Self Employed Pension – UK Guide

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What is a self-employed private pension?

In short: A self-employed pension is a private savings pot that you set up yourself to pay for your life after you stop working. Because you don’t have an employer to sort it out for you, you are responsible for starting it.

The government encourages you to do this by giving you Tax Relief. This means for every £80 you pay in, the government automatically adds £20. It is effectively “free money” to reward you for saving for your future.

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How it Works (The Essentials)

1. You choose the provider Unlike employed staff who get given a workplace pension, you must pick your own. You have three main choices:

• Personal Pension: You open an account with a big provider (like Aviva or PensionBee), and they invest the money for you.
• SIPP (Self-Invested Personal Pension): You open an account where you control exactly which shares or funds your money buys. This offers more control but often requires more effort.
• NEST: The government workplace scheme is also open to self-employed people. It is designed to be simple and low-cost.

2. The Government adds money (Tax Relief) This is the biggest benefit. The standard tax relief is 20%.

• Example: You transfer £80 from your bank account.
• Bonus: The government adds £20.
• Total: You now have £100 in your pension pot.

Note: If you are a higher-rate taxpayer (earning over £50,270), you can claim back even more money through your annual tax return.

3. There is a limit (The Annual Allowance) You cannot put unlimited amounts in tax-free. For the 2024/25 and 2025/26 tax years, the limit is usually £60,000 per year.

• Important Rule: You usually cannot pay in more than you earned that year. If your profit was only £25,000, your tax-free limit for that year is £25,000 (not £60,000).

4. Sole Trader vs. Limited Company How you pay depends on your business setup:

• Sole Traders: You pay into the pension from your personal bank account. You get the 20% top-up automatically.
• Limited Company Directors: It is usually best to pay directly from your business bank account. These are “employer contributions.” They count as a business expense, meaning they reduce your Corporation Tax bill.

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Advanced Rules & “Hidden” Benefits

5. The “Carry Forward” Rule

If you have a very profitable year, you might want to pay in more than the £60,000 limit. You can do this by using unused allowance from the previous 3 tax years.

• Condition: You must have been a member of a registered pension scheme during those years (even if you didn’t pay anything in).
• Benefit: This is a great way to reduce a large tax bill after a successful year.

6. The “Low Earner” Rule

Even if you have little to no income (or make a loss), you can still pay into a pension.

• The Limit: You can pay in up to £2,880 a year.
• The Bonus: The government will still add tax relief (bringing the total in the pot to £3,600).

7. Consolidating Old Pensions

If you have worked previous jobs, you likely have old pension pots scattered around. You can combine these into your new self-employed pension.

• Pros: Easier to track; potentially lower fees; less paperwork.
• Cons: Some older pensions have special benefits (like guaranteed annuity rates) that you would lose if you move them. Always check the small print first.

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Taking Your Money Out

8. When can you take it?

You cannot touch this money until you are older.

• Current rules: You can access the money at age 55.
• Future rules: This will rise to age 57 in 2028.

9. The 25% Tax-Free Lump Sum

When you reach the access age, you can usually take 25% of the total pot tax-free. The remaining 75% is taxed as regular income when you withdraw it.

10. Warning: The “Money Purchase Annual Allowance” (MPAA)

If you start taking taxable income from your pension (not just the tax-free lump sum), the amount you can save tax-free in the future drops drastically to just £10,000 a year.

• Why it matters: Be careful about accessing your pension “early” if you plan to keep working and saving, as it severely limits what you can save afterwards.

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Inheritance Tax: A Major Change Coming

Currently, pensions are generally “outside your estate,” meaning your family usually pays no Inheritance Tax on them when you die.

However, this is changing.

From April 2027, the government plans to include unused pension funds in your estate for Inheritance Tax purposes.

• If your total estate (including your home and pension) is above the tax-free threshold, your beneficiaries may have to pay Inheritance Tax on the pension money.

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Quick Summary Table

Feature	Detail
Who sets it up?	You do (Private Pension, SIPP, or NEST).
The Benefit	The government adds 25% to your contribution (turning £80 into £100).
Yearly Limit	£60,000 (or 100% of your earnings, whichever is lower).
Carry Forward	You can use unused allowance from the last 3 years.
Access Age	55 (rising to 57 in 2028).
Inheritance	Generally tax-free now; likely taxable from April 2027.

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