolidate self employed pensions

For many people it could be advantageous to consolidate their existing pensions into one plan. Pension consolidation involves bringing all of your separate pension plans together and combining them into one single pension pot.

This makes it easier to keep track of your pension savings and see how your investments are performing.


No, I do not have existing pension arrangements

It’s never too early – or late – to set up a pension. You won’t have access to a workplace pension scheme if you’re self-employed but there are various types of pension you can contribute to. These include:

  • A private Personal Pension
  • A Stakeholder Pension
  • National Employment Savings Trust (NEST)
  • A Self-Invested Personal Pension (SIPP)

These four types of pension are your only options if you’re a sole trader. If you are director of a limited company you have these and some other options (please see the ‘Company Director Pensions’ section below).


What are my self employed pension options?

Unfortunately, not all pension arrangements are the same and it is important to understand the benefits and drawbacks of each. The table below summaries the most common arrangements you are likely to come across.


Personal Pension

A personal pension is a type of defined contribution pension. You choose the provider and make arrangements for your contributions to be paid. Providers are normally insurance or investment companies. A pension adviser, such as Drewberry Wealth, can help you choose which is best for your needs and set it up for you.

Payments into a private pension attract tax relief up to annual limits and can be made either regularly, by lump sum, or a combination of both.

How much money will be in your pension pot at the end will depend on how much you’ve paid in, and how the pension fund’s investments have performed.

When you retire you can usually take up to 25% of the fund as a tax-free lump sum and the residual as taxed income. With effect from 6 April 2015, the pension freedom legislation has increased the flexibility of how pension benefits can be taken.


Stakeholder Pension

Stakeholder pensions are a form of defined contribution personal pension. They are offered by some employers but you can also set one up yourself.

Stakeholder pensions have low and capped charges and a default investment strategy for those who don’t want to choose which funds to invest in. Management charges in each year must not amount to more than 1.5% of the total value of the fund for each year until the 10th year of continuous membership in the scheme when the cap reduces to 1% per year.

stakeholder pensions

Stakeholder pensions are also flexible regarding contributions so this makes them a good option for self-employed people with irregular income patterns.

The minimum contribution to a stakeholder pension cannot be set higher than £20 and contributions can be paid weekly, monthly, at other intervals, or they can be a single one-off contribution. There are no penalties if the saver wants to transfer the fund to another pension arrangement.


Self Invested Personal Pension (SIPP)

If you want to take a more active interest in the investments in your pension fund, then a self-invested personal pension (SIPP) could be a good option.

SIPP for self employed

Investing in a SIPP means you can choose the stocks and shares and other assets that go into your pension. Permitted investments include equities, investment trusts, real estate investment trusts (REITs), and National Savings & Investment products.

You can manage these investments yourself, or you can pay a professional financial adviser to do it for you.

As with other types of pensions, any contributions that you make into a SIPP will receive tax relief, up to certain limits.


National Employment Savings Trust (NEST)

NEST (National Employment Savings Trust) is a pension scheme set up by the government. It was established mainly to help employers with automatic enrolment (where firms now have to provide a pension to employees) but you can also join NEST if you’re a sole trader or the sole director of a company that doesn’t employ anyone else.

Once a member, you can carry on contributing to your pension this way even if you change jobs or stop working.

The main features of NEST are flexible contributions and low charges.

NEST is a defined contribution scheme which means that the contributions paid in by you and anyone else are invested. A pension pot is built up and at retirement you have various options about how to turn this into an income.

Self-employed workers need to set up their own contributions to NEST. You can do this online by Direct Debit or debit card. You can contribute as often as you like but the minimum contribution is £10.

If you’re self-employed and employ other people you can sign up to NEST as an employer and make contributions for your employees.

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Company Director Pensions

If you are the director of a limited company, there are two ways that you can contribute to a pension, either personally (from your salary) or via your business. The case below provides an example of making contributions to your pension via your company.

pensions for company directors

Most contractors who operate under a limited company will draw a tax-efficient low salary and also pay themselves dividends.

Tax efficient pension contributions for Directors

For each £1,000 of company gross profit, they will pay corporation tax of 20% (£200). Of the remaining £800 dividend, a higher rate taxpayer will pay tax of 25% (£200). This leaves them with £600, having paid HMRC £400.

However, if the company contributes the £1,000 to a pension instead of taking it as a dividend, all of it will go into the pension fund. This means the individual has effectively received 40% tax relief.

Business owners should consider pension contributions as part of their broader tax planning, along with other options such as paying dividends. Your accountant or financial adviser can guide you on this, or call us to discuss further.

Company directors might also want to consider the way pension funds are invested. For example, you might wish to invest in your own commercial premises which can be arranged tax efficiently via a SIPP.

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Need help? Self-Employed Pension Advice…

If you would like to run through your options with one of our specialist pension advisers then please call us on 02084327333. Whether you’re looking to consolidate existing arrangements or just set up a new pension, your adviser will be able to provide you with a recommendation given your specific needs and process all the paperwork with the pension provider for you.

In addition to pensions for the self employed, given the lack of employer provided sick pay, another very popular policy is self-employed income protection, which pays out a monthly benefit to replace lost income if you are too ill or injured to work.

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