Saving for the future can be made easier by contributing to a pension, which is especially beneficial for self-employed individuals. However, without the support of an employer to establish a workplace scheme and handle contributions, the process may appear more complex. We created this blog to answer the queries you have in your mind regarding self-employed pensions.

Will I be eligible for the State Pension if I work for myself?

Self-employed individuals can still receive a State Pension if they meet the requirements of making sufficient National Insurance Contributions or accrue enough credits.

In order to be eligible for a State Pension, one must have a minimum of 10 qualifying years’ worth of contributions. To receive the maximum weekly rate, a minimum of 35 full years of contributions is required.

When will I get my State Pension?

Once you reach State Pension age, you are eligible to draw your state pension. This pension payment would not start on its own. You will be receiving a letter just two months before your eligibility age and it would be mentioning you your options to avail. The options would be to start claiming the pension payments or to defer it for now. This might means your pension payments would be larger but at the same time just keep in mind that you might be paying taxes on them.

What is the process for making National Insurance contributions to be eligible for the State Pension?

When employed by a company, your employer typically deducts the National Insurance amount you owe from your wages each time you are paid. They then pay this amount to HMRC on your behalf through PAYE.

If you are self-employed, it is your responsibility to submit your own tax returns. HMRC will use these returns to calculate the National Insurance amount you owe. The specific amount and type of National Insurance you need to pay depend on how you pay yourself from your business and the level of income you earn.

What if my self-employed profits don’t incur NI?

If your self-employed profits do not meet the threshold for National Insurance payments, you have the option to make voluntary (Class 3) NI payments instead.

Choosing not to pay the NI contribution may seem beneficial if you require the funds at the moment, but it will result in gaps in your NI record. Regrettably, this means that you will have one less year to contribute towards your State Pension total.

Insufficient years of NI contributions may result in a reduced State Pension when you reach the eligible age. You can verify the number of years’ worth of contributions you have by accessing your Personal Tax Account.

What’s the best type of self-employed pension?

If you do not have access to a workplace pension, you have the option to establish your own personal pension to help you save. It is also possible to set up a personal pension even if you already have a workplace pension.

The decision to choose a pension largely depends on your individual circumstances and preferences, similar to other financial choices. Numerous providers offer a range of products, which can generally be categorized into three types:

• Standard personal pensions
• Stakeholder pensions
• Self-invested personal pensions (SIPPs).

Standard personal pensions

Many pension providers provide self-employed individuals with standard personal pensions, which can be a viable option for those with variable incomes. While you have the option to make monthly contributions, some providers also allow you to make lump sum payments as you go.

The amount you contribute is added to a pension fund, which is then invested on your behalf with the aim of increasing the fund’s value and ultimately the size of your pension. Your pension provider may offer a selection of funds for you to choose from, including those that invest in specific industries or locations.

Stakeholder pensions

Stakeholder pensions must adhere to specific government requirements, resulting in increased flexibility and typically capped charges.

Different pension providers may have varying terms, but generally, the maximum charge for this type of pension is limited to 1.5% in the initial ten years, and 1% thereafter. Additionally, there is potential for lower monthly payments, with some starting as low as £20.

These pensions are known for their ease of administration, making management simpler. While they are less risky and offer stability, they may also yield lower growth compared to other personal pension options.

Self-invested personal pensions (SIPPs)

SIPPs provide individuals with increased autonomy in managing their pension funds and selecting investments. This enhanced flexibility allows for adjustments to be made according to personal preferences across a broader spectrum of investment choices.

This means you need to have expertise in managing the finances otherwise it could be time consuming and risky.

Will I get tax relief if I pay into a self-employed pension?

As a self-employed individual, you do not have the advantage of employer contributions towards your pension. However, the government is committed to assisting everyone in saving for retirement, which is why tax relief is available on personal pension contributions. Referred to as ‘relief at source’, your pension provider will request 20% tax relief from the government each time you contribute to your pension fund, even if you reside in Scotland and pay the 19% starter rate. If you are subject to a higher tax rate, you can claim additional tax relief by declaring the payments on your Self Assessment tax return. The specific amount you can claim depends on your place of residence.

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

Claiming tax relief on personal pension contributions in Scotland

1% on any income you have paid the 21% Intermediate tax rate on

22% on any income you pay 42% Higher rate tax on

25% on income you have paid 45% Advanced rate tax on

28% on income you pay 48% Top rate tax on

Will I be required to pay taxes on the contributions I make towards a private pension scheme?

The amount of pension contributions you can make in a year without incurring tax depends on the amount you pay into your pension during a tax year. For the tax year 2024/25, the pension Annual Allowance is set at £60,000. Therefore, you can contribute up to this amount in a year without being liable for tax on those contributions.

Previously, there was a Lifetime Allowance that limited the total amount you could pay into your pension over your lifetime. However, this restriction was removed starting from April 2023.

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Note: It must be noted that the information provided in all our blogs are solely for the awareness purposes and are designed with the intention to create an ease for the reader to understand the rules and their importance. However, it should never be considered as an ultimate replication of rules. RezEx Accountants (RezEx Ltd) does not own any responsibility for any unpleasant event that may arise due to misinterpretation of a specific part or whole of the information.

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