SIPPs for the self-employed

Is a SIPP a good pension option for self-employed people?

Whether you run your own limited company, you are a contractor or work as a freelancer, finding a pension that suits the way you work is essential. Self-Invested Personal Pensions (SIPPs) deliver the flexibility and control that many self-employed people want.

IR35 and SIPPs

A SIPP is still a good pension option if you are caught by the off-payroll working rules, commonly known as IR35, and deemed to be an employee rather than self-employed. By making contributions to your SIPP, you may be able to offset the additional tax you have to pay as a result of falling inside the IR35 regulations. More information can be found on the government's IR35 and pensions page.

Benefits of a SIPP for the self-employed

Flexible contributions

Many self-employed people see their income fluctuate from month to month. A SIPP allows you to flex your contributions in line with your income, subject to any minimums set by your provider and the annual allowance set by the government. Annual allowance.

Investment choice

A SIPP gives you access to a broad range of investments including shares and funds. In exactly the same way you decide how to run your business, you can  choose where your pension savings are invested.

Tax benefits on contributions

The tax benefits on contributions will depend on how your business is set up.

Self-employed

If you are freelance or a contractor and your pension contributions are from your taxable income, you will receive tax relief at 20%. Pay £80 into your SIPP and it will be topped up with 20% tax relief, turning your contribution into £100 in your pension.

On top of this, you will be able claim back further tax relief through your self-assessment tax return if you are a higher or additional rate taxpayer.

Limited company

If you have set up a limited company, you can make contributions to your SIPP directly from your pre-taxed company income. This saves you paying tax and national insurance on the money as income and also saves the limited company employer’s national insurance on the contribution.

This type of contribution also reduces your limited company’s profits and its corporation tax liability.

Tax-efficient investment growth

Investments held in your SIPP grow free of tax. There is no income tax or capital gains tax due on any investment growth or dividends.

Tax-free lump sum

Once you reach age 55 (57 from 2028) you can take up to 25% of your pension tax-free (subject to a maximum of £268,275). This can be taken as one, or many, lump sums.

Good for consolidating  older pensions

A SIPP can be a good home for any older pensions you might have accumulated over your working life. Combining smaller pensions into a SIPP makes it easier to plan for retirement as everything is in the same place. It can also be more cost-efficient, especially where a SIPP provider charges a flat fee.

SIPP for self-employed case study

Will is a 38-year-old self-employed health and safety consultant. He earns between £120,000 and £150,000 a year working with clients in the construction sector. His income stream fluctuates, especially as he likes to take two months off in the summer to spend time with his family.                                                                                               

I took out a SIPP because it is really easy to adjust my contributions. During the months I’m working I pay in around 10% of my income. When I get to the end of the tax year, I make an additional contribution, depending on how much money I’ve earned that year. I love this flexibility but I also like the investment choice I get with my SIPP. I can put my money in investments that match my views.

SIPPs for limited company directors case study

Rachel, 27, has set up her own limited company creating visuals and virtual tours of properties for construction firms. As a limited company director, she is able to make contributions to her SIPP directly from the company’s profits.

In her first year of trading, the company made profits of £40,000. She decides to leave £30,000 in the business for future growth plans and pay £10,000 into her SIPP. By doing this instead of paying it as salary, there is no national insurance (employee and employer) or income tax to pay. As Rachel is a basic rate taxpayer this saves £2,000 in employee tax, £1,200 in national insurance plus a further £1,380 in employer national insurance (assuming 2023/24 rates). If, instead, she had declared the £10,000 as company profits, she would have faced a corporation tax liability of £1,900.

I love how tax-efficient this is, my primary focus is growing my business but these tax benefits mean it makes sense to start building a pension pot for the future.

SIPPs for contractors case study

Tony, 53, is an IT consultant. He works as a contractor through an umbrella company on a long-term project with a telecommunications firm.

He set up a SIPP five years ago when he went self-employed, using it to consolidate pensions from previous employers. Umbrella companies are legally required to enrol their employees into the workplace pension scheme but the umbrella company Tony works for also let him set up a salary sacrifice arrangement to pay into his SIPP. This diverts some of his gross pay into his SIPP, saving on employee and employer national insurance and income tax.

It’s great they let me do this, I’m about 10 years from retirement so I’m really focused on paying as much as possible into my SIPP.