Investment and retirement considerations for the self employed

All companies that employ people now have a responsibility to provide pensions to their employees, but it’s just one of the many things a self-employed person will have to take care of themselves – by Christian Leeming

 
So if you are self-employed, you risk being left behind when it comes to retirement saving as well as other long-term benefits – unless you take a few simple steps.
 

Set up a pension

 
Over 4.8 million people are self-employed yet approximately 45 per cent of those aged between 35 and 55 have no private pension*, which means they are missing out on key tax advantages.

As a general rule, to work out how much you should be paying into a pension every year, divide your age when you started the pension by two then save this percentage of your gross income into it each year. So, for example, 36-year olds should be saving about 18 per cent; 40-year-olds, 20 per cent, and so on.

‘if you are self-employed, you risk being left behind when it comes to retirement saving’

A flexible way to plan for your retirement is using a Self-Invested Personal Pension (SIPP) where you can make regular contributions from as little as £25 per month, change the amount, suspend them and make additional lump sums in your good trading years to make up for any years when business was not so good.

If you are employed by the company you own, then the company can also make a pension contribution on your behalf and this is treated as a trading expense to reduce the company’s tax liability.

Self-employed workers can personally invest (from a private bank account), up to 100 per cent of salary into a pension (there’s an annual maximum of £60,000) and receive income tax relief at 20 per cent for basic rate taxpayers and 40 per cent for higher rate taxpayers.

You can transfer former workplace pensions from previous employers into your SIPP and manage them all in one place.
 

Example: Assuming you’re a higher-rate taxpayer and expect to turn a profit of £20,000 in the 2023/24 tax year

If you’re able to pay the entire £20,000 profit from the company, directly into a pension as an employer contribution, the company shouldn’t have to pay any tax or employer National Insurance on the contribution. The money will be able to grow tax-free, with tax only coming into play when you come to make a withdrawal from age 55 (rising to 57 from 2028).

In comparison, if you were to take the profit as additional salary (assuming the entire £20,000 remains in the higher-rate tax band), you’ll have to pay at least £400 in employee National Insurance and £8,000 in income tax. In addition, the business will have to pay employer National Insurance at 13.8% (£2,760).

And if you decide to take the £20,000 profit as a dividend, corporation tax will first be levied at 19%, reducing the payment to £16,200. You’ll then pay a tax of 33.75% on the dividend above £1,000 (the dividend allowance), meaning you’ll end up receiving £11,070 after tax.

What type of pension suits self-employed people?

 
Self-employed people have the same pension options available to them as employed people. These are: private, stakeholder, NEST (the national pension scheme set up for auto-enrolment) and SIPPs.

SIPPs can be popular with the self-employed, who are used to managing their finances on their own, because they allow savers to choose what they want to invest their pension savings in, rather than deferring the decisions to a pension fund manager.

‘Most pension providers allow you to stop, start and change the level of contribution whenever you want’

You may be worried about fixing your monthly pension contributions when your income is irregular. You needn’t, because most pension providers allow you to stop, start and change the level of contribution whenever you want.

Alternatively, you can set a low minimum monthly contribution and then top up on an ad hoc basis whenever you are able to make a larger contribution.

Other considerations

Besides your long term retirement saving, there are other needs to take into account to protect your savings now and in the future.

As well as setting aside a portion of income for retirement, it’s important to have a short-term savings buffer if you are self-employed, to help you ride out any immediate cashflow issues or pay for any other emergency, business-related outgoings, such as equipment.

Three months’ worth of income is often quoted as a useful cash buffer for anyone who is self-employed. This can help to cover fallow periods, when you are not earning income but may be investing in, for example, research or training instead.
 

Life and income protection insurance

 
Life insurance is not costly but it is vital if you are self-employed, to make sure your family have costs covered if anything happens to you.

Income protection is designed to pay you a monthly amount if you are unable to work due to ill health and is also sensible for self-employed people to set up – employed people often receive this as an employee benefit.
 

Private health care

 
The benefit of private health care is often provided by employers. If this is important to you, there are a range of plans that you can set up as an individual.
 
*This is Money pensions article

Can I get more help with my pension?

Yes, you can. MoneyHelper is a government service that offers free, impartial pension help to all. On their website you’ll find guides on many pension topics, or you can speak to one of their pension specialists for free.
 
Free and impartial help with money, backed by the government | MoneyHelper >