Self-employed pensions: everything you need to know

Being self-employed often means sorting out your own pension, which might not be at the top of your to-do list. However, it can be worth the effort, as you benefit from tax relief on your pension contributions. In this guide, we’ll explore the different self-employed pension options available, how tax relief works, and how to get your pension set up.

Yes, self-employed people are entitled to the State Pension, just like anyone else in the UK. How much you get depends on your National Insurance (NI) record. To qualify for the State Pension, you need to have paid NI contributions for at least 10 years. To get the full State Pension, you need to have contributed for at least 35 years.

On top of the State Pension, many people prefer to have an extra financial cushion for retirement, for example a pension scheme for self-employed people. Unlike workplace pensions, which an employer takes care of, you’ll need to set up and manage your personal pension yourself.

With private pensions for self-employed people, you have the freedom to choose a plan that matches your financial goals and retirement needs. Once you’ve chosen a self-employed pension plan, you’re responsible for making contributions.

The money you put into your pension is invested in things like stocks, bonds, and mutual funds. With these investments, the goal is to grow your pension pot over time and ideally build up a healthy sum for you to use in retirement.

Yes, the tax relief on pensions for self-employed individuals is one of their main advantages. The government gives you a helping hand by adding a bit more to your pension pot every time you make a contribution.

The key thing to remember is that there’s an annual limit on how much you can contribute to your self-employed pension each year and still benefit from tax relief. This is known as the “annual allowance”. For the 2024/25 tax year, this limit is £60,000. 

The government will top up any pension contributions within this allowance based on your income tax rate.

Example calculation

If you’re aiming for a £100 pension contribution:

As you can see, additional rate taxpayers typically get the biggest tax benefit from contributing to a self-employed pension. Keep in mind that if you have a high income or flexible access to your pension, your annual allowance may be lower.

If you have a self-employed pension and want to follow a similar approach to workplace pensions, you could aim to contribute at least 8% of your earnings. While you don’t have the benefit of an employer adding to your contributions, you could work up to saving a little on top of the 8%. A pension calculator can help you set a specific retirement savings goal and find out how much you need to save regularly to hit that target.

Pensions for the self-employed are similar to other kinds of retirement savings: the earlier you start saving, the better. Just remember, the final amount will depend on how well your investments perform. With investing, there is always the risk that your investments go down in value.

The carry forward rule helps those with self-employed pensions by letting them use unused pension allowances from the past three tax years. If you don’t use your full annual allowance in a year, you can carry over the unused portion to the current year.

This rule works on a rolling basis, so each year, the oldest year’s allowance drops off. This means that, if you want to use unused allowance from the 2021/22 tax year, you need to do so by the 2024/25 tax year. Just keep in mind that the annual allowance between the tax years 2021 and 2023 was slightly lower, at £40,000.

Example: 

• 2021/22: You contributed £20,000 of your £40,000 allowance

• 2022/23: You contributed £30,000 of your £40,000 allowance

• 2023/24: You didn’t make any self-employed pension contributions, so you had £60,000 unused.

By the 2024/25 tax year, if your financial situation improves, you could potentially contribute up to £90,000 to your pension savings. This includes:

• £20,000 carried forward from 2021/22

• £10,000 carried forward from 2022/23

• £60,000 for the current year

This total of £90,000 is available as long as you haven’t used up all the previous allowances.

For further details, you can find out more on the government webpage on unused annual allowances.

If you are self-employed and looking to supplement your State Pension, you have two main options: personal pensions and self-invested personal pensions (SIPPs). 

There’s another option called Nest pensions, which function both as workplace pensions and pensions for self-employed people. You can also opt for stakeholder pensions, which are flexible plans provided by banks, building societies, and insurance companies.

Personal pensions, also known as private pensions, involve making contributions into a pension fund that’s managed by professionals. With private pensions for self-employed people, you can choose where to invest your savings based on your appetite for risk and how much money you want to invest.

