How much can I pay into a pension when I'm self employed?

The maximum amount you can save each year and get tax relief on these contributions is called the annual allowance.

The annual allowance maximum is £40,000 a year spread across all of your pensions, not just one pension. This £40,000 includes any tax relief from the government as well. If you make any payments into your pension that exceed this amount, you will have to pay a tax charge at your average tax rate.

There is also a maximum amount that you can pay into your pension and receive the government’s tax relief upon these contributions. There’s two different maximums, depending on whether you’re earning or if you’re not.

Self-Employed Pensions

How much can I pay into my pension and get tax relief?

There are limits on how much you can pay into your pension and get tax relief on these payments. Including the government's 25% tax relief contribution, you can contribute your total annual income within the tax year into your pension. For example, if you earned £30,000 a year, you can pay £22,500 into your pension, and receive the government's 25% tax relief contribution of £7,500, to make the total annual earning amount of £30,000.

If you pay in more than what you earned within that year you will not be tax charged (up to £40,000), but you will have to get in touch with HMRC to return the tax relief that we claim on your behalf.

However, if your income is £40,000 and above, then £32,000 is the maximum amount you’re allowed to contribute into your pension a year that receives an £8,000 tax top-up. 

Therefore, whatever you earn a month you can put into your account on a monthly basis, but this cannot accumulate to an amount that exceeds £40,000 by the end of the year, including the government’s tax top-ups. 

Can I still pay in and get tax relief, even if I’m not earning?

Yes. Although, if you're not earning any UK relevant earnings (employment income such as pay, wages, bonus, overtime & commission that is taxable), then the maximum you can contribute into your pension each year is a total of £2,880. This contribution will receive the government's 25% tax relief of £720 to make a total £3,600 contribution into your pension.

It is possible to receive employer pension contributions on top of this to bring you up to the £40,000 cap. But again, it’s important to be mindful that your contributions, the tax relief added by the government and any employer contributions do not exceed £40,000.

Can I pay in more if I’ve not contributed before?

You can usually carry forward unused annual allowance from the previous three years. It is best to speak to a financial adviser to assess what unused allowance you might have. 

When is the annual allowance reduced?

If your adjusted income (your income plus pension contributions) is over £240,000 you will receive a reduced allowance. For every £2 of income you earn above £240,000, your annual pension tax relief reduces by £1. The maximum reduction is £30,000. This means anyone earning over £210,000 will have their annual allowance capped at £10,000. 

Once you’ve started to take benefits from your pension, you will trigger the Money Purchase annual allowance which means you can contribute a maximum of £4,000 into your pension a year.

What happens if you pay in more than the £40,000 limit?

If you exceed the limit, you’ll be liable for something called an ‘annual allowance charge’ which represents the tax due on any amount over the contribution limit.

It might be possible for your pension provider to pay the charge from your pension benefits. In some situations, you might be able to reduce the charge by using any of your unused allowance from previous tax years. 

How much can I pay in over my lifetime?

There is also a maximum amount you can put in pension savings (across all the plans you might have) during your lifetime. This is handily called the ‘Lifetime Allowance’. Those who surpass the 'lifetime allowance' (£1,073,100 as of 2020/21) will face a tax charge.

How much should I be paying into my pension?

If you're unsure about how much you should be saving into your pension, visit our calculator to input your income and see how much you should be saving today to set you up for a retirement pot that is relevant to your earnings today.

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