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Pension options for the self-employed

The Money Advice Service recently published research that suggested 45% of self-employed workers between 35-55 have no private pension. Obviously, with the knowledge that a state pension will barely cover your food costs during retirement, this is a worrying statistic.

There are a number of pension options available to self-employed people, and you’ll be able to get some money back from the taxman on each (which we’ll come to). But here’s a quick summary of the main types:

  • Personal pensions: These are the standard private pensions that you can get from most high street providers
  • Stakeholder pensions: Here the maximum charge is capped at 1.5%. Also, you’re able to stop and start premiums without a penalty
  • Self-invested personal pensions: These tend to have a broader range of investment options, but they’ll cost you more
  • NEST pensions: This is a workplace pension scheme created by the government, but not every self-employed person is eligible


What about tax relief on pensions?

The government is keen to get people saving for their retirement. As such, they offer tax relief on pension contributions which can lower your tax bill and increase your pension fund.

Unsurprisingly, there are limits on how much the government will support your contributions. For the 2019/20 tax year, this limit stands at £40,000 (or 100% of your earnings if less). Go over that, and you’ll be liable to pay tax on the extra money you put away.

So, as a self-employed person, this is a tax-efficient way of saving money. But if you’re the director of a limited company, there is the potential for even better efficiencies. Let’s take a look at the two possible scenarios:


Making personal pension contributions as the director of a limited company

Say you’re the owner of a limited company, and you take both a salary and dividends. Your dividends won’t count as relevant earnings, so only your salary will be used to calculate your tax relief limit. If you’re taking a small salary and large dividend, this could leave you out of pocket if you exceed the limit.

Fortunately, there’s a more efficient way to save. By making the pension contribution straight from your company as an employer contribution, you’ll bypass the salary limit. And it gets even better because working in this way will give your company tax breaks, too. Below, we’ll take a look at how it works.


Making employer pension contributions directly from your limited company

In the government’s eyes, a company contribution to your pension is seen as an allowable business expense. This means that the company will receive tax relief against corporation tax so that the company could save up to 20% in corporation tax.

Of course, your contributions must not step outside the rules for allowable deductions, which state that the pension contributions should be ‘wholly and exclusively’ for the purposes of business.

You could also save almost 14% in National Insurance contributions too, as employers don’t have to pay National Insurance on pension contributions.

So, by taking this route, your limited company could save over 30% by paying money directly into your pension, rather than paying over the money in the form of salary.


Choosing a pensions provider

As you can imagine, there is a whole raft of pension providers available. The best one for you will depend upon your personal needs and the needs of your company.

That said, a great place to start is our very own supplier directory.


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