As a self-employed person, you have more freedom to choose your own pension, rather than having to use one provided by an employer. You can pick the pension provider you want and with a self-invested personal pension (SIPP) you can even choose the investments you want to include. Unlike an employee, with pension contributions taken from their salary, you're free to change how much you pay in month-by-month or add lump sums – so you’re in total control within the limits the government put in place.
The tax perks of a self-employed pension
When you're running your own business, being tax efficient is important. Paying into a pension is one of the best ways to invest your income.
As a self-employed person, you'll get tax perks on your payments. How this works will depend on the type of self-employment.
Any gains from your pension investments are also free from tax, unlike savings interest. And you can get access to your money sooner than you might think. If you want, you can take a tax-free lump sum at 55 (rising to 57 in 2028).
Sole trader
If you're a registered self-employed as a sole trader, your pension will come from your net profits and the government will add tax relief to top up your payments at the basic rate of tax (20%).
For example, for every £100 you contribute to your pension it really only costs you £80 with 20% tax relief. If you're a higher rate taxpayer you can potentially claim more tax relief using your self assessment form.
Limited company
If you run your business as a limited company (Ltd), then your pension payments normally come from your turnover as a business expense. So you'll pay less corporation tax, but none of the tax relief will be added to your pension.
Any returns on your pension investments are usually free from Capital Gains Tax and income tax.
Personal or SIPP pensions for the self-employed
As a self-employed person you can choose between a personal pension or a self-invested personal pension (SIPP). Both have their advantages, so it’s up to you to see which one you’d prefer.
With a personal pension, the pension provider will have a range of investments for you to choose from based on things like the risk you'll accept. Your pension will then be run by a fund manager with the aim of getting the best returns. All you need to do is make contributions, so it’s better if you’re unsure about the world of investments. Generally, the costs for a personal pension are lower than a SIPP.
A self-invested personal pension (SIPP) gives you a lot more control over the investments inside it. You choose and manage them yourself and can pick things like shares, bonds or investment funds. This takes more understanding of what you’re investing in, so you’ll need to do your homework about the performance and risk level of each investment. If you'd like see whether a SIPP would suit you, you can check out anAviva SIPP here.
