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

While there is no hard cap on how much you can pay into a self employed pension each year, there are limits on the amount of tax relief you'll receive.

In this article, we'll break down each of the key limits that affect paying into a pension when self employed

How much can I pay into my self employed pension?

Strictly speaking, there are no maximum (or minimum) limits on how much you can add to your pension. There are however limits on how much you can pay in while still benefitting from tax relief.

The two limits you need to be aware of are:

  • annual pension allowance
  • lifetime pension allowance

Annual allowance

Each tax year, you can contribute up to £40,000 or 100% of your total annual income into your pension to claim the 25% tax bonus. This applies across all of your pensions, not each pot separately.

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 your income is £40,000 or higher, then £32,000 is the maximum amount you’re allowed to contribute into your pension a year - as you'll also be receiving an £8,000 tax top-up. 

You won't be charged anything if you go above this cap, but you will have to get in touch with HMRC to pay back any tax relief you claimed on the excess. This will be charged at your standard tax rate.

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

Yes. Although, if you're not earning any employment income such as wages, bonus, overtime or taxable commission, the maximum you can contribute into your pension each year is £2,880.

You'll still receive the government's 25% tax relief on this contribution - giving you a £720 tax bonus for a total £3,600 in your pension pot.

It is possible to receive employer pension contributions on top of this to bring you up to the £40,000 cap. Again, it’s important to be mindful that your total pot from personal contributions, employer contributions and tax relief does 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. This means you can go over your annual allowance and still receive tax relief on your contributions, up to a maximum of £120,000 (if you or your employer haven't paid into a pension at all for the last 3 tax years).

Backdating pension contributions is relatively straightforward, as long as you have had a pension open for the entire period - but there is a catch.

You still won't be able to go above the annual allowance - 100% of your earnings for the year. It's usually best to speak to a financial adviser to assess what unused allowance you might have before making any decisions.

Need help getting started with your pension? Check out our article on setting up a self employed pension.

What about high earners?

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 - up to a maximum reduction of £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 the maximum you can contribute into your pension is £4,000 a year.

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What happens if you go above the annual allowance?

If you exceed your annual pension allowance, you’ll be liable for an ‘annual allowance charge’. This is essentially a tax charge owed 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 unused allowance from previous tax years. 

Lifetime allowance

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’.

Currently, this lifetime allowance is £1,073,100 as of 2020/21. Again, those who surpass the 'lifetime allowance' will face a tax charge on the excess.

How much should I be paying into my pension?

One of the most important questions when it comes to pensions is how much you should save. While it does vary hugely by the individual, a good rule of thumb is to take your age and half it. Add this number as a percentage of your pre-tax income to your pension every month to help set you up for a happy future.

If you're unsure about how much you should be saving into your pension, check out our article on how much to save. Alternatively, visit our pension calculator to see how much you should be saving today to set you up for a comfortable retirement.

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