Self-employed? How to turn irregular profits into long-term pension savings

Essentials

1. No auto enrolment safety net — you must set up your own pension (personal, stakeholder, or SIPP).

2. Tax relief: personal contributions up to 100% of trading profits (not dividends). The provider adds 20%; higher and additional rate relief is claimed via Self-Assessment.

3. Carry forward: use unused Annual Allowance from the previous 3 years (membership of a scheme required in those years).

4. National Insurance (2025/26):

Class 4: 6% (£12,570–£50,270), then 2% above.
Class 2: generally, not payable above the small profits threshold (credited for State Pension).
Pension contributions do not reduce Class 4 NI.

5. State Pension: usually 10 qualifying years for any entitlement, approximately 35 years for a full pension. Check NI record and consider top-ups.

Case study (illustrative, 2025/26 rules, UK)

Scenario: £60,000 trading profit; contributes £20,000 gross to SIPP (£16,000 net plus £4,000 relief at source).

Tax impact: £20,000 gross extends the basic rate band. Approximately £9,730 is shifted from 40% to 20%, creating ~£1,946 additional relief via Self Assessment.
Net cost: £14,054 for £20,000 pension saving.
NI impact: no change (still based on profits).

Practical tips

Use carry forward to smooth irregular income.
For limited company owners: employer contributions can be deductible for Corporation Tax and are not capped by personal “relevant earnings” (still subject to AA/MPAA/taper).

Important: This is general information, not personal advice. Pension and tax rules can change, and their effects depend on your circumstances. Investments (including pensions) can fall as well as rise in value, so you may get back less than you invest. Consider regulated financial advice before taking action.