Working for yourself can mean independence.
But no employer means there’s no one to rely on for help – saving for retirement is your responsibility.
4.8 million people in the UK work for themselves. But only 14% of them are saving into a pension. That leaves a lot of people who might find they don’t have enough money to retire when they want, with the income they need.
Whether you’re a sole trader or the owner of a limited company, a pension can help you save for your retirement.
And a pension can make sure you can carry on enjoying your independence whenever you decide to shut up shop.
The generous tax breaks from the government can help you get there, especially if you own a limited company.
This article is not personal advice and does not cover all nuances. Tax law is complex. If you are unsure of any tax implications please seek advice.
Here are a few options you could consider:
1. Add money to a pension
If you’re the owner of a limited company, here’s an example of how you and your business could be taxed, depending on whether your company pays you a dividend, a salary, or makes an employer pension contribution.
For all three examples, we’ll assume you’re a higher-rate taxpayer who’s already received more than £5,000 in dividends in the current tax year. Tax rules can change, and the benefits depend on your circumstances.
Company profit paid to you as a dividend
If you choose for £10,000 in company profits to be paid to you as a dividend, your company will first pay corporation tax (usually 19%). This would reduce the dividend by £1,900, leaving £8,100. You’ll also pay income tax on the dividend of 32.5% (that’s another £2,632.50) leaving you with just £5,467.50.
Company profit paid to you as a salary
Another option is to pay yourself £10,000 as part of your salary. However, after National Insurance and higher-rate tax, you might only receive around £5,800. And the business will have to pay up to £1,380 (13.8%) in employer National Insurance.
Company profit paid to you as an employer pension contribution
If your company pays £10,000 to you as an employer pension contribution, it wouldn’t count as profit, and there would be no corporation tax.
The full £10,000 would go into your pension, with the chance to grow tax free.
As the money isn’t being paid to you as a dividend or salary, you personally wouldn’t pay any tax until the time comes to take the money out, possible from the age of 55 (57 from 2028).
It’s important to remember that HMRC might question if the total salary and benefit package is excessive for the work undertaken. If you’re unsure, please contact your accountant.
Existing HL clients – If you’ve registered your company details with us and are authorised to make payments, you can use your company’s debit card to make contributions to your HL SIPP online. Unlike a cheque or bank transfer, you won’t have to wait for the cheque to arrive or your money to clear. It will be available to invest right away.
If you’d like to register your company details with us so you can make employer contributions online, just call 0117 980 9926. We can set everything up in one phone call.
If you aren’t authorised to make company contributions, your employer will have to make contributions by cheque, bank transfer, and/or Direct Debit.
Sole traders can’t make employer contributions as outlined above, but they can make personal contributions and claim back tax relief, which we’ll explain in more detail below.
2. Claim forgotten tax relief
When you make a personal contribution to a pension, you’ll automatically receive basic-rate (20%) tax relief at source, regardless of how much tax you pay. Every UK resident under age 75 qualifies for it, including limited company owners and sole traders, but there are important limits on how much you can contribute tax-efficiently. See how much you can contribute.
If you’re a higher-rate taxpayer, you can enjoy even more tax relief, but you have to claim it back through your self-assessment tax return or local tax office. Additional-rate taxpayers can claim back up to a further 25% in the same way.
So a £10,000 contribution only costs a basic-rate taxpayer £8,000. It could cost even less for a higher or additional-rate taxpayer.
If that’s the first you’ve heard of it, don’t worry.
You can reclaim any unclaimed tax relief from the last four tax years. If you do receive a rebate, you could even use it to top up your pension and get another round of tax relief.
3. Boost your spouse or partner’s pension
If your spouse or partner works for your company, you can make employer contributions to their pension and save tax as explained in tip number one.
Doing this will boost your joint income in retirement, since you can take money from two pension pots. But beware, HMRC may randomly investigate small businesses to check people are doing the jobs they are paid to do for the company.
You can even pay in £3,600 gross as a personal contribution (£2,880 net) and your spouse or partner will receive basic-rate tax relief, if they are a non-earner.
4. Carry forward your ‘unused’ pension allowance
When you’ve got a business to run, pension contributions can understandably drop down your list of priorities. But if you only add to your pension sporadically, you could find yourself playing catch up later down the line.
Each tax year there’s an annual limit on pension contributions. For 2017/18, it’s £40,000 for most people, but if you have ‘adjusted income’ over £150,000, your annual allowance could be lower. Broadly, ‘adjusted income’ is your total income plus the value of any employer pension contributions.
For more details on these rules, you can get your copy of our annual allowance factsheet.
There is a way to ‘carry forward’ any unused allowance from the previous three tax years. That means in the current tax year you could potentially pay up to £160,000 into your pension. You could receive up to 45% tax relief on it too, so the effective cost to you could be just £88,500. That’s a £71,500 gift from the government.
If it’s a personal contribution and you have the right level of earnings, you could also get some (or all) of your personal allowance back.
