When you work for yourself, one of the biggest financial choices is where to save. Most people weigh up a pension against an ISA. They are both useful, but for different jobs.
A pension provides tax relief on the way in and is designed for retirement purposes. An ISA provides clean, penalty-free access at any time, making it suitable for both short-term and medium-term needs.
This isn’t just a personal finance question. As we reported in New report calls for HMRC nudges to boost self-employed pensions and Government relaunches Pensions Commission as millions of self-employed fall behind, policymakers know that too few self-employed people are saving enough.
If you’re worried that you haven’t started saving for your retirement yet, our guide It’s never too late to start saving for a pension is a good place to start.
Pensions vs ISAs – the main differences
| Feature | Pension (SIPP or personal pension) | ISA (Cash or Stocks & Shares) |
|---|---|---|
| Tax relief on contributions | Yes. Relief up to your earnings and within the annual allowance. Basic rate added at source. Higher and additional rate may be claimed via Self Assessment (HMRC). | No tax relief when you pay in. Growth and withdrawals are tax free (GOV.UK ISA guide). |
| Tax on growth and withdrawals | Growth tax free inside the pension. From access age you can usually take 25% tax free, with the rest taxed as income (HMRC). | Growth and withdrawals are tax free. No income or capital gains tax inside an ISA. |
| Access | Not normally before age 55, rising to 57 in April 2028 (policy note). | Anytime. If your ISA is “flexible,” you can withdraw and replace money in the same tax year. |
| Annual limits | Annual allowance of £60,000 for most people, subject to tapering and the money purchase annual allowance if triggered (HMRC). | ISA allowance £20,000 per tax year across all ISAs combined. |
| Best use case | Long-term retirement saving with strong tax advantages. | Accessible buffer and medium-term goals without tax complexity. |
Worked examples
Jane – steady income, basic rate taxpayer. Jane runs a design business earning £40,000. She pays £200 a month into a pension. Thanks to tax relief, it only costs her £160. Over 25 years, with growth, she could build a pot comfortably above £150,000. If she put the same £200 into an ISA, she would still build savings, but without the tax top-up her final pot would be noticeably smaller.
Sam – irregular earnings, needs flexibility. Sam is a photographer whose income fluctuates significantly. He keeps £12,000 in a Stocks & Shares ISA, giving him a cushion for tax bills and quieter months. When he completes a large commission, he puts £3,000 into a pension. This mix means he has accessible savings plus long-term funds locked away for retirement.
Amira – consultant on higher rate tax. Amira earns £90,000. She contributes £500 a month to a SIPP. With higher rate relief claimed through Self Assessment, her net cost is just £300. Over time, this difference could add up to hundreds of thousands compared with using only an ISA. She still uses an ISA for short-term savings, but her pension is the primary source of retirement savings.
How to combine both, in practice
1. Set a pension baseline. Even modest regular contributions matter. For many self-employed people, a popular option is a SIPP, which gives flexibility over providers and investments. Our main guide – how do pensions work if you’re a sole trader – explains the mechanics, and our simple guide to SIPPs covers how they work in practice.
2. Build an ISA safety net. Aim for three to six months of essential costs in an ISA, so you are not tempted to raid your pension. Stocks & Shares ISAs can suit longer buffers. Cash ISAs suit very short-term needs.
3. Use lump sums in a smart way. If you have an excellent quarter or secure a one-off contract, think about dividing the money. Putting some into your ISA gives you a safety buffer you can reach if needed, while paying some into your pension secures the available tax relief for the long term.
ii SIPP — from £5.99/month
A Which? Recommended pension option for the self-employed — simple, flexible, and low-cost.
4. Review each year. As profits rise, consider increasing pension contributions within your annual allowance. If you start flexible drawdown in the future, watch out for the money purchase annual allowance.
Key rules to know
- Tax relief on contributions. You can claim tax relief up to 100% of your relevant UK earnings, within the annual allowance. Basic rate relief is added automatically if your scheme uses relief at source. Higher and additional rate relief must be claimed through the Self Assessment process.
- Annual allowance. The standard limit is £60,000 a year. If you earn over £260,000, your allowance may be tapered down. If you have already flexibly accessed a pension, the money purchase annual allowance reduces contributions to £10,000 a year.
- Access age. You cannot usually take money out before age 55. This rises to 57 on 6 April 2028. There are very limited exceptions, for example serious ill health.
- ISA allowance. You can save up to £20,000 each tax year across all your ISAs combined. Flexible ISAs allow you to take money out and replace it within the same tax year without losing allowance.
- Tax-free pension cash. When you access your pension, you can normally take 25% of the pot tax free. The maximum is capped at £268,275 unless you have individual protection. The rest is taxed as income when withdrawn.
Find out more about SIPPs and ISAs
If you’re looking for a provider that offers both SIPPs and ISAs in one place, take a look at interactive investor. Their platform is popular with self-employed savers who want the flexibility to manage pension and ISA investments side by side.
FAQs
Is a pension or an ISA better for retirement? For long-term savings, pensions usually win due to tax relief. ISAs win on flexibility. Many self-employed people use both.
Can I move ISA money into a pension? There is no direct transfer, but you can withdraw ISA savings and contribute them into a pension, subject to your allowance and earnings.
How do I claim higher rate relief? If your scheme uses relief at source, you must claim the extra relief through Self Assessment.
What about a Lifetime ISA? A LISA can help first-time buyers and those saving for later life. It has limits and penalties if used for other purposes.
What is the money purchase annual allowance? After you begin drawing a taxable income from your pension, the amount you can put back in and still receive tax relief is usually restricted to £10,000 a year.
This article is intended as general information only and shouldn’t be taken as personal advice. The rules on pensions and ISAs can change, and the way they affect you will depend on your own situation. If you’re unsure, check the latest official guidance or talk to a regulated financial adviser.