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The complete guide to self-employed pensions

Being self-employed means you may have to start your own pension now, rather than hoping the State might cover you in the future. But don't worry. You'll be fine - just follow our guide

Many people, even those with great job satisfaction, dream of the day they can finally retire from work. With visions of long walks, lazy mornings and exploring the world, retirement is a chance to slow down and enjoy your old age.

The only spanner in the works is how you plan to fund your retirement. The best way to do this is through a self-employed pension.

So, if you’ve made the move to starting your own business, or you can now afford to put some money away, you won’t regret starting a self-employed pension. In this article, we’ll help you navigate the world of self-employed pension plans.

Keep reading to learn about self-employed tax rates, pension contributions, state pensions and everything in between.

What is a pension for the self-employed?

A pension is really just a long-term savings scheme, where the money you put aside now will hopefully grow for your future. This is especially important as you’ll no longer be receiving a wage or able to pay yourself as a self-employed worker.

Being self-employed means you’ll have no workplace pension to fall back on from an employer. As such, it’s up to you to save for and to secure your future. So investing in a personal pension fund is a wise decision.

You won’t be automatically signed up for a personal pension which means you’ll need to start your own fund.

You’ll have the freedom to choose any pension fund you want. You’ll have control over your money, how it’s invested and hopefully, will be able to accrue as much interest as possible.

Remember: You may be retired for over 30 years, so saving a little now will mean excellent rewards after you reach retirement age. So, for a carefree retirement with the funds to last you for up to three decades – a staggering third of your life – it’s recommended that you start saving as soon as possible.

Understanding private pensions

Different from state pensions (more on this later), private pensions for self-employed people are set up and paid into by individuals. Once you retire, you’ll receive your private pension in addition to your state pension, which together should mean you’re comfortable money-wise.

Combining your private pension with your state one

Self-employed state pensions are very different to private pensions. The main difference is that the government funds your self-employed state pension, and you fund your private pension.

Many people search for ‘do self-employed workers get a state pension’, and the answer is… it all depends.

Paying national insurance when self-employed is just as important as people who are traditionally employed. In order to receive a state pension, you’ll need to have made National Insurance contributions throughout your life.

As long as you’ve made regular contributions, you’ll be eligible to receive your state pension once you reach a pre-set age (determined by the government).

Unfortunately, the state pension is not high enough to fund the lifestyle most people enjoy when they’re working.

This means having a private pension is essential if you want to live well. If you’re unsure about whether you’ll receive a state pension or want to check the amount you’re predicted to get, visit the check state pension page.

How self-employed pension contributions work

Once you’ve started a self-employed private pension plan, you’ll need to make regular contributions. But what are self-employed pension contributions?

These are regular amounts that you voluntarily pay into your pension fund. You can set the amount you pay, and it’s often simpler to set up a monthly direct debit for the contributions you wish to make.

If you’re unsure about how much to pay into your private pension when you’re self-employed, consider the following:

  • Age: The older you are, the less time you have to build up your pension. This means you’ll need to make higher contributions than a younger person would
  • Lifestyle: If you want to enjoy a lavish lifestyle after retirement, you’ll need to pay more money to your pension fund
  • Family: If you’re planning to support different family members after your retirement, you’ll need to pay more than if you just need to support yourself

Working out which options are best for you

You may feel like the state pension is enough for you to live off. However, if you want to feel secure financially, a private pension may be the best option for you.

When it comes to private/personal pensions, you have four different options. These are ordinary, stakeholder, self-invested and NEST pension.

There’s no real ‘best’ pension for self-employed people, because the best choice for you will entirely depend on your circumstances.

Below, we’ve summarised your choices:

  • Ordinary: Most personal pensions fall into this category, where you make voluntary contributions that will be paid out after you retire.
  • Stakeholder: Different from ordinary pensions, stakeholder personal pensions have a maximum charge of 1.5%. You can also choose to stop paying into your pension and restart at any time, without having to pay a penalty. You’ll need to meet a range of different standards that are decided by the government and your money will be mostly invested in stocks and shares.
  • Self-invested: Self-invested personal pensions or SIPPs give you better control over where your money is invested. They allow you to have a more hands-on approach to your pension, although you may incur higher charges.
  • NEST: Finally, you can also choose to start a NEST (Nation Employment Savings Trust) pension. Here, your funds are invested with the NEST Corporation, which is run with its members’ needs in mind. You can check your eligibility for a NEST pension online.

