How do pensions work if you’re a sole trader?

Being a sole trader gives you unlimited freedom. Freedom to set your own hours, pick which projects to work on, and even how much you want to work.

But that freedom comes with responsibility.

There are no paid sick days. No paid holidays. And no workplace pension, either. You’ll need to set one up yourself.

Unfortunately, when it comes to the latter, research suggests the self-employed aren’t doing so well. According to July 2025 government study, only over 3 million self-employed individuals are not currently saving in a pension.

The good news, if you’re one of the 3 million non-contributors, is that it’s an easy problem to fix. Starting a pension is relatively straightforward. And once you’ve opened an account, you can set things up so your savings take care of themselves.

Here’s what you need to know about setting up a pension when you’re self-employed.

Why save into a pension fund?

You should save into a pension fund for two reasons:

• So you can live more comfortably when you retire
• Because it has attractive tax benefits

Safeguarding your retirement

While your National Insurance contributions entitle you to a state pension, this will only get you so far.

According to the Pensions and Lifetime Savings Association, you need around £33,000 a year — or £47,500 a year if you’re a couple — to live comfortably as a pensioner. At £230.25 a week, the current state pension falls decidedly short.

The money you set aside in a pension fund will bridge this gap and make it so you have more money to spend on hobbies and other luxuries that will make your retirement more enjoyable.

Pension tax benefits

Saving money in a pension fund also has tax benefits.

For every £1 you save in a pension fund up to the lower of 100% of your annual earnings — this is your net profit if you’re a sole trader, and your salary and dividend income if you’re a limited company — or £60,000 a year, the government will pay tax back into your pension at your marginal rate. This is the Annual Allowance.

So, if your highest tax rate is 20% and your profit is £30,000, the government will give you 20% of your tax back up to a maximum of £6,000. And if you earn £80,000 and save £40,000, the government will contribute £14,000.

This calculator works out how much tax relief you could get based on your annual earnings.

You can read our guide to pension tax relief for the self-employed here.

If you’re set up as a limited company, contributions to your pension fund that you make through your company up to £60,000 a year are allowable expenses. So, saving into a pension fund can also help lower your corporation tax bill.

We’ll discuss the tax implications of saving into a pension fund shortly.

What’s the best pension for sole traders?

This depends on your personal circumstances and preferences. There are three main types:

• Personal pensions — the most popular type of pension for the self-employed
• Self-invested personal pensions, which require more of your involvement
• Stakeholder pensions, ideal if your business hasn’t taken off yet or you want more flexibility

Personal pensions

A personal pension works the same way as a workplace pension. The only difference is that you set it up yourself.

Once you open an account, you start making regular monthly payments. You can also make one-off payments.

Personal pensions are simple, straightforward, and require minimal input from you.

A manager will assess your appetite for risk, invest your money in line with your risk profile, and monitor your investments to make sure you get the best returns. They’ll also handle tax relief, which will get deposited directly into your account.

The main disadvantage is that they’re somewhat inflexible.

Most personal pensions require a minimum contribution which you’ll have to commit to paying each month. This can be an issue if your income is irregular, for example because the nature of your business means demand is seasonal.

Self-invested personal pensions

As the name suggests, self-invested personal pensions, known as SIPPs for short, are more hands-on.

You can appoint a manager to monitor your investments and make decisions on your behalf. But the main draw is that you get to pick which funds and stocks your money’s invested in.

This high level of control is only an advantage if you’re comfortable picking your own investments. If you’re not sure about what you’re doing, you’re probably better off with a personal pension.

SIPPs also tend to be more expensive, because you pay fees per investment instead of a management fee on your whole portfolio.

Read our simple guide to SIPPs here

Stakeholder pensions

Stakeholder pensions are designed to encourage more people to save for retirement. They’re therefore cheaper, more flexible, and more accessible.