While you make the decisions about your risk level and pension contributions, experienced fund managers handle the actual investing to aim for good returns. Some consider this one of the best pensions for self-employed people who are new to investing, as it requires less hands-on management.

For those who want more control and a wider range of investment choices, there’s the self-invested personal pension (SIPP). Whether you’re investing in stocks, bonds, or property, you have control over where your money goes. 

For the self-employed, a SIPP can be especially useful because you can adjust your contributions based on how much you earn. If you have a good month, you can put in more money; if your earnings are lower, you can contribute less.

Tax relief on SIPP contributions can vary. Sole traders receive tax relief up to the annual allowance, while those running a limited company can make contributions from company funds, potentially reducing the company’s tax bill.

Nest is a workplace pension scheme where your employer will automatically enrol you if you’re eligible, but it can also be used as a pension for the self-employed. You can start contributing from just £10 each time, and you have the flexibility to pause contributions whenever you need.

If you’re self-employed, you can join Nest by signing up on your own. It is considered a simple and relatively low-cost self-employed pension plan. By joining Nest, you can benefit from the same features as employees, such as tax relief on your contributions.

A stakeholder pension is another retirement savings plan you can use if you’re self-employed or don’t have a workplace pension for whatever reason. You make contributions, which the pension provider invests for you, and the amount you end up with depends on how much money you put in and how well the investments perform. You can make regular payments or pause them if needed without penalties, but missing payments may reduce your final pension pot.

If you run your own business, setting up a self-employed pension might not be high on your list of priorities, but it can be worth looking into. There are three key benefits:

• A pension helps you save for retirement, which is particularly important if you’re not receiving a regular salary or employer contributions. Investing in a pension now can help to set you up for a more comfortable retirement.

• Contributions to your pension savings are tax-efficient, meaning you get tax relief on the money you put in. This effectively gives you extra financial support from the government.

• Self-employed pension plans often include access to expert investment management. Your money is invested by financial experts, so you don’t need to manage the fund yourself.

Although it might seem like a hassle to set up your own pension, it can be worth taking advantage of the tax benefits and professional investment management available to you.

When it comes to self-employed pensions, there are a few key risks to keep in mind.

With private pensions for the self-employed, your money will be invested in things like stocks and shares. This means the value of your pension can go up or down with market changes. The amount you have when you retire might therefore be higher or lower than what you put in.

Another risk is potential changes to UK tax rules. Tax relief on pensions for self-employed people can change at any time, so the perks you enjoy now might not be available in the future. What seems like a good deal today might not be as beneficial later on.

So, you’ve decided to start saving towards a pension for the self-employed. What are the next steps?

Here are some ideas:

1. Choose your pension type: Decide which type of self-employed pension plan suits you best. You can pick from various pension funds or a default investment option. Many providers offer online tools to make it easier to manage your investments.

2. Select a provider: Research and choose a pension provider with a good reputation and options that match your needs.

3. Assess your risk: Decide how much risk you’re comfortable with. Pension funds come with varying levels of risk and potential returns, so make sure you are happy with the risk level of your chosen plan.

4. Check fees: Most pension plans for the self-employed in the UK will have a service fee and a fund management fee based on the value of your investments. Also, check how flexible the plan is when it comes to contributions and drawdown options.

5. Start contributing: You can usually start by making an initial lump sum payment. You can also set up regular contributions or make additional lump sums as needed.

For personalised advice on pension plans for the self-employed, it can be helpful to consult a pensions adviser. They can talk through your options with you and optimise your self-employed pension plan to suit your needs.

Self-employed pensions are a popular way to save for retirement because any growth on your investments is tax-free. But you don’t have to choose between a pension and saving your money elsewhere. 

Thanks to the Personal Savings Allowance, basic-rate taxpayers can earn up to £1,000 on their savings without paying tax. See how much money you could make on your savings by comparing high-interest savings accounts.

If you’re looking for a savings account to boost your retirement fund, our marketplace offers attractive rates from various UK banks and building societies. Simply register for a Raisin UK Account, log in, and apply today to get started. It’s completely free.