If you’re Self-employed, it’s entirely up to you whether or not you save for your retirement. Unlike employees, who benefit from workplace pensions, you’ll need to set up your own pension plan.
There’s good news, though — the Government offers Tax Relief to help boost your pension savings. But how does this work? Let’s break it down.
Types of Pensions for the Self-Employed
As a Self-employed individual, there are various schemes you can use to save for retirement:
- Personal Pension (PP) or Self-Invested Personal Pension (SIPP): A private pension where you contribute, and the provider invests your money.
- National Employment Savings Trust (NEST): A Government-backed, low-cost pension scheme open to the self-employed.
- Lifetime ISA (LISA): Not a pension, but a savings account with a 25% government bonus, which is only accessible at the age of sixty for retirement purposes.
Understanding Tax Relief on Pension Contributions
The Government encourages pension savings by offering tax relief, depending on the tax bracket you’re in.
- Basic-rate taxpayers (20%) get an automatic top-up from the government.
- Higher-rate (40%) and additional-rate (45%) taxpayers can claim extra relief through Self Assessment.
Either way, you can contribute up to £60,000 per year (or 100% of your earnings, whichever is lower) and still receive tax relief.
Net vs Gross Contributions Explained
There are two ways of calculating what your pension contribution is — Gross Pension Contribution and Net Pension Contribution.
- A Gross Pension Contribution is the total amount that goes into your pension, including tax relief.
- A Net Pension Contribution is the actual amount you pay in, before the government adds tax relief.
Example for a Basic Rate Taxpayer (20%)
- You pay £8,000 (net)
- The provider adds £2,000 (tax relief)
- Total pension contribution = £10,000 (gross)
- You don’t need to do anything—the pension provider claims the 20% relief for you.
Example for a Higher Rate Taxpayer (40%)
- You pay £8,000 (net)
- The provider adds £2,000 (tax relief)
- Your total pension contribution = £10,000 (gross)
- You can claim an extra £2,000 (20%) via Self Assessment.
- The final cost to you is £6,000, but your pension gets £10,000
Example for an Additional Rate Taxpayer (45%)
- You pay £8,000 (net)
- The provider adds £2,000 (tax relief)
- Your total pension contribution = £10,000 (gross)
- You can claim an extra £2,500 (25%) via Self Assessment.
- The final cost to you is £5,500, but your pension gets £10,000
Make the Most of Your Self-Employed Pension
- Even small contributions add up over time, especially when you factor in tax relief.
- You can maximise your contributions, while staying within your annual allowance to benefit from tax savings.
- You can claim extra relief if you’re in a higher tax band — so don’t leave money on the table.
Planning for retirement as a self-employed individual doesn’t have to be complicated. By understanding tax relief, you can save more while paying less in tax—a win-win situation.
For help and advice with all your tax affairs, get in touch with Grace Certified Accountants on info@gracecertifiedaccountants.co.uk