How pension tax relief works for the self-employed

Saving for retirement can be particularly challenging when you work for yourself. Unlike employees, you aren’t automatically enrolled into a workplace scheme, and you don’t have an employer topping up your pension each month.

Fortunately, the government boosts what you put into a private pension by providing tax relief on your pension contributions.

In this guide, we explain how tax relief works and why it represents a valuable and rare tax break for self-employed individuals.

How does tax relief work on pension contributions?

If you pay into a personal pension or SIPP, your contributions are treated as coming from your post-tax profits.

That means you pay the contributions directly from your own bank account, and the provider then reclaims tax relief from HMRC and adds it to your pot.

• If you contribute £80, the pension provider claims £20 back from HMRC. So, your total contribution becomes £100.
• This 20% uplift applies automatically, even if you don’t fill out a tax return.

If you are a higher-rate (40%) or additional-rate (45%) taxpayer, you can reclaim extra relief via Self Assessment:

• Contribute £8,000 → the pension provider claims £2,000 → your pot is credited with £10,000.
• On your tax return, you can claim another £2,000 if you are a higher-rate taxpayer (or £2,500 if you are additional-rate). That relief does not go into your pension, but it reduces your income tax bill or increases your refund.

This means pensions are a very effective way to save for the future. A contribution of  £10,000 in your pension could have cost you as little as £5,500 net, depending on your tax band.

Annual allowance and contribution limits

For the 2025/26 tax year, the annual allowance is £60,000 or 100% of your trading profits, whichever is lower. So if your profits are £40,000, the most you can normally contribute is £40,000 (gross).

If your profits fluctuate – as they do for most sole traders – you may be able to use the carry forward rule.

This lets you use any unused allowance from the previous three tax years, as long as you were a member of a pension scheme in those years.

Example:

• 2022/23 profits = £15,000 (allowance £60,000, but you only used £15,000).
• 2023/24 profits = £25,000.
• 2024/25 profits = £30,000.
• 2025/26 profits = £70,000.

In 2025/26, you could potentially contribute up to £130,000 gross by carrying forward the unused allowances. However, in practice, cash flow is often the bigger constraint for sole traders.

There is also a tapered annual allowance if your total income exceeds £260,000, but this only affects a a tiny minority of self-employed people, but we’ve included this information for completeness.

What about if you run a limited company?

If you trade through a limited company, pension contributions are typically made by the company itself, rather than by you personally. The company can contribute to your pension directly, and this is usually an allowable business expense, which reduces the company’s Corporation Tax bill.

• A £10,000 company contribution reduces the company’s Corporation Tax liability by £2,500 (at the 25% rate).
• You do not pay income tax or National Insurance on that contribution.

Sole traders cannot do this. As there is no legal separation between you and the business, contributions must come from your personal income after tax.  Tax relief is applied by the system described at the start of the article.

This difference in how tax relief is applied to pensions is one reason why some people consider setting up a limited company once their profits reach a certain level.

Pension vs ISA for the self-employed

An ISA and a pension both offer tax advantages, but they work differently:

• Pensions: upfront tax relief, but withdrawals (apart from 25% tax-free) are taxed as income. Locked away until at least age 55 (57 from 2028).
• ISAs: no upfront relief, but growth and withdrawals are tax-free. Accessible at any time.

For most long-term retirement savings, the tax benefits of pensions make them the more powerful option. But ISAs can provide flexibility alongside a pension.

We explain the trade-offs in detail in our guide: Should you pay into a pension or an ISA if you’re self-employed?

Choosing the right pension as a sole trader

Most sole traders go for either:

• A personal pension from a mainstream provider. You choose a fund from a set list, and the provider manages it.
• A Self-Invested Personal Pension (SIPP), which gives you more investment control – funds, shares, ETFs, or ready-made portfolios.

We have written a simple guide to SIPPs for the self-employed.

If you are starting out, our article on how pensions work if you are a sole trader covers the basics.

What about the State Pension?

Even without significant private pension savings, your State Pension will likely form part of your retirement income.

You need at least 10 qualifying years of National Insurance contributions to get anything, and 35 years for the full rate (£230.25 a week in 2025/26).

It is worth checking your NI record for gaps and filling them if possible.

Key points

• Sole traders pay into pensions personally, with providers claiming 20% relief at source.
• Higher-rate and additional-rate relief is claimed via Self Assessment.
• Annual allowance is £60,000, but limited to 100% of trading profits. Carry forward rules can boost this.
• Directors of limited companies receive relief via company contributions.
• Pensions lock money away but offer big tax advantages over ISAs for long-term saving.