A Small Business and Self-Employed Guide to Pensions

15th May 2019

After years of hard work, at some point, we’ll all want to finally stop working and get out of the day to day grind of being in business.

However, without securing your pension, this future may be out of reach. Whether you choose to retire at home or relocate to another country, you’ll still need a constant source of income to support your retirement.

Pension For Small Business Owners

Considering your day-to-day business operations, small business owners understandably have a full plate and researching and setting up a pension scheme is all too often pushed down the priority list. However, it’s not only your business’ future that you have to secure; you also have to think of yours.

While you’re entitled to the basic State Pension, the amount will not be enough to cover your living expenses by the time you retire. Relying on your savings is also not an ideal setup, as healthcare improvements can allow you to outlive the money you’ve stored during the years you were working.

Tips for Setting Up Your Pension

1. Decide when you want to open your pension pot

Depending on which scheme you choose, you can usually open your pension pot by age 55. However, certain circumstances may push you to open it at an earlier age like falling ill, or if you want to retire earlier than 55 (and are lucky enough to afford to do so).

Consider these situations and whether your pension scheme will give you enough money to live off on. Note that you don’t have to open all your pension pots at the same time; you can also open one, then scale down your business at the same time.

2. Pick the right pension for you

Picking the right pension scheme depends on a number of factors:

  • The kind of lifestyle you want when you retire
  • How much you need to live comfortably
  • How much your investments will grow by the time you retire
  • The fees included in each pension scheme (e.g. annual payments, fees for setting up the plan, bank charges, consultation fees, etc.)

3. Shop around for the best deal

Don’t just pick the first scheme and stick with it. Ask around, consult with a few providers, and compare and contrast each scheme before picking one that will fit your preferences.

4. Use your pension as an exit strategy

If your exit strategy involves selling your company and using that money to finance your retirement, pay a lump sum into your pension before you sell your business. You’ll get a good pension while reducing your capital gains tax this way.

However, note that going beyond your life allowance (the amount of pension you can get from pension schemes, currently at £1,055,000 for 2019/20) will trigger extra tax penalties.

5. Set up a pension mortgage

In this setup, you’ll only pay the interest on your mortgage while also paying your pension. Once your mortgage term has ended, you can then pay off the base mortgage using the money you saved in your pension (which is tax free).

Different Types of Pension Plans for Small Business Owners

There are a number of options available. How much you have to invest will vary, depending on the provider and the services you’ll get. Each payment scheme has their pros and cons, so it’s a matter of choosing which one will give you the best life for your future.

1. EPP

Executive Pension Plans (EPP) are based on contributions and run by a life assurance company. Under this scheme, your employees do not need to pay their National Insurance (NI) contributions. Your contributions are also subject to tax relief limitations, and you have flexibility in terms of payment frequency and amount.

If you have an existing pension scheme, you can transfer it to your EPP.

2. SIPPs

Self-invested Personal Pensions (SIPPs) are similar to personal pensions, as it’s covered by the same tax, eligibility, and contribution rules.

With SIPPs, however, you have more flexibility in terms of investment as long as they are allowed by the HMRC. You can also hire a fund manager or broker to help you out with investment decisions and strategies.

Note that your administration costs can run high, since you need to hire someone for assistance.


Small Self-administered Scheme (SSAS) are trust-based pensions, which will give you the freedom to invest or lend money using your pension pot, while still receiving advantageous tax breaks.

Under this scheme, you can hold up to 5% of your company’s shares, lend up to 50% of your pension to the employer, and borrow up to 50% of your scheme’s assets. You’ll also have unlimited contributions, which are then considered tax deductible.

4. Pension Salary Sacrifice

Under this scheme, your employees will give up a percentage of their salary upfront to go straight into their own pension pots. By doing so, both you and your employees will be exempt from paying NI contributions.

You then have the option to pass on these savings to your employees (as additional pension contributions) or not. The HMRC has an extensive list of non-cash benefits that your employees can get if they participate in salary sacrifice. Note that you employees have the option to not take part in this scheme.

Pensions For Self-Employed Professionals

Self-employment comes with more freedom as opposed to working for another company. However, without an employer, no one will set up your pension scheme for you. This means calculating your investments and tax is an added responsibility on top of finding and maintaining your client base.

Similar to small business owners, you’ll also get a State Pension (if you’re eligible), however the total amount may not be enough to live comfortably after you choose to stop working.

