Working for yourself can be a blessing and a curse: you’re totally in control of the work you take on, but you also have to deal with erratic paydays. This can make it especially difficult to budget when rent, bills and just about everything else runs month to month; so it’s no surprise that contributing to a pension is often overlooked by those living the freelance life.

Multi-hyphenates shouldn’t sleep on their pensions though, as they are already at a disadvantage compared to their peers enrolled into a workplace pension scheme. According to analysis, the self-employed workforce is missing out on an estimated £4 billion worth of pension contributions per year from employers, and a further £1 billion per year from pension tax relief.*

Alarmingly, research has found that more than 60% of self-employed people have no form of pension savings at all.** A survey by Citizens Advice found that more than two thirds of self-employed workers don’t have a personal pension due to a lack of understanding and more than a quarter don’t have one due to a lack of information.*** So, we want to show you that saving for retirement can actually be really easy once you know how.

Before we start, it’s worth noting that when we talk about ‘self-employed’ people we’re referring to people who work for themselves and do not run their own business as a Ltd company.

Now, let’s break down some of the most common causes for confusion when it comes to pensions for self-employed people.

 

How does pension tax relief work?

Pension tax relief is one of the biggest benefits of saving with a pension as it’s essentially free money. When you save into a pension, you’ll earn back the income tax you would normally pay in the form of top ups from the government. How much tax relief you get depends on how much you contribute, the income tax you pay and your pension annual allowance.

Let’s say you pay the basic tax rate and you contributed £80 into your personal pension. You’d earn that tax back in the form of a 25% top up, boosting your pension savings to £100.

Higher rate and top rate taxpayers may be eligible to claim additional tax via their self assessment tax return. For example a 40% income taxpayer may be eligible to an additional 25% tax relief on their net pension contributions. For example, if they contributed £80, they’d earn that tax back in the form of a 25% top up, boosting their savings to £100. Plus they’d be able to claim additional 25% tax relief from the government via your self-assessment tax return, reducing the cost of your pension contribution.

With a Moneybox Personal Pension, we’ll claim back basic rate tax relief for you at no cost! If you’re a higher or top rate taxpayer, you’ll have to claim the additional tax relief yourself by completing an HRMC Self Assessment tax return.

Pension tax relief makes contributing to a personal pension one of the most tax efficient savings you’ll ever make.

 

Are pensions tax-deductible for self-employed?

In short, no. Because your pension contributions aren’t a business cost and don’t have an impact on your profits, you can’t claim expenses for them in your tax return. However, if you’re paying into a pension you will be eligible for pension tax relief.

(It’s worth noting that if you’re a director of your own Ltd company, the above doesn’t apply to you if you pay pension contributions directly from your Ltd company)

 

How much can I contribute to a personal pension each year?

You can contribute as much or as little as you want to your personal pension each year, however there is a cap on how much tax relief allowance you can claim.

Most individuals can normally save up to £40,000 (the pension annual allowance) each tax year, meaning a basic tax payer would have to add £32,000 into their pension to receive the maximum tax relief, taking their savings up to £40,000 (however, remember that you are only entitled to tax relief based on your income earnings and the income tax paid)

If you don’t maximise your annual pension tax relief allowance, you can carry forward whatever remaining allowance you have into the next year. In fact, you can carry forward any unused allowances for up to three previous tax years (as long as you have been a member of a pension during that period).

 

How much should self-employed people save for retirement?

When setting a savings goal for retirement, the ‘save half your age’ rule of thumb is a good place to start.**** By this rule, you take the age at which you start saving for retirement and divide it by two. Then you’ll aim to save that percentage of your gross salary (before taxes and deductions) each year. So if you start saving at 30, you should aim to save 15% of your salary per year.

Ultimately though, it really depends on what kind of lifestyle you imagine for your future self. For example, do you want to stop working altogether or do you imagine you’ll always take on the occasional project? Do you imagine you’ll take trips away? It’s generally assumed that your living costs will go down after having paid off any mortgages, and presumably you will save on travel costs too. The Pensions and Lifetime Savings Association (PLSA) produces the retirement living standards guidelines, which outline how much money you might need per year in retirement based on a minimum, moderate and comfortable standard of living.

Once you have an idea of how much you might want to save for retirement, you can use our Pension Calculator to figure out how much you need to save each month or year.

The calculator uses a few details including your age, your target income and your current savings to work out how much your projected pot is on track to be worth and what you need to do to get on track to reach your goals.

 

Use the Pension Calculator

 

I don’t know what my yearly income will be, how can I budget for my pension?

We know the unpredictability of self-employment makes budgeting for your pension tricky, but the good news is that with a Moneybox Pension you can contribute as little or as much as you like, whenever you like. There’s no set amount you have to contribute – so you could choose to deposit a set amount each month or you could contribute whatever you can afford when you have the spare cash.

You might find it useful to identify your most reliable sources of income and work out how much of that income you can realistically afford to put away for your pension.

You should also be sure to take advantage of tax relief in years where you earn higher income. Not only will you have more income to allocate to your pension, but you could also be eligible for higher tax relief, allowing you to really maximise your pension contributions.

 

Explore the Moneybox Pension

 

* ii, Self-employed missing out on £4 billion in pension contributions, 2021
** https://www.fidelity.co.uk/self-employed/
*** Citizens Advice, Half of self employed people do not trust pensions
**** Fidelity Global Retirement Savings Guidelines White Paper

As with all investing, the value of your pension can go up and down, and you may get back less than you invest. Tax treatment on your pension contributions depends on individual circumstances and is subject to change. Payments you make into your pension won’t be accessible until the minimum pension age (currently 55 increasing to 57 in 2028). We do not currently offer drawdown products (for the Moneybox Pension).