They must meet the following requirements set by the government:

• Fees capped at 1.5% of your pension pot a year for the first 10 years and 1% of your pension pot thereafter. You can also transfer other pensions to a stakeholder pension for free
• A very low minimum contribution of £20 or less. You can also stop or restart contributions whenever you want without having to pay a penalty
• While you have the option of choosing which fund to invest in, you don’t have to. There’s a default investment fund your money is put into if you prefer not to choose

How much should you save into a pension?

The short answer is: as much or as little as you can afford. The more you can save, the more your pension pot will grow.

A good rule of thumb is to save a percentage of your earnings equivalent to half the age you were when you started your pension. So, if you started your pension aged 34, you should save 17% of your earnings each year.

That said, every little helps. It’s better to save £10, if that’s what you can afford, than to save nothing at all.

Here are some tips to help you maximise your pension savings:

• Start as early as possible. And yes, if you don’t have a pension plan this means look into starting one today
• Be as consistent as you can. It’s better to save £50 a month than £200 every six months
• Pay into your pension by direct debit, so you can set it and forget it
• Review your contributions regularly and increase them as your income grows

Read more about how much you need to save to meet your pension goals.

What’s the most tax-efficient way to pay your pension?

If you’re a sole trader, there’s only one way to pay into your pension. You make contributions from your net profit, and most pension plans will automatically collect tax relief for you.

The key thing to remember is that you can’t pay more into your pension than 100% of your net profits, or £60,000 a year – whichever is lower.

This is known as the Annual Allowance, and for the 2025/26 tax year, it remains at £60,000.

So, if your net profits are £30,000, your maximum contribution that year is £30,000. If your profits are £70,000, your contribution is capped at £60,000. Any pension payments above that limit won’t attract tax relief – and may even be taxed at your marginal rate.

That said, if you’ve contributed less than the Annual Allowance in the past, you can usually carry forward unused amounts from the previous three tax years, as long as you were a member of a pension scheme during those years.

For example, suppose your earnings and contributions looked like this:

• 2022/23: Earned £50,000 – contributed £10,000 (Annual Allowance was £40,000)
• 2023/24: Earned £50,000 – contributed £10,000 (Annual Allowance was £60,000)
• 2024/25: Earned £50,000 – contributed £10,000 (Annual Allowance was £60,000)

This gives you £130,000 in unused allowance you can carry forward into 2025/26.

If your profits are high enough, you could pay up to £190,000 into your pension in 2025/26 – that’s your full £60,000 Annual Allowance for the current year, plus the £130,000 carried forward – and still benefit from tax relief.

It’s also worth noting that the £60,000 (Annual Allowance) limit will decrease if:

• Your ‘adjusted income’ – your taxable income plus your pension contributions, including tax relief – exceeds £260,000 a year
• Your ‘threshold income’ – your adjusted income less pension contributions – exceeds £200,000 a year

Don’t let retirement creep up on you

There’s an old fable about a cricket and an ant.

The ant worked hard all summer, gathering food for the coming winter.

But the cricket spent the whole time relaxing, singing, and laughing at the ant for spending all its time working.

Well, winter did come round, eventually. And while the ant had enough food to tide it over until the next summer, the cricket ended up with nothing.

As humans, we’re wired to prefer instant gratification over long-term goals.

Why set money aside to spend two decades down the line, when you could spend it on stuff that’ll make you happy today? Right?

But just as winter eventually came and spelt trouble for the cricket, two decades will pass too. And when they do, you’ll want to enjoy the new chapter to the fullest.

So make sure you’re prepared.

Open a pension and start saving something today.

Introducing the ii SIPP

• ByteStart has partnered with Interactive Investor, a Which? Recommended Self Invested Pension Provider (SIPP) provider.
• With the ii SIPP, you pay a simple flat fee, not a percentage fee.
• You can also use the ii SIPP to combine any other pensions you may have and manage everything in one place via their website or user-friendly app.
• You can find out more here.

We recommend that you speak with a pension specialist who can provide personalised advice tailored to your specific circumstances and needs. The information on our site should not be used as a substitute for professional advice.