Self-employed and Pensions: Money
Being self-employed offers lots of benefits, like greater independence and flexibility when it comes to work but, it also means that you’re in charge of your own financial future. This can pose lots of challenges but also opportunities when it comes to saving for later life.
Unlike those employed in a workplace, self-employed workers are not usually covered by automatic enrolment. This means that if you’re self-employed you will not benefit from employer contributions and the responsibility to set up and start saving into a pension falls entirely on your shoulders.
One of the challenges in saving for a pension when self-employed is that income levels can fluctuate making it difficult to save regularly for the longer term. However, you will still need an income in retirement and there are strategies you could potentially use to do this that suit those with fluctuating levels of income.
Saving into a pension is a tax-efficient way of making provision for income in retirement. There are a number of pension options available to self-employed people:
- Personal pensions
- Stakeholder arrangements
- Self-invested personal pensions (SIPPs)
- Small self-administered schemes (SSAS)
- Master Trusts
For those worried about fixing a monthly pension contribution due to irregular income, many pensions providers will allow you to stop, start and change the level of payments to suit your needs. Alternatively, you could set a low minimum monthly contribution and then top up on an ad-hoc basis whenever you are able to make a larger contribution or just set up a pension with one capital payment.
You should also remember that you will receive tax relief on your contributions. You can contribute whatever you want into a UK registered pension but tax relief is only received up to a certain amount. There is an annual allowance of £40,000 per annum but you usually can only contribute that amount if you have earnings of £40,000 or more. If you take your income in the form of dividends from your own company these don’t count as earnings for the purposes of receiving tax relief, but the good news is that you can contribute as an employer from your company instead and that contribution will be tax deductible for your company. Employer contributions also save you income tax and National Insurance.
You may be able to benefit from strategies, such as carry forward to increase the amount that you pay into your pension. This could allow you or your company to contribute more than £40,000 in a tax year by using allowance from the past three tax years.
Tax relief at source is normally received on contributions to a pension scheme at the basic rate (currently 20%). You can claim any higher rate tax relief through your end of year tax assessment. If you are paying employer contributions into your pension you need to let your scheme know as these should not attract further tax relief. As stated above employer contributions will be tax deductible for your company.
If you would like further guidance for the self-employed and pension planning you can find out more about how we can help here.
Self-employed and the State Pension
Knowing what you might get from the state pension can help you plan what else you might need to achieve the retirement that’s right for you. Anyone reaching state pension age today will get a state pension of £168.60 a week if they have been paid or credited with enough years of National Insurance Contributions (NICs). You may be able to fill gaps in your record by making voluntary NICs called Class 3.
Self Employed people normally pay either Class 2 or Class 4 NICs based on their earnings.
From 6 April 2016, under the new state pension, self-employed people can gain more state pension than they were able to in the past. For qualifying years added after 6 April 2016, all NICs and credits count equally for the new state pension. This includes Class 2 NICs made by self-employed people which are treated the same as employee contributions and count towards the new state pension.
Class 2 NICs are payable at a flat rate of £3.00 per week in 2019/20 by the self-employed (including partners) who earn over the Small Profits Threshold of £6,365 in 2019/20. The contributions are paid per individual and not per job they have.
A self-employed person who has earned less than the Small Profits Threshold in the tax year can apply for a refund of Class 2 NICs. Even when you do not have to pay class 2 National Insurance, you may wish to pay Class 2 anyway in order to preserve your pension entitlement and entitlement to certain other State Benefits. Voluntary Class 2 NICs can be made if profits were below the Small Profits Threshold or the individual has lived and worked abroad.
Class 4 NICs are payable at a rate of 9% between the Lower Profit Limit and the Upper Profit Limit (£8,632 and £50,000 in the 2019/20 tax year) and then at a rate of 2% on profit above the Upper Profit Limit.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.