Half of self-employed DON'T save in a pension - so should you invest?

Almost half of self-employed workers are not paying into a pension each month, a new study suggests.

Just 51 per cent put money into their pension each month, while three in four save regularly into cash accounts, the survey by Workwell and the Association of Independent Professionals and the Self-Employed (IPSE) found.

It means scores of people who work for themselves could be missing out on tax relief on their savings. That's because the Government adds a percentage onto anything you save. And they could even be paying tax twice on their investment.

If you're a basic rate taxpayer, the Government adds 20% to whatever amount you pay into your pension. So a £100 contribution becomes £125 in your pot.

Financial advisor Lucy Goodwyn, who shares tips to reduce your tax bill on Instagram and Facebook, told NimbleFins: "Being self-employed means it’s likely your income will fluctuate from year to year, and it can be a challenge to save on a regular basis. This can mean that many people do not see a pension as a priority.

"But a pension is the most tax-efficient vehicle available to UK savers because the Government typically adds relief to your contributions. This boost essentially increases the value of every pound you pay into a pension."

As a self-employed worker, putting money into a pension reduces the profits you make, which can be the difference between paying basic rate tax or higher rate. Depending on the circumstances, it could also potentially reduce your taxable income by:

  • Helping you hold on to your personal allowance, which is slowly withdrawn once you earn more than £100,000.
  • Bringing your income down below the additional-rate tax band, which starts at £125,140.
  • Help you hold on to your Child Benefit, which is gradually withdrawn if one parent in the household earns more than £50,000.

Cash savings accounts can also leave investors paying tax twice - first in income tax and then on any interest made over the threshold.

NimbleFins previously reported how millions were expected to pay tax on their savings income after interest rates rose.

For those with a small, or no pension pot, Lucy Goodwyn still encourages investing.

She added: "It’s never too late.

"No two people have exactly the same income, savings, assets and family set-up, so pensions are a very personal thing. Not maximising pension contributions may seem like a good option given current cost pressures, but could have long-term implications and you’ll miss out on the tax benefits.

"How much you pay in now is a choice that could significantly impact your standard of living later in life, when you have fewer other options open to you.

"Given those longer-term consequences, it’s worth asking yourself if not prioritising your pension contributions is the best way to balance your short-term needs with your long-term plans."

Cons of saving into a pension

While there are many pros to saving into a private pension, one drawback is you can only access the money once you hit 55-years-old, and this will rise to 57 in 2028.

Ms Goodwyn said: “A pension is a long-term investment vehicle.”

Other investment options for self-employed people

Ms Goodwyn suggests considering ISAs as well as pensions to make use of tax-free saving.

She said: "Using pensions and ISAs together can help you save for the future as well as reduce your tax liability, contributing to overall financial wellness.

"The end of the tax year is an ideal time to take stock and ensure you’re making your money work as hard as possible, especially given the reductions in tax reliefs and allowances coming in 2024/5.

"How much you pay into your pension depends on your earnings and the tax bracket you fall into, so it is best to get financial advice to plan for your lifestyle now, and in retirement."

NimbleFins provides general information about how pensions work, not individual advice. Please contact a qualified financial advisor to discuss your personal financial situation.

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Helen Barnett

Helen is a journalist, editor and copywriter with 15 years' experience writing across print and digital publications. She previously edited the Daily Express website and has won awards as a reporter. Read more here.