Managing your pension when you’re self employed

Freelancing and self-employment are increasingly common in the UK, especially amongst parents looking for a more flexible way to work around their children. But whilst working for yourself can tick a lot of boxes, it also means there’s a lot to sort out, including your pension.

Saving into a pension is a useful way to plan for the future, but fluctuating income (and having to arrange it all yourself) can make it a bit trickier. We answer some of the most commonly asked pension questions from self-employed workers.

Will I still qualify for the State Pension if I’m self-employed?

Yes, as long as you have at least 10 years of National Insurance Contributions (NICs) at or above the qualifying threshold, you’ll be eligible for the State Pension.

The size of your future pension payments depends on how many qualifying years of contributions that you make. To get the full weekly rate of pension, you’ll need 35 years of contributions.

How do I make NICs if I’m self-employed?

Working for yourself means that you’ll report your earnings with a Self Assessment tax return. HMRC use this to work out how much income tax and National Insurance (NI) that you need to pay. Self-employed people usually pay Class 2 and Class 4 NI, depending on how much they earn.

If your self-employed income is £0 – £6,514:

You won’t incur NI on any self-employed income in this bracket, so won’t make qualifying payments for your State Pension. To make qualifying payments anyway, you can make voluntary contributions (known as Class 3
NI) to fill any gaps in your NI record.

If your self-employed income is £6,515 and above:

This is the start of the Small Profits Threshold (SPT). You’ll pay Class 2 NI at a rate of £3.05 per week.

If your self-employed income is £9,568 and above:

Known as the Lower Profits Limit, you’ll pay Class 4 NI at a rate of 9% on any self-employed income within this bracket.

If your self-employed income is £50,270 and above:

Known as the Upper Profits Limit, you’ll pay Class 4 NI at a rate of 2% on any self-employed income within this bracket.

Deciding not to make voluntary NICs might be useful at the time if you’re struggling, but leaving gaps in your NI record does, unfortunately, mean one less year towards the amount of State Pension that you get. You can check your contributions so far using your Personal Tax Account.

That said, relying solely on the State Pension might mean that you struggle in the future, which brings us to the topic of private pensions when you’re self-employed.

Private pensions when you’re self-employed

Choosing a private pension is probably right up there with getting a mortgage. Unless it so happens to be what you do for a living anyway, the choice and terminology can be pretty dazzling.

Do your research! Pensions basically work by entering your contributions into a fund, which is then managed and invested by the pension provider. The better the fund performs, the bigger your pension pot. It’s well worth speaking to an independent pensions advisor, or to your accountant if they offer this service.

Working for yourself means that you miss out on employer’s contributions into your pension fund, so the government make up for this by offering tax relief (which they pay into your fund) on any self-employed pension contributions that you make.

You’ll need to provide the details of your pension on your Self Assessment tax return to get anything, but HMRC will add (roughly) £25 for every £100 of contributions that you make.

*This article was written by the Accountancy Partnership which provides online accounting services to self-employed workers. Find out more about what they do, or get a quote online.

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