Self Employed Pension

A self-employed pension is a flexible plan to save for retirement. You can change how much you save as your cash flow and the profitability of your business fluctuates. Self-employed pensions are ‘defined contribution’ pensions. Your money is invested in shares, bonds, property or cash, and your final pension will depend on how much you pay in and the performance of your investments.

Self Employed Pension

A self-employed pension is a flexible, tax-efficient way of saving for retirement. There are limits on how much you can save, but generally, you benefit from Income Tax relief at your highest marginal rate (up to 45%) on your contributions. Your contributions immediately benefit from basic rate income tax relief, which instantly boosts the amount you save by at least 20%. You reclaim tax relief at higher rates with your self-assessment tax return. Once invested, your savings grow free from all personal taxes.

If you’re self-employed, your earnings may be irregular. You don’t need to commit to saving a regular amount if you find it difficult to budget. Instead, you can pay into your pension when you can afford to.

However you choose to save, it’s a good idea to start as soon as possible. Your savings will be invested in various assets, including cash, fixed interest, shares and property. The longer the time you invest, the better the outcome.

You can start withdrawals from your savings as early as 55 (57 from 2028).

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Earn Income Tax relief at up to your highest marginal rate (up to 45%) on your pension contributions.

Your pension contributions will reduce your Adjusted Net Income. This means you can earn even higher rates of Income Tax relief on your contributions - up to an effective rate of 60%.

Your pension savings grow free from all personal taxes.

You can make regular or flexible single contributions depending on your circumstances.

Your pension savings can be paid as a tax-free lump sum to your loved ones if you die before retirement (or 75, whichever is earlier).

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Frequently Asked Questions

The information provided in these FAQs does not constitute professional financial advice. We strongly recommend that you consult a professional adviser before proceeding with a financial transaction.

What Is a self employed pension?

If you’re self-employed, you can save for your retirement in a personal pension. It’s flexible. You pay regular contributions or make ad-hoc payments. Your pension provider will claim basic rate Income Tax relief and add it to your pension pot.

It’s vital to have a pension if you’re self-employed. Employers are required by law to set up a pension scheme for their staff. This means the majority of employees pay into a workplace pension.

If you’re self-employed, starting a pension is up to you, but most self-employed workers don’t have a plan. If this sounds like you, you might struggle to make ends meet when you retire. Your savings will be invested in various assets, including cash, fixed interest, shares or property. The longer the time you invest, the better the outcome.

What tax relief will I get on what I pay in to my pension?

You get Income Tax relief when you pay into your pension. Your pension provider will automatically claim Basic Rate Income Tax Relief and add it to your pension. This will top up your contributions by 20%. For example, if you pay £100 into your Personal Pension, the taxman will add another £25. This means that for each £100 you pay, your gross contribution will be £125.

Higher and additional rate taxpayers can claim a further 20% or 25%, respectively. These higher rates of Income Tax relief can be claimed through your Self-Assessment Tax Return every year.

In addition to these main Income Tax reliefs:

  • If your Adjusted Net Income is more than £100,000, the top rate of tax relief you earn could be as high as 60%. This is because your pension contributions will reduce your Adjusted Net Income, and this will help you to recover your ‘lost’ Personal Allowance gradually – you lose £1 of your Personal Allowance for every £2 you earn over the threshold.
  • If you’re a Higher Rate taxpayer with young children, you may be paying the High Income Child Benefit Tax Charge. If your Threshold Income exceeds £60,000, this charge recovers 1% of your Child Benefit for every £100 you earn above the threshold. Any contributions you make to a Personal Pension will reduce your Threshold Income, so they could help to recover some of your Child Benefit.

Once invested, your pension contributions grow free from personal Income Tax and Capital Gains Tax. The maximum amount you can contribute to your pension(s) is limited by the lower of your Relevant Earnings (subject to an absolute minimum of £3,600 gross) and the Annual Allowance. For the 2024/25 Tax Year, the Annual Allowance is £60,000.

Bear in mind, if your Adjusted Income is more than £260,000, your Annual Allowance will be reduced by £1 for every £2 of income over the £260,000 threshold. The maximum reduction is £50,000. The restriction does not apply if your Threshold Income is less than £200,000.

Note that this tax treatment depends on your circumstances and may be subject to change in future.

What happens when I retire?

When you reach 55 (57 from April 2028), you have three options:

1. Take your pension fund as a lump sum.

2. Use it to buy an annuity (a guaranteed income).

3. Take your pension commencement lump sum and transfer your savings balance to a flexible access drawdown plan. You can then draw either a regular or a variable income.

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Neil Jenkins owner of Fintegrity

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