A Guide to Pensions for the Self-Employed

When you're your own boss, you have the freedom to set your own hours, choose your clients, and build a career on your own terms. But with that freedom comes a huge responsibility: you are solely in charge of your long-term financial security.

There is no employer to auto-enrol you, no HR department to manage your scheme, and no one else to pay into your pension. If you don't do it, nobody will.

This guide explains the pension options available to you as a self-employed person - whether you're a sole trader, contractor, or limited company director - and how an independent adviser can help you build a plan as robust as any employee's.

The challenge: Why pensions are critical for the self-employed

As a self-employed person, you are outside the auto-enrolment system. This means you have two major disadvantages from the start:

1. No "Nudge": You are not automatically "nudged" into saving. You have to make a conscious, active decision to start.

2. No Employer Contributions: You don't get the compulsory 3% employer contribution that employees receive, which is a key part of their pay package.

You have to make up for this yourself. The good news is that the government provides a huge incentive in the form of tax relief, which acts as your "self-employed bonus."

Your pension options: Personal Pensions vs. SIPPs

Since you don't have a workplace scheme, you will need to set up your own. Your options are a type of defined contribution (DC) 'pension pot'.

1. Standard Personal Pension

This is a straightforward, "off-the-shelf" pension set up with a provider (like an insurance company or investment platform). You choose where to pay your money from a list of investment funds they offer. This is an excellent, simple option for those who want a "hands-off" approach.

2. A SIPP (Self-Invested Personal Pension)

A SIPP is a 'do-it-yourself' personal pension. It gives you the ultimate control and flexibility, allowing you to invest in a much wider range of assets, including:

• Thousands of different funds

• Individual stocks and shares

• Investment trusts

• Commercial property

A SIPP is suitable if you are a confident investor or, more commonly, if you are working with a financial adviser who can build and manage a bespoke portfolio for you.

The power of tax relief: Your "self-employed bonus"

This is the most important benefit of saving into a pension. When you pay into a pension from your personal bank account, the government gives you a top-up.

• You pay in £80: The pension provider claims 20% tax relief from HMRC, adding £20 to your pot. Your contribution instantly becomes £100.

• If you're a higher-rate (40%) taxpayer: You get the 20% at source, and you can then claim back an additional 20% on your Self-Assessment tax return. This makes the true cost of that £100 in your pension just £60.

• If you're an additional-rate (45%) taxpayer: The true cost of that £100 in your pension is just £55.

As a sole trader, you can contribute as much as you like, but you will only receive tax relief on contributions up to 100% of your 'net relevant earnings' (your profits) or the £60,000 Annual Allowance, whichever is lower.

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A special case: Paying from your Limited Company

If you are the director of your own limited company, you have a major strategic advantage. You can make contributions in two ways:

1. Personally (as above): You pay into a pension from your personal bank account, which you've taken as a salary or dividend.

2. As an Employer Contribution: You can instruct your company to pay directly into your pension.

The second option is almost always the most tax-efficient route.

Why is a company contribution so powerful?

When your company pays into your pension, the contribution is treated as an allowable business expense. This means:

• The company saves on Corporation Tax (currently 19-25%) on the contribution.

• There is no Employer's National Insurance to pay (as there would be on a salary).

• There is no Personal Income Tax or Employee's NI to pay (as on a salary).

• There is no Dividend Tax to pay (as on a dividend).

It is the single most tax-efficient way to move profits from your company into your personal wealth.

How our independent advisers can help

As a self-employed person, your time is money. While you're an expert in your field, you may not be an expert in pensions - and that's where we come in. An adviser can do the heavy lifting so you can focus on your business.

Here are the key services our advisers provide for our self-employed clients:

1. Getting You Started

We will help you choose the right pension "wrapper" - a simple Personal Pension or a flexible SIPP - based on your goals and provider preferences.

2. Creating a Flexible Contribution Plan

We understand that self-employed income can be "lumpy." You might have great months and terrible months. We'll help you create a contribution strategy that works for you, such as paying in a flexible amount or a single, larger lump sum at the end of your company's financial year.

3. Maximising Your Tax Efficiency

This is vital. We will:

• For Limited Company Directors: Calculate the most tax-efficient way to extract profits, balancing salary, dividends, and pension contributions.

• For Sole Traders: Ensure you are claiming all the tax relief you are entitled to via your Self-Assessment return.

• Manage Your Allowances: If you have a large one-off profit, we can advise on using "carry forward" to contribute more than the £60,000 annual limit by using unused allowances from the previous three tax years.

4. Building Your Investment Strategy

You don't have a "default fund." We will build a diversified investment portfolio for you that matches your personal attitude to risk and your target retirement date.

5. Consolidating Your Old Pensions

Most self-employed people were employees first. We can help you trace all your old workplace pensions, analyse them for any valuable guarantees or high fees, and advise if you should consolidate them into your new plan.

Get started here to book a free pension review and take advantage of a no-obligation chat with an independent financial adviser who specialises in self-employed pensions.