Pension tax relief for the self-employed and contractors

It can be tough to take a long-term approach to your financial security when you’re working on short-term contracts, but ultimately, learning how to effectively manage your pension when you’re self-employed will help you create the ideal retirement.

Pensions are still one of the best investment choices, as they provide a host of unique tax benefits that could offer a great return later on down the line.

If you’re thinking about preparing for later life, it’s best to start contributing to a pension as soon as possible – this way, compound interest gets more of a chance to work its magic. Below you’ll find some important information about tax relief pensions for the self-employed.

Tax advantages of pensions

Thanks to top-ups on your pension contributions made by the government, every time you pay into a pension, you effectively make money.

Currently, basic rate taxpayers pay 20% tax on their income, but when you make a contribution to your pension, this tax gets refunded, which means that for every £100 you put in, the value of your input increases by £25 (because 20% of £125 is £25). It might be worth thinking about it like this: you get 25% of your contribution payed to you as a top up from the government.

Plus, your pension pot will begin to grow from compound interest – this is essentially interest on your interest, so the longer your pension stays invested, the greater this effect becomes.

There is a limit to how much pension tax relief you can get, however, and this is currently capped at 100% of your income, or £40,000 annually.

If you pay into your pension through your company (you might want to do this if you’re a contractor operating as a Ltd company, for example), then you also save money on your corporate tax since paying into your pension this way reduces your company’s tax liability.

How to claim tax relief on your pension

For basic taxpayers, the tax relief benefits come into play automatically, but if you’re in the higher tax bracket, you’ll need to claim your additional relief via a self-assessment tax return.

You may be eligible for claiming back a further 20% tax relief, enabling you to make even more money on each contribution. You can visit HMRC’s website to find the self-assessment portal.

Why a personal pension is a good idea for the self-employed

A personal pension can offer you a huge amount of flexibility as a self-employed worker, allowing you to make contributions when it best suits your financial situation.

Moreover, you can choose which funds you want to invest your savings into, enabling you to take optimum control over your savings.

How iSIPP can help you

At iSIPP, we’ve made it easy for you to set up a personal pension – you can get it done in a matter of minutes, and we can consolidate (combine) any of your old workplace pensions into one location, making your savings incredibly easy to manage.

Our platform is accessible 24 hours a day, 7 days a week, from wherever you happen to be in the world. We believe you should have complete control over your money, and we can give you the agency you need to invest it in a way that suits your personal circumstances.

We know that being self-employed can be extremely difficult and offer irregular wages, which is why we make it easy for you to contribute to your pension at whatever time works best.

iSIPP aims to empower self-employed pension holders and give them the freedom they need to take control over their financial future, and we are FCA regulated so you can be confident your money is in safe hands. Please get in touch if you feel like this can help you out.

Summary

Pensions have plenty of wonderful benefits when it comes to saving money as a contractor or self-employed worker, and flexible pension providers like iSIPP are here to make the saving process as easy as possible.

Before you make any big moves with your pension, make sure you seek expert financial advice, as this could help you get the most out of your hard-earned money.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.