Private Pensions For The Self Employed: The Ultimate Guide10 min read

private pensions, self-employed, retirement

In this guide, we explain what private pensions for self-employed people are, how they work, and how you can find the best private pension scheme for you.


Who Is This Guide For?

Before we dive straight in, I want to add a bit of context as to how this guide came about.

Earlier in the week, a close friend and I were discussing our plans for the future over lunch.

My friend happens to be self-employed and runs a successful business in the automotive industry. He is financially astute and has always been savvy with his money, which has helped make his business very profitable.

Halfway through the conversation, we got talking about retirement. I told him that I have contributed to my workplace pension scheme since I was first employed, in the hope of building a nice little nest egg by the time retirement rolls around.

At this point, he turned to face me. “You’re lucky, I don’t get to have a pension because I’m self-employed”. I looked back at him, unsure if he was joking. He looked pretty serious.

“You know you can still have a pension if you’re self-employed, right?” I replied.

He laughed me off.

“No, seriously” I continued. “You can set up a private pension and pay into it yourself. You even get all the same tax benefits as if you were paying into a workplace pension arranged by an employer”.

He stared back at me, looking a little puzzled.

The thing is, for a lot of self-employed people, the idea of a private pension is completely novel. And if you’re one of those people, then this guide is for you.

So without further ado, here is your definitive guide to private and personal pensions for the self-employed.

What Is A Workplace Pension Scheme?

For the vast majority of people, a pension just sort of happens automatically.

Employers are legally obliged to set up a pension scheme for their employees and the money is taken from people’s salaries every month and placed into their pension fund.

Unless you work in the civil service or public sector, most workplace pension schemes nowadays are known as ‘defined contribution’ schemes.

This means that the amount you pay in is a set figure, but the figure you actually withdraw upon retirement will be dependent on how well the pension fund performs.

The alternative to a ‘defined contribution’ pension scheme is known as a ‘defined benefit’ scheme.

This isn’t relevant when talking about private pensions for self-employed people, because all private pensions are ‘defined contribution’ schemes. So we won’t be exploring defined benefit pension schemes in this article.

What Is A Private Pension Scheme?

There are around 4.4 million self-employed people in the UK. For self-employed people, a private pension is often the best and only choice of pension available.

Private pensions (or ‘personal’ pensions) are set up by you, as an individual, with a private pension provider. A private pension is similar to a workplace pension because you still make regular contributions to your very own pension fund.

All private pensions are known as ‘defined contribution’ schemes, which means the amount the pension will be worth on retirement depends on how much you’ve paid in and how well the pension fund has performed.

When you make your payments into a defined contribution scheme, your money doesn’t just sit there in a pot waiting to be withdrawn.

Instead, your pension fund manager will invest your money in the hope of making you a greater return than the what you contributed.

As such, the value of your private pension can go up or down, depending on market conditions and the state of the economy.

In practice, this isn’t as alarming as it sounds.

Because most self-employed people contribute to their pensions over a long period of time, the vast majority of defined contribution pension schemes deliver a higher return than what you pay in throughout your working career.

This is due to the slow upward march of the market over time and the effects of compound growth.

What Is The Difference Between A Workplace Pension And A Private Pension?

The main difference between a workplace pension and a private pension is who sets the pension up. Workplace pensions are set up by your employer, whereas a private pension is set up by you.

In addition, if you are self-employed then your private pension will not benefit from matched employer contributions, because you have no employer.

By law, the minimum contribution into a workplace pension is 8% of the employee’s qualifying earnings between both the employer and the employee.

The employer must contribute a minimum of 3% and the employee must contribute the remaining 5%. Either party can choose to contribute more than the minimum.

The only minimum contribution for a private pension scheme is the one outlined in the scheme rules, which are set by your private pension provider.

Is A Private Pension Different To The State Pension?

It’s important to note that a private pension or a workplace pension is different to the state pension.

The state pension is a government run pension scheme available to those aged 66 and over who have made National Insurance contributions throughout their working life. This includes self-employed people.

The current state pension is equal to £185.15 per week and is payable in addition to any private pension or workplace pension that you may have.

If you have missed any National Insurance contributions throughout your working life, you will not be entitled to the state pension until you make up any gaps in your payment record.

What Are The Tax Benefits Of Private Pensions For Self Employed People?

The main reason why pensions are such an effective method of saving for retirement is due to the tax status of pension contributions.

When you make contributions to your private pension, some of the money which would have gone to the government via tax is paid into your pension instead.

This reduces your liability to tax and increases the amount you can save. In short, it’s free money that you would otherwise not be entitled to.

The amount of tax relief you can claim depends on your income tax band:

  • For basic rate taxpayers the pension tax relief is 20%.
  • For higher rate taxpayers the pension tax relief is 40%.
  • For additional rate taxpayers the pension tax relief is 45%.

As you can see, the pension tax relief bands currently mirror the income tax thresholds.

How Can Self Employed People Claim Tax Relief On Private Pension Contributions?

If you have a private pension, your tax relief is claimed using the ‘relief at source’ method.

