News and Analysis | Carla Gerlach | August 19, 2022

Pension “Need to Knows” for freelancers and the self-employed

At Path we know how important it is to feel in control of your finances when you are freelance or self-employed.

There is no automatic enrolment into a pension scheme for the self-employed, so it is vital to understand how to start your pension and how to invest in it well. It is up to you to consider saving for your retirement, but the financial planning team here at Path can help you with every step – and also make sure that as well as saving for your pension, you are aligning your money with your values.

Remember, with a pension a little bit goes a long way, so if you can afford to make personal contributions, it is definitely worth putting aside a little each month if you can. And it’s also never too late to start – so even if you wish you had started your pension earlier or had previously had a company pension scheme, it’s probably still worth considering a personal pension.

The first point you must take into consideration is whether you are working as a sole trader or for a limited company. There are many advantages of the former, including low levels of administration for you to complete, resulting in lower accountancy fees, as less administration equals lower professional costs. You won’t need to file accounts or be registered each year with Companies House or complete corporation tax calculations for HMRC. There are also less complexities surrounding small levels of profits under around £30,000 per year, as the tax liabilities are low although there are no great tax efficiencies to be gained.

However, working as part of a Limited Company Agreement also has its benefits. You can control the level of earnings you take, for example salary and dividend split, which allows any tax liability to be structured as efficiently as possible within the tax rules. This also allows you to add partners in order for them to benefit from salary and pensions contributions too. There is the potential for higher net pay depending on the agreed salary and dividend split. Dividends are taxed at a lower rate than salaries, plus you have an annual dividend allowance you can use of £2,000. This would need to be weighed up against what is netted after corporation tax is paid, then dividends paid out.  Your Path adviser can talk you through using pension contributions from your company to increase your personal pension provision, reducing the taxable profits in your business at the same time.

Pensions offer an opportunity to take a higher level of risk than you may do with your short-term funds. Given that you cannot access the funds until your minimum retirement age, or potentially longer if you are not planning on retiring until after 60, they offer a very long investment timescale – which means there is more opportunity for higher returns and enough time to recover if the markets should drop. While taking slightly more risk when you are younger does drive long-term growth, you should consider investment risk carefully. 

At Path, we’ll discuss your preferred risk approach with you in detail before making a recommendation – and you can change this at any time should you wish.

Pension contributions are limited to 100% of your UK relevant earnings each year but this doesn’t mean you cannot contribute at all while you are building up your self-employed earnings. If your earnings are lower and you are a non-taxpayer, you can contribute a maximum of £2,880 net (£3,600 gross) to a personal pension each tax year to boost your retirement savings in the longer term.

In the future if you become a higher rate or additional rate taxpayer you could claim back further tax relief on personal contributions.

If you are employed or freelancing under your own limited company you can make gross employer contributions from any retained business profits, meaning provision for your future financial independence while reducing any corporation tax liability.  These can be a really tax efficient way to make contributions into a pension of your choice. Although remember, if you did later decide to employ someone, you are responsible for offering them a workplace pension, and would also be required to meet the auto-enrolment employer minimum contributions for any employee.

Once your earnings increase as your business builds up you should be able to increase the level of pension contributions you can make.  It is really worthwhile reviewing this regularly and getting financial advice to ensure you are making the most of any tax efficiencies available to you.

And as always at Path, we would always advise you to invest in your pension along with your values. If green investments and not investing in polluting or damaging industries or funds is important to you, then it’s worth speaking to your adviser about how you can align you pension with your own ethical priorities. You can book a free consultation with Path here.