There are loads of great reasons to be self-employed. Starting your own business gives you control of your destiny, the flexibility to work hours that suit you, and the freedom to make decisions.

When it comes to your finances, though, working for yourself can mean you have to take on a bit more of the responsibility. From paying yourself to managing your personal finances, there’s no payroll clerk in the background or automatic enrolment pension for you to take advantage of.

In addition, new research has found that self-employed workers are potentially missing out on up to £4 billion in pension contributions each year, when compared to employees.

So, if you’re a business owner, or you work for yourself, here’s why taking control of your pension is so important.

Self-employed people missing out on £4 billion in pension contributions each year

New research from interactive investor has revealed that around 4.3 million self-employed people in the UK are missing out on an estimated £4 billion in employer pension contributions every year.

This estimate is based on what self-employed people would probably receive from an employer if they were in employment, rather than working for themselves. It assumes that entrepreneurs are missing out on employer pension contributions worth 3% (the minimum an employer must pay) of gross salary.

Of course, many employers pay more than the minimum 3% of salary on behalf of their workers, so the real figure could be much higher than this.

Here’s an example:

• For a full-time employee on the UK’s median salary of £31,461, the total pension contribution (8% of gross salary) in one year would be £2,516, typically made up of an employee contribution (5%) of £1,573 including tax relief (1%) of £314 and personal payment of £1,258, as well as an employer contribution (3%) of £942.
• A self-employed person earning the same amount and paying in the same proportions of income would have to pay the additional employer contribution of £942 to put themselves on a level playing field with the equivalent employee.

This £4 billion figure underlines the need for self-employed people to take control of their retirement savings.

Without making the right contributions now, you risk not being able to maintain the lifestyle you want in retirement, and either replying on the State Pension or having to work in your later life to generate an income.

Four in five self-employed workers not contributing to a pension at all

According to this research, an estimated four in five self-employed people are not putting any money in a pension at all.

According to the latest Family Resources Survey pension participation rates among the self-employed was just 18% in 2019/20, although this does represent a slight increase on the 2015 figures.

Not only are roughly 3.5 million people missing out on employer contributions by working for themselves, but they are also missing out on tax relief, which they could receive if they set up their own pension. Estimates suggest around £1 billion a year is being foregone in tax relief.

Part of the reason for the low take-up of pensions could simply be because there isn’t automatically a scheme for self-employed workers to contribute to. Employed workers typically have a ready-made scheme to join, with contributions automatically deducted from salary, which makes the process simple.

Take control of your own retirement planning

Returning to our original point, this is why it’s so important that you take control of your own finances if you’re self-employed.

Running your own company gives you plenty to think about, and it’s easy to overlook your personal finances when you’re busy generating sales, fulfilling orders, and balancing the books.

However, if you don’t consider making pension contributions then you could struggle for income when you’re older, and find you have insufficient savings to maintain the lifestyle you want.

Many business owners assume that their company is their retirement, and the sale of the business will fund their later life. While this may be true in some cases, this overlooks the significant tax benefits of contributing to a pension while you’re working.

Tax relief is equal to 20% of your contribution if you are a basic rate taxpayer, so every £100 contribution to your pension only costs you £80. If you’re a higher- or additional-rate taxpayer, you’ll benefit from even more tax relief through your self-assessment tax return.

This makes pensions an attractive investment for self-employed people as you’re essentially getting an immediate 20% boost on your savings through tax relief. And, as you’re typically investing for a long period, you’ll generally also benefit from positive investment returns on your contributions.

An additional benefit of making pension contributions is that it can help reduce your business tax burden. As you can deduct any costs incurred in running the businesses before profits are calculated, including pension contributions, this can cut your Corporation Tax bill.

And, in addition to deducting pension contributions before Corporation Tax is calculated, contributions are also exempt from National Insurance at 13.8%.

Get in touch

If you’re self-employed and want to take control of your business and personal finances, please get in touch. Contact us by email at info@blueskyifas.co.uk or call us on 01189 876655.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.