This sounds complicated, but from your perspective it is actually pretty simple:

  1. As a self-employed person, you pay tax on your earnings as normal.
  2. From your taxable earnings (i.e. your take home pay), you pay money into your private pension.
  3. Your pension provider will then claim your 20% tax relief directly from the government on your behalf, which they pay directly into your pension fund for you.

If you’re a self-employed basic rate taxpayer, you don’t have to do anything to claim the tax relief on your pension contributions. Your private pension provider will do all the hard work for you.

Claiming Higher Or Additional Tax Relief On Self Employed Private Pension Contributions

If you’re a self-employed higher or additional rate taxpayer, you will need to claim the extra tax relief you are entitled to manually. You can do this either through your tax return or by contacting HMRC directly.

Don’t be put off by filling out the extra forms. This is literally free money in the form of an extra 20% (for higher rate taxpayers) or 25% (for additional rate taxpayers) reduction in your tax liability.

Remember, the first 20% tax relief that you are entitled to will be automatically claimed by your private pension provider and put into your pension fund, so you don’t have to worry about doing this yourself.

It’s only for the extra 20% or 25% (as a higher rate or additional rate taxpayer) that you need to do a little bit of work yourself.

If you do claim the extra relief, this will be supplied to you either as a reduction in your tax liability, as a rebate at the end of the tax year, or as a change to your tax code.

Once you’ve submitted your return or contacted HMRC directly, you simply sit back and wait. It’s minimal effort for what can be a pretty sizeable amount of money!

How Does Private Pension Tax Relief Work In Practice?

Here is a table which shows how tax relief is calculated for self-employed people, based on a £100 pension contribution before tax:

Pension ContributionTaxpayer ThresholderPension Contribution
(After Tax)
Tax Relief
£100Basic (20%)£80£20
£100Higher (40%)£60£40
£100Additional (45%)£55£45

What Age Can A Self Employed Person Receive Their Private Pension?

The individual terms of your private pension will determine when you are entitled to receive your funds, but it is normally age 55 at the earliest.

Some pension schemes set the entitlement age to 60 or 65, so you need to make sure you choose a private pension scheme which aligns with your plans for retirement.

How Do Self Employed People Pay Tax On Private Pension Withdrawals?

When you get your private pension payments after you retire, you will generally be able to withdraw 25% of the total amount of your pension fund tax free.

For the remaining 75% of your pension fund, you will generally have to pay income tax at the then applicable rates of income tax.

While this may seem to offset the pension tax relief you are entitled to on your pension contributions, you can structure the receipt of your pension fund in a particular way to avoid paying too much tax.

This is called tax avoidance, which is completely legal (as opposed to ‘tax evasion’ which is most definitely not!).

What Types Of Private Pensions For Self Employed People Are There?

Nowadays, there are several different types of private pensions available for self-employed people.

Your personal circumstances will dictate which private pension scheme is best for you. It is always recommended that you do your own research and compare the private pension schemes out there before making a decision.

The most common types of private pension fund are:

  • Standard private pensions.
  • Stakeholder private pensions.
  • Self-invested personal pensions (“SIPPs”).

Standard Private Pensions

A standard private pension scheme will usually offer you a range of financial products that you can choose to invest your pension fund into. Your choice will be dictated by your investment horizon, risk tolerance and plans for retirement.

Some standard pensions will require you to make a minimum contribution each month. This may be difficult for individuals with flexible or irregular income.

Instead, you may prefer a standard private pension which allows you to pay in whatever contributions you like, including lump sums.

You should always carefully evaluate the terms of the pension scheme to ensure you can keep up with any minimum contribution requirements.

Stakeholder Private Pensions

Stakeholder private pensions are a type of pension scheme which must adhere to strict government rules.

Their fees are capped at a low level (these are the amounts that the private pension provider charges you for holding, managing and investing your pension fund), equal to 1.5% of the fund for the first 10 years and 1% every year thereafter.

You also have less flexibility in choosing which financial products to invest in.

Stakeholder pensions have a minimum contribution level, although it is very low in comparison to other private pension schemes.


Some private pensions will permit you to freely choose which financial products your pension fund is invested in. These are called Self-Invested Personal Pensions (“SIPPs”).

These offer a much wider range of investment products than a standard private pension (you can choose just about anything) and are often a better option for the more experienced investor.

You can learn more about the fundamentals of investing by reading my post which debunks some of the biggest investing myths.

Is There An Age Limit On Opening A Private Pension For A Self-Employed Person?

As long as you are under 75, you are still eligible for tax relief on contributions into your private pension.

Theoretically, this means you could open a private pension fund aged 74 and still get all the tax benefits.


Even if you are self-employed, you can still open a private pension fund to begin saving for your retirement. Starting a pension is often one of the first pieces of advice a professional financial advisor will give you, and for good reason.

Thanks to their tax status, private pension schemes are one of the most effective ways for self-employed people to save for their retirement.

If you found this post helpful, please consider sharing it on social media or by email using the buttons below. You can also share your thoughts by leaving a comment below.

Disclaimer: I am not a professional financial advisor, so nothing you read on this blog should be taken as investment or financial advice. Please seek your own independent investment advice from a professional advisor before making financial or investment decisions. Thank you!

Leave a Reply