08 January 2025
What to know about the self-employed pension
8 minutes
When you’re self-employed, you have a few options when it comes to pension plans. Some of the most common choices are a personal pension plan and a self-invested personal pension (or SIPP) plan. You can even utilise the National Employment Savings Trust (NEST). Which self-employed pension to pick depends on your income, goals, and preferences.
In this article, we’ll tell you how to set up a pension when self-employed. We’ll discuss the different schemes available, the annual allowance, and any tax perks you could get. We’ll also look at some tips on how to pick the best plan for you.
Why do I need a pension when I’m self-employed?
Though technically not a legal requirement for the self-employed, paying into a pension plan can help you save for retirement. Your pension savings can supplement your State Pension, and you can access your pension funds as soon as you turn 55 (rising to 57 after April 2028).
Do I still get the State Pension if I’m self-employed?
You must have at least 10 qualifying years of National Insurance Contributions (NIC) to get the State Pension in the UK. A qualifying year is when your salary is above the lower earnings limit. Even if your income for that year is below the threshold for NIC, the year still qualifies as long as you earn above the lower earnings limit. These rules apply even if you register as self-employed.
However, you won’t receive the State Pension until you reach the minimum pension age set by the Government. Check the Gov.UK website to see when you’ll be eligible for the State Pension.
What pension options do the self-employed have?
As a self-employed worker, you have a few pension options available.
Personal Pension
Personal pension, also known as standard personal pension or ordinary personal pension, is a private pension scheme that anyone can join—even the self-employed. You set this up with the pension provider, and you can pay a set amount each month or a lump sum. You can also take a contribution holiday whenever you want without any penalties.
When setting up your pension pot, the provider will ask how you want to invest your funds. You usually have a choice between:
- Asset investments, such as shares or bonds
- Company investments based on geographic location, e.g. investing in UK-based companies vs Europe-based companies
- A mix of both
Some providers may keep it simple and describe the investments depending on their risk profile, such as cautious, balanced, or aggressive. The provider will then aim to grow your pension pot based on your selection.
Personal pension plans have an annual management fee, which is charged as a small percentage of your pension pot’s value. The fee covers the costs of managing your funds and investing on your behalf. You may also pay extra fees if you decide to switch investment styles or consult a financial adviser. Your pension provider should give you a complete list of fees and how they’re charged.
Stakeholder Pension
Stakeholder pension plans work similarly to personal pensions but are subject to UK government regulations. When setting up a stakeholder pension, the following standards apply:
- The minimum payment for regular or lump sum contributions can’t exceed £20
- Annual management charges are capped at 1.5% of the pension pot for the first 10 years and 1% after that
- No fees or penalties if you decide to transfer to another provider
- Your funds must go to a default investment fund if you don’t want to choose how your savings are invested
Unlike personal pension plans, stakeholder pensions have a narrower range of investment options. They’re usually pre-selected by the provider, although you may have a general level of choice. If you don’t want to pick and just want to start saving, you can let the provider put your money towards a default investment fund.
Self-Invested Personal Pension (SIPP)
A self-invested personal pension, or SIPP for short, is another type of personal pension that offers a lot of flexibility. With a SIPP, you’re in control of how to invest your money and have more investment choices than a personal or stakeholder pension plan. You also have the freedom to change or add to your investment portfolio whenever you want.
Here are some of your investment options with a SIPP (note: some SIPP providers may offer more or fewer options than mentioned below):
- Company shares, domestic or foreign
- Unit trusts
- Investment trusts
- Commercial property
- Government securities
Because SIPPs offer more freedom than other pension plans, they typically have higher fees and administration charges. You also take full responsibility if your investments fail—unless you pay a financial adviser to help you manage your portfolio.
National Employment Savings Trust (NEST)
The National Employment Savings Trust, or NEST for short, is a government-backed workplace pension scheme. It’s run as a trust by the Nest Corporation, which means there are no shareholders or private owners. Even though NEST is government-backed, it’s not the same as the State Pension. Like other personal pension plans, you can access your NEST pension funds when you turn 55 (57 after April 2028).
Despite the name, NEST allows self-employed people to join the scheme. It works similarly to personal pension plans from private providers, but with a few key differences:
- The annual management fee is 0.3% of your total pension pot for that year
- Your contributions incur a 1.8% fee, which goes towards paying the government loan used to establish NEST. You pay this fee before you get your 20% tax relief.
- Example: If your monthly contribution is £100, you’ll pay a fee of £1.80, leaving you with £98.20 towards your pension pot. Your tax relief will be calculated based on £98.20. (We’ll discuss later how providers calculate your tax relief ).
Although NEST has limited investment options, you can still choose how to invest your savings. NEST pools everyone’s funds together, investing them in various assets and companies. However, you can direct where your money should go: in ethical or Sharia-law-compliant funds, high-risk investments for potentially better returns, or low-risk options tailored for different life stages.
How much should I save for a self-employed pension?
The annual allowance for tax-free personal pension contributions is £60,000. Any amount over that limit is subject to income tax. However, the amount you should contribute to your self-employed pension depends on a few things:
- Your monthly or yearly income
- The target income you’d like when you retire
- Any existing pension pots
- Your intended retirement age
The standard advice is to start a private pension for self-employed people as soon as possible, but everyone’s personal circumstances are different. If you’re setting up a pension when self-employed, that means worrying about a possible fluctuation in income.
