🧱 A Lego-Style Guide to Pensions for Freelancers & Business Owners
(For anyone who switches between being solo and running the show)
Why bother?
Because pensions are like planting money trees 🌳 - and the taxman will even water them for you. However, you need to plant them correctly, 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 business profits), or
£3,600 gross if you earn less (you pay £2,880 and HMRC adds £720)
🚫 What doesn’t count as “relevant earnings”?
Dividends
Rental income (unless it's from a holiday let)
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 = saves corporation tax
There's no link to your salary or dividends – your company can pay in up to £40,000/year
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 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 £40,000/year (includes personal + employer contributions)
Didn’t use it all? You can carry unused allowance forward for up to 3 years
If you earn £200k+ (after pension contributions), your allowance may shrink — all the way down to £4,000 if your total income hits £312k+
⏳ Limit 3: Lifetime Allowance
Currently £1,073,100 (yes, it’s a big number!)
Go over? HMRC takes a chunky tax bite: 55% if taken as a lump sum, or 25% if left in the pot
🧱 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-rate taxpayer, you claim the rest back through your tax return.
2. Net Pay
Used for workplace pensions.
Contributions come out of your pay before tax is taken.
You get full tax relief straight away.
But if you earn under the personal allowance, this method gives no top-up from the government.
Bottom line:
Most freelancers and company directors using personal pensions will be using relief at source.
🧱 STEP 5: What Should You Do?
Since many people flip between being self-employed and running a limited company, just 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.