Self- Employed Pensions: Your 5 Most Asked Questions Answered.
What is a self-employed or personal pension?
A pension gives you an income when you are older, so you can retire and stop working or work less. It can also help if you need to retire early due to poor health. So it is a way of saving for your retirement.
If you are self-employed then you will need to set up a private pension for yourself. This is called a personal pension plan. They are a form of defined contribution or what is also known as “money purchase’ pension. That means that you pay money in, usually with tax relief to build your pension pot.
How do I set up a pension as a self-employed person?
You can get a personal (also sometimes referred to as private or stakeholder) pension from financial services companies such as insurance companies, banks and building societies and invest (save) into it on a regular basis These are known as pension providers.
Because you set up the pension yourself you are not only able to choose the pension provider:
You can decide how much
How often you pay into it and
How your money is invested - including if you want to manage it yourself. Yes, many people do not know this but you can manage your pension yourself.
You can start most personal person pensions from age 18 or open one on behalf of someone younger but you cannot open or pay into a personal pension after you reach age 75, unless you are transferring across a pension you have already contributed to.
Usually pension contributions should be made from UK relevant earnings. But do you know that even if you do not have any earned income, for example from employment or self- employment, you can invest up to £3,600 gross each year in a personal pension plan and get tax relief from it.
The amount the pension will pay will depend on how much you pay in, how well your invested money grows, the fess and charges you will pay and lastly how and when you choose to take the money.
What is the best type of Pension if you are self-employed?
There are 3 main types of personal pensions for people who are self-employed.
Self-invested personal pension (SIPP) – this offers flexibility and control over investments
Stakeholder Pensions: Simpler and lower costs with capped charges
· NEST (National Employment Savings Trust): A government backed option with low fees.
The most suitable one for you will very much depend on how hands on you wan to be and your income level.
Should I start a Personal Pension if I am self-employed?
You can claim the state pension if you are self-employed. How much you will get will very much depend on your National Insurance record when you reach state pension age.
By itself, the state pension is unlikely to give you enough money for a comfortable retirement, even if you qualify for the maximum amount. And you will also need to wait until your state pension age, currently 66 for men and women, to claim it.
Starting your own pension means you will normally have more money to live off in retirement because you will have both your private and state pension to life off.
You can also access your private pension from 55, 11 years earlier than you can access the state pension. This means you will get an income if you need to retire early due to ill-health.
How much should I contribute to my pension each month?
Once you decide to set up your private pension, your pension provider might have a minimum amount you must out in each month to keep it active but you will usually need to save much more than this for a comfortable retirement.
There is a very general rule and that is that you should aim to save half your age as a % of your income per year into your pension. So, for example if you are 30 and earn £40,000 you should aim to save 15% of that income into your pension pot. So that is £6,000. That is £500 as the gross amount.
You can use websites like the Money Helper.Org linked here for more precise calculations.
Can I get tax relief on pension contributions as a self-employed individual?
When you pay into a pension, you usually benefit from tax relief. This means the money you would normally pay in tax is added to your pension instead.
Looking at our example above, the gross pension we said would be £500 but the amount you will have to pay in yourself each month will be 80% * £500 = £400 and your pension providers will automatically claim tax relief for you at a fixed rate of 20%. So, pay in £400 and £100 will be the tax relief on your pension contributions.
If you pay income tax at a higher rate than 20%, you will need to claim the extra relief by yourself by contacting HMRC or completing a Self-Assessment tax return. If you are self-employed, you must claim the full amount of the payment on your tax return. You will then get relief via your tax calculation for the year in question.
You will usually benefit from tax relief on all your pension savings, providing your contributions each year are not higher than the amount you earn or the annual allowance of £60,000 for the 2025/26 tax year.
Blog content is for information purposes only and over time may become outdated as the tax landscape is constantly changing, although we do strive to keep it current and up to date. It is written to help you understand your taxes and is not to be relied upon as professional accounting, tax and legal advice. For additional help please contact our team, or a professional adviser.