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, research suggests the self-employed aren’t doing so well. The Pensions Commission reported in May 2026 that only 17% of self-employed people are currently saving into a pension, falling to just 4% among people who rely entirely on self-employment income.

The good news, if you’re not currently contributing, is that it’s an easy problem to start fixing. 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 as a self-employed person.

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 Retirement Living Standards, a comfortable retirement currently costs around £45,400 a year for one person or £62,700 for a two-person household. These figures do not include rent or mortgage costs. At £241.30 a week, the full new State Pension falls decidedly short.

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

Pension tax benefits

Saving money in a pension fund also has tax benefits.

For personal pension contributions, tax relief is normally available on contributions up to the lower of 100% of your relevant UK earnings or the Annual Allowance. For a sole trader, relevant earnings broadly include taxable trading profits. For a limited company director making personal contributions, salary counts as relevant earnings, but dividend income does not.

Many personal pensions operate on a relief-at-source basis. If you make a gross £30,000 pension contribution as a basic-rate taxpayer, for example, you would normally pay £24,000, and the pension provider would claim £6,000 basic-rate tax relief from HMRC.

Higher-rate taxpayers can usually claim additional relief on the part of their contribution corresponding to income on which they actually paid higher-rate tax. You normally claim this additional relief through Self Assessment or directly from HMRC.

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, the rules are different for employer pension contributions made directly by the company. These are not restricted by the director’s salary in the same way as personal contributions and can generally be deductible for Corporation Tax purposes where they meet the normal business-expense rules, subject to the director’s available pension allowance.

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 and straightforward, requiring minimal input.

A manager will assess your risk appetite, invest your money in line with your risk profile, and monitor your investments to help you achieve the best returns. They’ll also handle tax relief, which they’ll deposit directly into your account.

The main disadvantage is that they’re somewhat inflexible.

Some personal pension providers set minimum contribution levels, although many modern pensions let you change, pause, or make one-off contributions. This flexibility can be useful 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 (SIPPs) 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 level of control only helps 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.

SIPP charges vary considerably between providers. Some charge percentage-based platform fees, others use fixed fees, and there may also be dealing or investment charges depending on what you hold.

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 are 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 can choose 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 equal to half your age when you started your pension. If you started your pension at age 34, for example, 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 you should 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. If you also want money available before retirement, compare pensions and ISAs for the self-employed.

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 personal contributions based on your relevant earnings, and most pension plans will automatically collect basic-rate tax relief for you.

The key thing to remember is that tax relief on your personal contributions is normally limited to 100% of your relevant UK earnings. Separately, your pension savings are also tested against the Annual Allowance.

The Annual Allowance for the 2026/27 tax year remains at £60,000.

So, if your relevant earnings are £30,000, you could normally receive tax relief on up to £30,000 of gross personal pension contributions that year.

If your relevant earnings are £70,000, the standard Annual Allowance would normally limit pension saving to £60,000, after which an annual allowance tax charge may arise.

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, if your contributions were as follows:

• 2023/24: contributed £10,000 (Annual Allowance was £60,000)
• 2024/25: contributed £10,000 (Annual Allowance was £60,000)
• 2025/26: contributed £10,000 (Annual Allowance was £60,000)

This would leave £150,000 of unused Annual Allowance potentially available to carry forward into 2026/27.

However, carry forward does not remove the relevant-earnings limit on tax relief for personal contributions. The amount you can contribute with personal tax relief will still depend on your current-year relevant earnings, as well as your available Annual Allowance. Large contributions are an area where professional advice is particularly worthwhile.

The £60,000 Annual Allowance can also be reduced for high earners. In 2026/27, the tapered Annual Allowance can apply where both:

• Your threshold income exceeds £200,000.
• Your adjusted income exceeds £260,000.

The taper rules are complex, so seek advice if your income is around or above these levels.

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 working all the time.

Winter eventually came round. 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 speaking 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.