The best way to determine how much you should set aside for your pension is to consult a financial adviser. They can advise you on saving up for retirement while dealing with income changes. Your adviser can also help you find the right pension plan for your situation and give some advice on how to invest your pension pot.
You can also use a pension calculator, such as the one from MoneyHelper, to see where things stand and how to proceed with your pension planning.
The annual allowance and the “carry forward” rule
You can pay up to £60,000 into your pension plan in a single tax year before you start paying income tax on your pension contributions. This is called the “annual allowance,” and it applies to all your pension plans.
The annual allowance also counts any tax relief funds added to your pension pot, so remember this when planning your contributions.
However, you can use the “Carry Forward” rule, especially if your income has fluctuated in the past few years. Carry Forward allows you to use any unused allowance from the past three tax years and add it to your current allowance. You can use this rule once every tax year if your income is higher than usual and you want to increase your contributions for that year.
Gov.UK has guidance on how the Carry Forward rule works based on your income. The UK Government also has a calculator to help you determine whether you have any unused allowances or if you need to pay tax on your pension contributions.
It may be worth consulting a financial adviser if you have questions about your annual allowance or how the carry-forward rule works.
What are the tax perks of paying into a self-employed pension?
Paying into a self-employed pension can gain you a few tax perks, depending on whether you’re registered as a sole trader or a limited company.Remember that annual allowance limits apply and that exceeding these limits will incur a tax charge.
Sole trader
Sole trader pension contributions worth up to 100% of your annual income or the £60,000 annual allowance get 20% basic rate tax relief. You won’t get any tax relief on pension contributions that are worth more than your yearly income.
Your provider will claim the tax relief for you and add the funds, known as the “government top-up”, to your pension pot. You can also claim the relief yourself if your pension plan isn’t set up for automatic tax relief.
- Example: You earned £35,000 for the current tax year and paid £5,000 into your pension savings. Your pension provider will automatically claim the 20% tax relief for you and add £1,250 government top-up to your pension pot.
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Note: The government top-up or tax relief appears on your pension pot as a 25% bonus, even though your tax relief is only 20%. That’s because when you pay into your pension, it’s assumed that the money you’re contributing is the remaining 80% after paying your 20% tax rate. Using the £5,000 example above, you get £1,250 back because that’s how much income tax you paid. To find out how much government top-up you’ll get, divide your payment by 0.8, then multiply the result by 0.2: £5,000 / 0.8 = £6,250 (This is how much you had before paying income tax) £6,250 x 0.2 = £1,250 (This is how much you paid in tax and will get back as a relief) |
If you’re a higher earner and pay Income Tax above the basic rate of 20%, you can claim additional tax relief on your Self-Assessment Tax Return. The amount differs depending on your income tax rate and where you live. Gov.UK has guidance on how much additional tax relief you can claim, how to claim it, and if specific situations apply to you.
Limited company
Your pension payments are considered business expenses, so they’re excluded from corporation tax. Any gains earned on your pension investments are not subject to capital gains tax and income tax.
What is the best pension for a self-employed person?
Everyone’s income situation is different, so there isn’t a one-plan-fits-all when it comes to self-employed pension.
Consider these tips instead to help you pick the right pension plan for your circumstances.
- Shop around to compare options and plan features from different providers.
- Ask for the key facts document for each pension plan. Providers must provide this information to you and you can file a complaint if you don’t get one.
- Take note of all the fees and how they’re charged. Any fees charged directly to your pot will affect the value of your pension when you retire.
- Carefully consider the contribution amount. Make sure you can afford the monthly contribution. Know your options if you need to reduce your payments or take a contribution holiday.
- Examine how the funds are invested and make sure you’re happy with it. If you think your funds are underperforming or feel the risk is too high, contact your pension provider about changing the investment option.
- Get advice from an independent financial adviser, especially if your situation is complex.
In summary: what to know about your self-employed pension
There are four pension schemes available to you if you’re self-employed: the personal pension, stakeholder pension, self-invested personal pension (SIPP), and the National Employment Savings Trust (NEST). Each scheme offers unique benefits, such as different investment options, regulated fees, and minimum contribution amounts.
The annual tax-free limit for pension contributions is £60,000, and anything over that is charged income tax. However, you can use the “Carry Forward” rule, which lets you use unused allowances from the past three years.
You can also use certain tax perks, such as the 20% tax relief on sole trader pension contributions. Higher earners can claim additional tax relief on their contributions, depending on their yearly income and where they live. Meanwhile, those registered as a limited company can exclude pension contributions from their corporate tax bill.
Remember that personal pension plans do not replace the State Pension for the self-employed. Instead, they supplement your State Pension income once you reach retirement age. You can also access your pension funds earlier than the State Pension age.
Disclaimer: The information provided in this article about self-employed pensions is for general informational purposes only. It does not constitute formal financial advice. Readers are strongly encouraged to consult with a qualified financial adviser to obtain advice tailored to their specific circumstances and financial goals.
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