🧱 A Lego-Style Guide to Pensions for Freelancers & Business Owners

🌳 Why Bother?

Because pensions are like planting money trees - and the taxman will even water them for you.
But you need to plant them the right way, depending on whether you’re self-employed or running a company.

🧑‍🎨 STEP 1: Are You Self-Employed (Sole Trader)?

✅ You’re your own boss and get paid from your business profits.

💸 How to pay into your pension:
You make personal contributions from your earnings.

🧮 How much tax relief can you get?
You can claim tax relief on what you pay in, up to:

• 100% of your “relevant earnings” (this means your business profits), or

• £3,600 gross if you earn less (you pay in £2,880 and HMRC tops it up with £720)

🚫 What doesn’t count as “relevant earnings”?

• Dividends

• Rental income

• Interest or investment income

💡 So if you’re mostly earning from things like rent or dividends, your pension tax relief could be limited — even if you feel “rich on paper”.

🧑‍💼 STEP 2: Are You a Limited Company Director?

✅ You pay yourself a mix of salary and dividends, and you run your business through a limited company.

💸 How to pay into your pension:
Get your company to pay in as an employer contribution.

🎯 Why this is clever:

• It’s an allowable business expense → reduces your Corporation Tax bill

• There’s no link to your salary or dividends – your company can pay in up to your available annual allowance (see next step)

• It’s often more tax-efficient than personal contributions

🛑 Don’t pay from your own pocket if most of your income is dividends — you’ll miss out on valuable tax relief.

🚦 STEP 3: Know Your Limits (So You Don’t Get a Nasty Surprise)

🧮 Limit 1: Relevant Earnings (for personal contributions)

• Max tax relief = 100% of your earnings (or £3,600 if you earn less)

• Applies if you’re paying personally, not via your company

📆 Limit 2: Annual Allowance

• Usually £60,000 per year (includes personal + employer contributions combined)

• Didn’t use it all? You can carry forward unused allowance for up to 3 years

• If your threshold income > £200,000 and adjusted income > £260,000, your allowance is tapered down — as low as £10,000 if your income is very high

⏳ Limit 3: Lifetime Allowance

• 🚨 Abolished from April 2024 - there’s no overall cap on how much you can build up

• BUT there are still limits on tax-free lump sums:

  • Lump Sum Allowance (LSA) = £268,275

  • Lump Sum & Death Benefit Allowance (LSDBA) = £1,073,100

💷 STEP 4: How Do You Actually Get Tax Relief?

There are two main ways you get tax relief on your pension payments:

1. Relief at Source

• This is what most personal pensions use.

• You pay in from your bank account (after tax).

• The government adds 20% automatically.

• If you're a higher or additional-rate taxpayer, you claim the rest back through your tax return.

2. Net Pay

• Used for many workplace pensions.

• Contributions come out of your pay before tax is calculated.

• You get full tax relief instantly.

• But if you earn below the personal allowance, you won’t get any top-up under this method.

💡 Most freelancers and company directors using personal pensions will be on relief at source.

🧱 STEP 5: What Should You Do?

Since many people flip between being self-employed and running a limited company, follow this simple rule:

• 👉 When you're self-employed:
  Pay into your pension personally - you’ll get tax relief based on your profits.

• 👉 When you're running your own limited company:
  Get your company to pay the pension for you - it saves on corporation tax and gives more flexibility.

🔁 Switching roles?
Just switch the way you contribute. That way, you always get the best tax relief for your situation.

🎁 Final Handy Hints

• 📅 Switching roles this year? Review how you're contributing – don’t accidentally overdo it or miss tax relief.

• 📊 Keep a record of all contributions - across personal and employer pensions.

• 💬 Unsure? A chat with your accountant or financial adviser can help you stay on the taxman’s good side.