Pensions for self-employed people

If you’re self-employed, saving into a pension can be more difficult than for people in employment. There’s no-one to choose a pension scheme for you, no employer contributions and your income probably fluctuates. But there are many advantages to having a pension.

Getting the State Pension when you’re self-employed

If you’re self-employed, you’re entitled to the State Pension in the same way as anyone else.

For people reaching State Pension age from 6 April 2016, State Pension is based entirely on your National Insurance record.

You’ll usually need:

  • at least ten qualifying years on your National Insurance record to get any State Pension, and
  • 35 qualifying years to receive a full State Pension.

For the current tax year (2021/22), the full State Pension is £179.60 per week.

Have you worked for someone else rather than yourself in the past? Then you might have built up entitlement to Additional State Pension under the old system – and get more than this. The extra amount is called a ‘protected payment’.

In some cases, if you were contracted out of the Additional State Pension you might get less than £179.60, even if you have a full National Insurance record.

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If you have a partner, they can also get their own State Pension forecast. This means you can see what your household income will be from the State Pension.

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How best to save for retirement

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Some self-employed people say that their business is their pension – and they’ll sell it when they want to retire. But for many, they ARE the business – so if they retire, the business will have no value.

What if your business is your pension and your business goes bust? Then not only have you lost your work, but you’ll also have no pension.

There are around 4.5 million self-employed people in the UK, accounting for 15% of the UK workforce. Yet just 31% of self-employed people are saving into a pension. (Source: IPSE)

One big attraction of being self-employed is you don’t have a boss. But, in terms of pensions, this can be a disadvantage.

All employers now have to provide a workplace pension scheme for their eligible employees and pay into it. This boosts the amount their employees are saving towards retirement.

If you’re self-employed, you won’t have an employer adding money to your pension in this way.

But there are still some tax breaks it’s important to not miss out on. For example, you’ll get tax relief on your contributions – up to the lower of your annual earnings or £40,000 a year.

This means if you’re a basic-rate taxpayer, for every £100 you pay into your pension, the government will add an extra £25.

If you pay tax at the higher rate of 40% in England, Wales or Northern Ireland – you can claim back a further £25 through your tax return for every £100 you pay into your pension.

In Scotland, you can claim an extra £1.58 for every £100 paid if you pay tax at the Scottish Intermediate Rate of 21%. A and a further £26.58 if you pay tax at the Scottish Higher Rate of 41%.

Your business might also be able to contribute to your pension.

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Make the most of your pension pot

The earlier you start making contributions into your pension, the better.

It gives you more time:

  • to contribute to your savings before retirement
  • to benefit from tax relief
  • for your savings to grow.
Starting early could more than double your pension pot:
Start saving at age
Your contribution per month
Government adds tax relief *
Pension pot at 68

30

£100

£25

£112,000

40

£100

£25

£68,000

50

£100

£25

£36,000

*We've assumed tax relief of 20% is claimed and added by the pension provider. Higher rate tax payers can claim additional tax relief through their tax return. 

The figures shown are in today's prices. This means they've been adjusted to reflect the way inflation affects the purchasing power of your money. We've assumed inflation is 2%.

We've also made the following assumptions:

  • savings grow at 5% a year
  • charges are 0.75% a year
  • contributions increase each year in line with average earnings at 3.5%

(2021/22 figures)

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What pension schemes for the self-employed can I use?

While there are no specific pensions just for the self-employed, that doesn’t mean there’s nothing available for you.

Most self-employed people use a personal pension for their pension savings.

With a personal pension, sometimes called a private pension, you choose where you want your contributions to be invested from a range of funds the provider offers.

The provider will claim tax relief at the basic rate of tax on your behalf and add it to your pension savings.

How much you get back depends on how much is paid in, how well your savings perform, and the level of charges you pay.

There are three types of personal pension:

  • Ordinary personal pensions – which are offered by most large providers
  • Stakeholder pensions – which are subject to a cap on their charges
  • Self-invested personal pensions – which might have a wider range of investment options.
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NEST pensions

Or, if you’re self-employed you can also use NEST (National Employment Savings Trust). Created by the government, it’s run as a trust by the NEST Corporation. This means there are no shareholders or owners, and it’s run for the benefit of its members.

Although NEST is primarily for people who are employed – they also allow self-employed people to save with them.

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Financial advice

All different schemes have their pros and cons.

If you’re not sure which scheme to save with you could consider talking to a regulated financial adviser. They’ll make a recommendation based on your specific needs and circumstances.

The benefit of getting regulated financial advice is that you’re protected:

  • if the product you buy turns out to be unsuitable, or
  • in the unlikely event the provider goes bust.

But the main benefit is that a financial adviser can search the market for you and make a recommendation that’s personal to you.

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What is the annual allowance?

You can save as much as you like towards your pension each tax year. But there’s a limit on the amount that will get tax relief.

The maximum amount of pension savings benefiting from tax relief each tax year is called the ‘annual allowance’.

The annual allowance is currently £40,000 for most people, or 100% of your earnings if lower. If you exceed your allowance, a tax charge is made which claws back any tax relief that was given at source. 

If you earn less than £3,600, you can contribute up to £2,880 to a personal pension and still get tax relief.

If you’re a high earner with an income above £200,000 a year, your annual allowance might gradually reduce to as low as £4,000. This is known as the tapered annual allowance.

If you have taken more than the cash you are entitled to take tax-free through flexible retirement income, your annual allowance might also be £4,000. This is known as the money purchase annual allowance.

It might also be possible to contribute more than your annual allowance and still benefit from tax relief by using unused allowance from up to the three previous tax years. This is known as carry forward.

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MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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