Self-Employed Pension: Private Pensions for the Self-Employed

If you work for yourself, setting up your own private self-employed pension can help you plan for your retirement. Even though you won’t typically be able to benefit from matched employer contributions, the tax relief you receive is the same as if you were employed.

Tim Leonard Last updated on 05 April 2022.
Self-Employed Pension: Private Pensions for the Self-Employed

Setting up as self-employed can provide many advantages, but one downside is that you won’t be automatically enrolled into a workplace pension. Instead, responsibility for saving for your retirement lies with you, including choosing a suitable private pension to meet your needs.

This is more straightforward than you might think, and once open, you’ll be ready to contribute to your self-employed pension and claim pension tax relief to boost your pot.

How to set up a pension if you are self-employed

There is no particular self-employed pension plan or private pension for self-employed workers to use. Instead, you’ll need to choose from the different types of personal pensions available, including stakeholder pensions and self-invested personal pensions – or SIPPs – that are available to anyone who wants to arrange their own retirement provision.

Generally, a standard personal pension or stakeholder pension are the most straightforward options. Personal pensions give you a range of pension funds to select from, depending on the risk you are prepared to take, while stakeholder pensions work in a similar way but must limit the charges that they can levy and their minimum contribution levels.

» COMPARE: Personal pension providers

If you want more flexibility and control over your pension, and the potential to access a broader range of investments, a SIPP may be worth considering.

Whatever type of pension suits you most, it’s always vital to compare providers to see what fees you might be charged and check if a particular pension offers the features you are looking for.

» COMPARE: SIPP providers

Can I open a NEST pension if I’m self-employed?

If you are self-employed and want to save for your retirement, a NEST pension is another option you might explore.

The National Employment Savings Trust – or NEST for short – was set up by the government as a workplace pension scheme that would allow all employers to meet their obligations relating to auto-enrolment. However, a NEST pension can usually be used if you’re self-employed too as long as you are aged between 16 and 75, and ordinarily working in the UK.

How much can the self-employed pay into a pension?

When it comes to paying into a pension when self-employed, the same rules apply to self-employed pension contributions as apply to everyone else.

While there is technically no upper limit on how much you can pay into a self-employed pension plan, you will only receive tax relief on a certain level of contributions, known as the annual allowance.

In the 2022/23 tax year, your annual allowance is either £40,000 or 100% of what you earn, whichever is lower. You may be able to pay more if you have any annual allowance that went unused from the past three tax years, using the ‘carry forward’ rules.

But if you have already begun to access the money in your pension, the amount you can contribute going forward will usually drop to £4,000 annually, under what is called the money purchase annual allowance.

» MORE: Learn about pension contribution limits

Is there tax relief on pensions for the self-employed?

You will receive self-employed pension tax relief on the contributions that you make into your pension within your annual allowance.

If you are a basic-rate taxpayer paying 20% income tax, this means you will get tax relief at 20%. So if you want to pay £100 into your pension overall, it will effectively cost you £80.

If you are a higher-rate taxpayer paying income tax at 40%, you will get pension tax relief at 40%, meaning a £100 total contribution costs £60. And if you pay additional-rate tax at 45% that’s the tax relief you will receive, meaning £100 can be added to your pension overall at a cost of £55 to you.

Your self-employed pension provider will claim basic rate tax relief back automatically and make sure it goes into your pension pot. If you are a higher- or additional-rate taxpayer, you’ll usually need to claim back the extra relief you are allowed yourself when completing your self-assessment tax return.

» MORE: How pension tax relief works

How much should you pay into a pension if you are self-employed?

It is often suggested that halving the age at which you begin saving into a pension will give you a rough idea of the proportion of your income that you ought to be contributing to your pension.

So if you are 30 when you open your first pension, this would mean aiming to pay 15% of your earnings into your pension for the rest of your life. Your target amount will include the tax relief you receive, and if you had an employer it would include any contributions that they are obliged to make too. However, if you are self-employed, you don’t get these employer contributions boosting your pension pot.

Given you are effectively going it alone, the earlier you can start paying into a pension when you are self-employed the better. But if you have competing financial pressures, this is easier said than done. Trying to strike a balance between your retirement income goals and ensuring what you pay into your pension is affordable is key.

The above is a general starting point. It will not account for your unique situation. For instance, it does not consider other forms of income you may receive in retirement or the type of retirement lifestyle you may want. If you are unsure what your financial priorities should be, or how best to save for your retirement, it is usually a good idea to seek financial advice.

» MORE: Where to find pension advice

Do self-employed workers get a state pension?

If you pay National Insurance for long enough as a self-employed worker, you will be eligible for the state pension in retirement.

Generally you need a minimum of 10 years of qualifying National Insurance contributions to get any state pension at all, and at least 35 years of qualifying contributions to be entitled to the full state pension.

As you have no employer to arrange payment of your National Insurance (and tax) if you work for yourself, you will usually need to file a self-assessment tax return as part of your obligations for setting up as self-employed. Once HMRC has received and processed your return, you will be informed how much National Insurance (and other tax) you need to pay based on what you’ve earned.

If you want to make sure you are on track to get a state pension and to find out how much you might receive, you can request a pension forecast at any time.

» MORE: All about the state pension

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.

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About the author:

Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more

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