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How to pay into a pension when self-employed

In a workplace pension, your employer deducts your pension contributions before your wages are paid. But naturally, if you’ve got a self-employed pension, then actually paying into your pension is a bit different.

With a self-employed personal pension, you make contributions directly via bank transfer, or you can set up a Direct Debit or a standing order. You can set these up to pay monthly, as well as making additional one-off contributions if you want.

How much can I pay into my directors’ pension?

You can contribute as much as you like to your director’s pension, but the tax relief annual allowance applies.

The annual allowance allows you to pay up to 100% of your income or £40,000, whichever is lower, into your director’s pension in a single year through personal, company or government top-up contributions.

After this, you’ll be charged tax on all contributions.

The tax relief you receive depends on your income tax rate.

For example, a basic rate payer would effectively only have to pay £100 into their pension to save £125 in their pot.

It’s worth noting that company contributions do not get ‘grossed up’ in this way, and £100 paid in will be £100 saved. This is why, in some cases, it may be better to make personal contributions rather than company ones.

How much can a company pay into a director’s pension?

There’s no limit on company pension contributions for directors’ pensions, but there is a limit on how much you can receive tax relief.

As with personal contributions, for the 2022/2023 tax year, the tax relief annual allowance is 100% of your income or £40,000, whichever is lower.

The annual limit is important for company directors that take a mixture of salary and dividends. HMRC will not take into account dividends when calculating your income for tax relief purposes.

This means that if you take a low salary, then the maximum amount you can pay into your pension and the amount of receive tax relief will be low.

There’s also a lifetime allowance set by HMRC of £1,073,100 in personal, company and government top-up pension contributions. Anything above this and you’ll pay tax on it.

Company director pension

Business benefits of company contributions

There are tax-efficiency benefits to making pension contributions through your company:

  • Relief against corporation tax – Employer contributions to your director’s pension count as an allowable business expense. This means your company could receive corporation tax relief on directors’ pension contributions of up to 25%. This applies as long as the contributions meet the rules for allowable deductions.
  • No NI contributions – Any payments your company makes into your pension pot will not be subject to National Insurance. In the tax year 2022/2023 the National Insurance rate is 15.05%, which means your business could save up to 15.05% by paying into a pension rather than a salary.

Add these two tax-efficiency benefits up, and your company can save money by making employer contributions into your pension.

Be aware that HMRC will expect any pension contributions from the company to be “wholly and exclusively for business purposes”, with serious consequences for companies that are found to have flouted the regulations.

Pension planning for high-earning directors – SIPP and SSAS

If you’re a high-earning company director, there are several ways to maximise your investment returns. Not just the standard company and personal pensions.

Two of the most common and trusted options are a self-invested personal pension (SIPP) and a small-self-administered pension scheme (SSAS).

Directors pension – SIPP

As a high-earner, you may want to consider SIPPs as they offer a wider range of investment options for your pension pot. Which means you could get greater returns.

SIPP is also more flexible than a standard pension, allowing you to tweak and change your investments on a regular basis.

Directors pension – SSAS

SSAS is another option for high-earning directors. It differs from defined contribution schemes in that it is set up through a trust containing a maximum of 11 members.

SSAS is a popular choice when you want to give members of a family business a share of the company’s assets and pension.

Setting up a company pension scheme for directors

In order for your company to make director pension contributions that are eligible for tax relief, you’ll need to set up a company pension scheme with a reputable provider.

It’s essential that the pension provider you choose is both registered for tax relief with HMRC and invests your pension according to HMRC rules. You’ll pay tax on all contributions if they don’t meet either of these requirements.

When setting up a company pension scheme for directors, shop around and look for providers that specialise in your business size and growth plans.

A good place to start is by speaking to your accountant, as they’ll have knowledge of the market and have a good idea of the best policy for your business.

Directors pension calculator

When looking to calculate your director’s pension on retirement, you need to factor in:

  • How much you’ll be saving each year (through both personal and company contributions).
  • How much will be taxed.
  • How many years you’ll be contributing for.
  • What your pension scheme’s interest rate is

Good to know: In the tax year 2022/2023 you can contribute either 100% of your annual salary or £40,000 (whatever is lowest) and receive tax relief. Any contributions above this will be taxed at your income tax rate.

