Do the self employed get tax relief on pension contributions?


I am a self employed designer and I have a question about pension tax relief – I have no other income outside of my business and I earn roughly £30,000 profit per year. I am considering starting personal pension contributions – will these help reduce my tax bill?


Self Employed Pension Tax Relief


Answer, November 2017

Pensions are a very detailed and complicated subject and ideally you should speak with a qualified pensions advisor before making any decisions.

That said we’ll discuss how tax works when it comes to typical pension contributions for the self employed.

Your pension contributions are not a business cost and don’t affect your self employed profits, therefore they do not get included in the self employed section of your tax return.

Instead you enter your personal pension contributions in a separate section of your tax return called ‘tax reliefs’.

See screenshot of a paper tax return below – section 1 is where most self employed people will enter their pension contributions.


When it comes to how the tax relief works there are two different types of tax relief to consider, assuming a standard personal pension plan.


Relief at source in your pension pot

First your pension provider will automatically claim basic rate (currently 20%) tax relief ‘at source’ – this means that when you pay some personal pension contributions into your pension plan, some additional money is added on top of this by the government,

As an example, if you make £80 of personal pension contributions, the government adds another £20 to your pension, making it £100 in total.

The £80 (how much you pay in) is called your ‘net’ contribution – when this is combined with the £20 top up from the government the total £100 is called the ‘gross’ pension contribution.

There are limits to how much you can put into your pension:

  • The tax relief on your private pension contributions is capped at 100% of your annual earnings
  • You usually can’t pay in more than £40,000 per year (17-18 rates) into your pension pot – this is called the annual allowance


Higher rate tax relief

When it comes to your personal tax return, your gross pension contributions have the affect of increasing your basic rate tax band which means you will save some tax through your tax return if your earnings are in the higher tax band or above.

For example, for the 2017-18 tax year the higher tax band kicks in at £45,000 (unless you’re a Scottish resident then it is £43,000) – if you make £2,000 of net personal pension contributions, this is grossed up to £2,500 with the 20% tax credit, so this means your higher tax band becomes £47,500 instead of £45,000.

Lets look at an example of someone earning £50,000 of self employed profits in the 17-18 tax year with no other income. If we compare the scenario of them making £2,000 net personal pension contributions vs none, the below table shows the tax differences:


The tax saving in this example would be £500 – this is the net contribution of £2,000, grossed up to £2,500 (£2,000 divided by 0.8) multiplied by 20%.


If we now look at the question at the beginning of this article, this person is earning roughly £30,000 of self employed profits – assuming they have no other income to consider then they are not in the higher tax band which means they will not save any income tax through their personal tax return by making personal pension contributions, however they will still get the 20% basic tax relief in their pension fund as claimed by their pension provider.


Summary of Self Employed Pension Tax Relief

In summary, if you are self employed and making personal pension contributions you will usually get 20% tax relief in the form of this being added to your pension by the government and in addition to this you will get income tax relief through your personal tax return if your earnings are above the basic tax band.

Please note that the advice in this article relates to the self employed – if you trade through a limited company your pension contribution options are more complicated and often employer pension contributions are preferable.

Pensions are a highly complicated topic – we would always recommend speaking to a qualified pensions advisor before making any decisions.