Self-employment means being your own boss. But it also means that the responsibility for planning your retirement falls to you. Don’t delay. Because planning for your future should form part of your business plan today. Contributing to a pension and seeing to it that you benefit not just from the tax relief but the many other benefits to which you are entitled can be a cost-effective and flexible way to make a life for yourself and others.
If you’re self-employed you’re entitled to receive the state pension in the same way as everyone else. However, unlike working for an employer – who is legally required to enrol you into a workplace pension scheme – it’s up to you to decide if you have another pension or the state pension only. You may want to consider supplementing the state pension with other options to plan for your retirement.
As a sole trader or limited company owner, you’re still entitled to a state pension. For the tax year 2022/23, the flat rate benefit totals up to £9,339.20 for the year, or a little over £179.60 per week.
For men and women born between 6 April 1951 and 1953, laws for the old basic State Pension as opposed to the new State Pension apply.
Under the old laws, to qualify you must have paid or been credited with National Insurance contributions. And the amount increases every year by whichever is the highest of UK earnings, consumer prices or 2.5%. Whereas this uncertainty makes it more difficult to predict how much you’re eligible for until close to retirement, the new State Pension makes it easier to know from a much younger age.
If you’re self-employed, you can set up a personal pension, sometimes called a private pension. You could choose to have a simple personal pension, a stakeholder pension, or a self-invested personal pension. The type you choose will depend on your personal circumstances, financial goals, and attitude to risk. Learn more about personal pensions.
Personal pension schemes are usually set up as defined contribution pensions, so the size of your pension will depend on how much you contribute and how the investments in which your pension is invested perform over time. Bear in mind that, as with all investments, the value of your pension could go up as well as down so you may get back less than you put in.
It may be that you already have pension pots set up, particularly if you’ve previously been employed. If so, you may want to think about bringing all your pension pots together – you could combine them into one pension, which should be easier to manage and might reduce your fees.
If you’re not sure which pension is right for you, you may want to discuss your options with one of our financial advisers.
Because your pension contributions don’t impact on your profits and are not a business cost, you can’t include them as a tax-deductible expense in the self-employed section of your tax return. Your contributions should qualify for income tax relief, and you should add your personal pension contributions to the separate ‘tax reliefs’ section of your tax return.
As a basic-rate taxpayer, you’ll receive £25 for every £100 you pay in. Whereas higher-rate taxpayers can claim back an additional £25 for every £100 you pay in, when you come to file your tax return. This amount is based on the assumption that you’re making a personal contribution.
Those who want to put aside savings on top of the £40,000 annual allowance might want to consider a Lifetime ISA. For every £4 invested in a Lifetime ISA you’ll receive a £1 bonus, up to a maximum of £1,000 bonus each year, to put towards your retirement. As with ISA’s, savers can also contribute up to £4,000 each tax year without paying tax on future returns.
If your adjusted income (your income plus pension contributions) is over £240,000 you will receive a reduced allowance, such that for every £2 of income you earn above £240,000, your annual pension tax relief reduces by £1 and the maximum reduction is £30,000 meaning that anyone earning over £210,000 will have their annual allowance capped at £10,000. Those who surpass the 'lifetime allowance' (£1,073,100 as of 2022/23) will face a tax charge.
Crucially, Lifetime ISAs and pensions are taxed differently. A pension is tax-free when you pay into it, thanks to tax relief on the whole contribution, but you’re taxed on the money you withdraw from it. A Lifetime ISA is the reverse: you contribute money you’ve already paid tax on, but eligible withdrawals are tax-free.
If you’re self-employed, your tax status and personal situation will determine which of the two – or which combination of the two – is a better option for you. Self-employed higher rate taxpayers will benefit more from paying into a pension (the tax relief wins over the Lifetime ISA bonus). It’s not as clear cut for self-employed basic rate taxpayers though, and it’ll be about working out which scheme works for you.
Setting up as a sole trader is by far the easiest way to set up your own business. However, as the sole owner you may only have a personal pension. Limited companies, on the other hand, have more flexibility in how they choose to design a pension scheme, and, in terms of benefits, may even be more generous.
Limited companies are required, since the introduction of auto-enrolment, to make pension arrangements for employees. But by making a more generous pension contribution, you can reduce your company’s taxable profits and therefore the amount liable to Corporation Tax.
Generally, making the contribution through a limited company is more tax-efficient than if the same contribution were taken from your own funds.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice. Please note that during any transfer, your investments will be out of the market.