When you have all of these figures, you can calculate how much your director’s pension will be when you retire.

Your company pension scheme provider will be able to accurately calculate this for you and will build your directors pension plan around your goals for retirement age and income.

Getting your head around SIPP tax relief

SIPPs give you better control of your savings. You can choose where to invest and manage your pension yourself. If you do choose to use a SIPP, you may be eligible for tax relief.

But what is SIPP tax relief? Well, this is where the government tops up your pension contributions by 20%. This helps you build up your SIPP for retirement. For example, if you contribute £2,000 in a year to your SIPP, the government will add an extra £400 through tax relief.

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Tax-deductible pension contributions

As long as you’re a UK taxpayer and under the age of 75, you’ll be eligible for tax-deductible self-employed pension contributions. Depending on how much you pay into your pension, the government will add an extra 20% through tax relief.

If you would like to learn more about tax-deductible self-employed pension contributions, hiring a pension advisor can help to simplify things. They’ll be able to advise you on the best pension for you as well as any tax relief you can receive.

The new state pension rules for self-employed workers

As of 6th April 2016, a range of new state pension rules for self-employed workers came into play. These rules can help to give you a better indication of what you’ll get when you retire. The most important thing to consider here is your National Insurance contributions.

If you haven’t paid National Insurance before the 6th April 2016, you’ll need to make 35 years of payments to automatically qualify for your state pension. If that’s not your case, then you’ll need at least more than 10 ‘qualifying years’ to be eligible for your state pension. How does that work?

Calculating your self-employed state pension entitlement

Well, basically, ‘a qualifying year’ is where you’ve paid sufficient National Insurance contributions. And in order to receive a state pension, you’ll need to have paid enough National Insurance over your life.

You can check your self-employed state pension entitlement, your predicted retirement age and the amount you’ll receive through the check your state pension page.

Key considerations to bear in mind

In order to find the best pension scheme for self-employed people, take a little time to learn more about your options. Thankfully, the following points should help you to choose the right scheme for you:

  • Firstly, choose the best pension type to fit your requirements. For example, would you prefer to choose where your money is invested using a SIPP?
  • Consider using a comparison site to search a range of different self-employed pension schemes. Never just pick the first pension scheme you find – it’s worth researching and looking into the benefits of several schemes before choosing the most suitable.
  • Summarise your top choices and compare them against each other for different features and advantages.
  • Always look into any necessary charges and make allowances for these when investing.
  • Don’t over-extend yourself. It isn’t worth getting into debt by pouring too much of your income into a pension scheme.

How to set up a pension when self-employed

It really is better to start your private pension fund as soon as you can. This will mean you can pay in lower monthly amounts than you would need to if you waited to start later in life.

You can also use the below tips to guide you through setting up your pension as a self-employed person:

  • First things first, work out exactly how much you can spare each month. Make sure all your bills are covered, and then look at your disposable income. Never sign up for a pension that has higher payments than you can afford.
  • Consider ways to cut down on business expenses so you have more money available – view our article on money-saving tips for businesses for more advice.
  • When picking a scheme that’s right for you via a comparison site, you can usually sign up online or over the phone if you need to ask any questions.
  • Top tip: It may be worth choosing a provider with an easy-to-use website or app to allow you to monitor your investment.
  • Consider using a financial advisor to help you decide on a pension scheme and to answer your questions.

Self-employed pension summary

  • As long as you’ve made sufficient National Insurance contributions, you should be eligible for a state pension
  • Self-employed state pensions are often not high enough to support your current lifestyle
  • Investing in a self-employed private pension now will mean you can enjoy a stress-free retirement
  • You can choose from ordinary, stakeholder, self-invested and NEST pensions
  • It’s well worth taking a little time to find the right pension for your needs

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Content disclaimer: This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer here.

This is information – not financial advice or recommendation. The content and materials featured or linked to on this blog are for your information and education only and are not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such. Checkatrade website is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors, and it is therefore not authorised to offer financial advice.
Always do your own research and seek independent financial advice when required. Any arrangement made between you and any third party named or linked to from the site is at your sole risk and responsibility. Checkatrade blog and its associated writers assume no liability for your actions.

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