Tips For Pension Saving

1. Know your tax breaks

The government allows a number of business expenses for self-employed professionals to claim. In terms of pension, you have the following tax advantages:

  • Tax relief on your pension contributions up to £40,000 per year or the lower of your annual earnings
  • If you’re in England, Northern Ireland, or Wales and you pay tax at these areas’ higher rate of 40%, you can claim £25 for every £100 that you invest in your pension
  • If you’re in Scotland and you pay tax at the Scottish Intermediate Rate of 21%, you can claim £1.58 for every £100 invested in your pension; meanwhile, if you pay at the Scottish Higher Rate of 41%, then you can claim an additional £26.58

2. Start early

The earlier you start, the more you can contribute and the more your savings will grow.

For instance, if you’re currently 30 and you start your pension pot by contributing £100 at a 5% savings growth per year and 0.75% annual charges, you’ll have £70,000 in your pot by the time you turn 65. That amount will decrease that later you start.

3. Know how much you need to save

The amount you should save for your pension depends on a few factors:

  • How much pension can you afford
  • How much do you want to retire with
  • Your regular bills
  • Other expenses (e.g. entertainment, travel, etc.)
  • Emergency fund (e.g. for house repair, medical bills, etc.)

You can talk about this with your fellow self-employed individuals to get a good idea of what you need to prepare for. You can also use pension calculators that are available online, so you can get a rough estimate.

4. Move pension pots from previous employment

If you were previously employed, you can move your pension pots into your own so you can keep contributing to it (that is, if the scheme is favourable to you).

5. Work with an accountant or bookkeeper

You don’t have to do this on your own. Hire a professional accountant or bookkeeper to help you stay on top of your records, review your expenses, and know how much you can put into your pension.

Different Types of Pension Plans for The Self-Employed

1. Personal Pension Plan

A personal pension plan is the most popular option among self-employed professionals for a number of reasons:

  • You can get a lump sum or annuity (regular income) throughout your retirement
  • You can invest a lump sum or make regular payments until you can open your pot
  • You can get this scheme from a variety of providers (e.g. investment firms, high street banks, insurance companies, and a number of retailers)
  • Your provider will give you annual reports on your investment’s status
  • You can retire between the age of 55 and 75 and take 25% of the total pension tax-free

Of course, you have to do your due diligence and look at previous performance of your pension provider, any fees and penalties, and if you have flexibility as to where you can invest your money.

At retirement, the amount you’ll end up with will depend on how early (or late) you started and how well it was invested by your provider.

2. Stakeholder Pension Scheme

A stakeholder pension scheme is similar to personal pension plans, as you can also get a lump sum or annuity upon retirement. The same providers can also set up this scheme for you.

However, this scheme is a much better fit for moderate earners, those who have an irregular income, or those who want to increase other pension schemes.

This pension is flexible, as there are no penalties involved if you increase or decrease your contributions or if you stop and restart your contributions. You can also transfer this to another pension scheme.

Providers will often charge you 1.5% of your fund each year, and it goes down to 1% after the 10th-year mark.

3. Self-invested Personal Pension Plan

Similar to small business owners, you also have the Self-invested Personal Pension Plan (SIPPs) as an option.

Compared to personal pension plans, you can choose which investment you’d like with SIPP (as allowed by the HMRC). You can also borrow against the value of your funds (up to 50%) if you wish to invest somewhere else at any given time.

Under this scheme, you’ll also be exempt from capital gains tax and can get a tax-free lump sum.


Although it’s a workplace scheme, the National Employment Savings Trust (NEST) can still be used by self-employed professionals. NEST does not have any shareholders or owners; it’s created by the government for employees, as well as for self-employed and sole directors of companies that do not have any employees.

You can sign up with NEST and find out the different schemes available for you. One of the benefits of this scheme is that you can work with a financial advisor to guide you.

Regulated financial services like NEST provide protection to its clients, especially if the product you buy does not suit your lifestyle/preferences or if the provider goes bankrupt.

5. Sharia-compliant Pension

You can also choose to invest in Sharia-compliant funds. These are providers that will invest your funds into companies that are accepted under Sharia law (e.g. no investment for companies that produce alcohol).

Cover Your Bases

When you’re working for yourself, it’s not only the present and the foreseeable future that you should prepare for. Choosing how your life will look upon retirement may sound too far down the road to worry about today. However, any smart entrepreneur knows that covering your bases is key to having a secure long-term future.

To make sure you’re going to get the most out of your hard-earned money once you do decide to retire, get in touch with our professional team here at AK Tax and we’ll go through the options and help you setup the pension scheme that’s best for you.