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How do pensions work for sole traders?

If you’re self-employed as a sole trader or a partnership, you don’t have to pay into a pension scheme. However, it’s important to consider whether you should start paying into a pension scheme.

You could start contributing to a personal pension scheme. These contributions would be made after tax, meaning you contribute directly from your bank account into your pension scheme. You can therefore, claim tax relief from HMRC in relation to the pension contributions you make during the tax year. This means you get a bonus from the government of 25% of what you pay in. Therefore, you only need to put in £80 to receive £100 into your pension. The government wants people to save for retirement, so it’s a nice little thank you. Your pension provider will handle claiming that for you.

It might be worth seeking specialist advice from a pension expert when picking a pension scheme.

If you pay more than 20% income tax…

…then you can claim some additional tax relief in your self-assessment on any income taxed at a higher rate.

If you earn over £50K, then the rate of income tax is 40%. This means that earners over £50K are due tax relief of 40% on their contributions to the pension scheme. Likewise, people who fall into the additional rate bracket can get 45% tax relief.

If you are eligible for further tax relief – as mentioned above- then, this is claimed on your self-assessment tax return.

How much can the self-employed pay into a pension?

You can only receive tax relief up to a certain amount. Each year your pension has an ‘annual allowance’ for contributions that are eligible for tax relief. Contributions you make over that amount may not be topped up.

It can be possible to contribute your unused annual allowance from the three previous tax years through carry forward. The annual allowance is currently set at £60,000, or 100% of your income if lower than £60,000, in that tax year.

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