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Five ways self-employed people can increase pensions and lower tax bills

1. Use ‘carry forward’ as much as possible

Most people can contribute up to £ 40,000 to a pension, known as the ‘annual fee’ (including tax credit for the base rate, which is £ 32,000 of your contributions).

If you are self-employed, there may be some years when you cannot pay much in your pension pot, such as when you need to invest in your business. However, if you leave a small (or much) portion of your annual allowance unused, ‘transferring’ can help.

You can use your unused annual deductions from the three previous tax years in any tax year – provided you were a member of a retirement plan at the time. That means you can take advantage of an annual allowance of up to £ 160,000 (if you had income up to this level) by using transfer, including tax credit of up to £ 32,000.

You can use your unused annual deduction from the three previous tax years in any tax year.

An important point of attention here is that if you already have flexible access to your pension, you will be limited by the annual payment purchased in cash.

This lowers your annual allowance from £ 40,000 to £ 4,000 and also removes the ability to transfer unused allowances.

2. Lower your tax bill by putting profits into retirement

If you own a business, you may also consider donating part of your salary as a company contribution directly into your retirement.

The advantage of this is that the pension premium no longer counts as profit, which means you can reduce both your income tax and corporate tax in one fell swoop.

3. It’s not just about pensions …

If you are 18 to 39 years old, self-employed and taxpayer basic rate, Lifetime Isa can offer an attractive alternative to a pension.

You can deposit up to £ 4,000 per year into a Lifetime Isa and this is automatically topped up at 25 percent – identical to the upfront bonus Sipp investors receive through retirement tax credits. You can continue to contribute until your 50th birthday and receive the 25 percent bonus.

You can then withdraw the money tax-free from the age of 60 if you use the money for a first home worth £ 450,000 or less, or if you become terminally ill.

If you access the money for any other reason in 2020/21, you will be subject to a 20 percent government-imposed fine, while it will go back to 25 percent from 2021/22 – meaning you may get back less than you originally contributed.

In comparison, up to 25 percent of the money saved in a pension is available tax-free from age 55, with the rest taxed in the same way as income.

4. Save early and often and keep your costs as low as possible

The best ways to achieve the desired retirement are perhaps the simplest. When it comes to building a decent retirement pot, saving early and often – taking advantage of the available tax credits and letting compound growth work its magic – can make the whole process a lot easier.

Conversely, if you procrastinate, you will have to make greater contributions to make up for lost time.

In addition to how much we pay in pensions and how we invest, the costs we pay are the last important part of determining how much we retire. Even lowering your costs by 0.5 percent per year can add thousands of dollars to the value of your retirement.

Think about combining your old pensions

Modern retirement investment platforms are easy to use and offer a wide variety of investments to suit your needs and risk appetite

Modern retirement investment platforms are easy to use and offer a wide variety of investments to suit your needs and risk appetite

Millions of people, including those now self-employed, have built up a pension over the course of their lives – from an old employer scheme, for example – that they have now lost sight of.

Locating these old pensions and combining them with one provider can bring a number of practical benefits, including:

If you reduce your costs by 0.5 percent per year, you can add thousands of dollars to the value of your pension.

It’s easier to manage all your pensions in one place

You can reduce your costs, especially if you have a retirement pension

Modern platforms are easy to use and offer a wide range of investments to meet your needs and risk appetite

Before transferring any older pensions, it’s worth checking the terms and conditions as some come with valuable guarantees that could be lost.

Others may also face fines that can erode the value of your pension if you leave before a set retirement age.

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