Pension for self-employed
As well as being a flexible way to save, paying into a pension scheme can actually help self-employed people save on tax.
Reclaiming Self Assessment tax for your pension pot
If you’re a basic rate taxpayer, your pension provider can claim back 20% and add it to your pension pot. This means every £80 you contribute will be grossed up to a £100 contribution. Higher rate taxpayers can claim back the additional 20% through Self Assessment.
Pensions if you own a limited company
If you set up your occupational pension through your own limited company, then the contributions the company pays as your employer reduce the amount of Corporation Tax it pays.
State Pension if I’m self-employed
Self-employed workers are still entitled to a State Pension, as long as they make enough National Insurance Contributions (NICs) or accrue enough credits to qualify.
You’ll need to make at least 10 qualifying years’ worth of National Insurance Contributions in order to claim a State Pension. To get the full weekly rate, you’ll need to make at least 35 full years of contributions.
NI contributions
When you work for an employer, they will normally deduct any National Insurance that you owe from your wages each time they pay you. They pay this onto HMRC on your behalf using PAYE.
As a self-employed person you’re responsible for submitting your own tax returns, which HMRC will use to work out how much National Insurance that you owe. The amount and type of National Insurance that you need to pay partly depends on how you pay yourself from your business, and how much income you earn.
What’s the best type of self-employed Private Pension?
Without access to a workplace pension, you can choose to set up your own personal pension to help you save. You can still set one up, even if you have a workplace pension too. Like most financial decisions, choosing a pension really depends on your circumstances and preferences.
There are lots of providers offering a variety of products, though broadly speaking they fall into three categories:
* Standard personal pensions
* Stakeholder pensions
* Self-invested personal pensions (SIPPs)
Standard personal pensions
Most pension providers offer standard personal pensions to self-employed people, and they can be a good solution for those whose income tends to fluctuate. You can pay something in each month, but some providers will also let you pay in lump sums as you go.
The money you pay in is added to a pension fund and then invested on your behalf in the hope of growing the fund, and therefore the size of your pension pot. Your pension provider might give you a range of funds to choose from, such as one that invests in a particular industry or location.
Stakeholder pensions
There are specific government requirements which stakeholder pensions must meet, so they tend to offer more flexibility and any charges are usually capped.
The exact terms can vary between different pension providers, but in general the maximum they can charge you for this type of pension is restricted to 1.5% in the first ten years, and 1% after that. You might also be able to make much lower payments – some start from £20 per month.
Stakeholder pensions are usually easy to administer, so managing them can be much simpler. They’re normally less risky compared to other types of personal pensions which is great in terms of stability, but also means they tend to deliver lower growth.
Self-invested personal pensions (SIPPs)
SIPPs tend to offer you more control over how your pension fund is managed and the investments you choose. Greater flexibility means that you can make changes how and when you want to, across a much wider range of investment options.
This does mean that you need to be much more involved in the process of managing your pension pot though, so it can be time consuming, and higher risk if you’re not too sure what you’re doing!
Tax relief on a self-employed pension
Being self-employed means you don’t get the benefit of an employer making contributions on top of your own pension payments. Fortunately, the government are keen to help us all save for retirement, so there is tax relief available on contributions you make into a personal pension.
Known as ‘relief at source’, your pension provider will claim 20% in tax relief from the government each time you make a contribution to your pension fund.
If you pay a higher rate of tax, you can claim additional tax relief when you declare the payments on your Self Assessment tax return. The amount you can claim depends on where you live.
Claiming tax relief on personal pension contributions in England, Wales, or Northern Ireland:
* 20% tax relief on any income that you pay the 40% higher rate of tax on
* 25% tax relief on the part of your income which falls into the 45% additional rate tax bracket
Tax on private pension contributions
This depends on how much you pay into your pension during a tax year. In 2023/24 the Annual Allowance is £60,000, so this is the amount of pension contributions you can make before you start paying tax on them.
The Lifetime Allowance limited the amount you could pay in total (in a lifetime), but this was removed from April 2023.
Looking for help with Pensions?
If you have any further questions simply phone us on 020 4577 1565 and one of our friendly Dental Accountants will be happy to help.
