Pension Contributions

Personal pension contributions offer a tax efficient way of saving for the future. In essence, the contributions you make to a pension scheme are tax-free and the value of the pension fund grows, also free of tax. This is a very tax efficient way of saving for your retirement.

As a sole trader you only need to focus on personal pension contributions and not consider the rules regarding occupational pension schemes.

Annual Allowance

The total of all contributions (either personal, company or third party) that can be contributed within each tax-year is limited by an “annual allowance”. For the 2018/19 tax-year this is £40,000. If you have unused annual allowances for the previous three years you are able to use these should you wish to contribute more than £40,000 in any one tax year.

The annual allowance is reduced by £1 for every £2 of income over £150,000, including relievable contributions, to a minimum of £10,000. Sometimes it’s possible to keep paying  in after you take money out of a pension pot - but you may have to pay tax on contributions over £4,000 a year. That’s because your annual allowance drops to £4,000 for all defined contribution schemes you’re in. It drops in the first full tax year after you take money from your pension pot. The lower allowance is called the ‘money purchase annual allowance’. You cannot top it up with unused allowance from previous years.

It is possible to pay more than the annual allowance but there is a tax charge on the excess contribution. This is payable by the individual whose pension the money went into, irrespective of who made the contribution. It is not recommended that you pay more than the annual allowance each year.

Lifetime Allowance

This is the total amount that an individual can hold within pension funds in their lifetime. For the 2018/19  tax-year,  this is £1,030,000.

It is important to keep an eye on funding if you feel you may potentially reach the lifetime limit.

In addition to the allowances detailed above, contributions into a personal pension scheme are limited by your net relevant earnings for the tax-year. Net relevant earnings are broadly speaking the profits you make from your sole trader business (plus any other earnings you may have had in the year e.g. employment income).

Within each tax year, up to 100% of the net relevant earnings (NRE) can be made and receive tax relief. 

You should note that if you pay in to your pension more than your NRE, the overpaid contributions will be refunded to you. This can happen automatically  through the pension provider, when HMRC notify them that there is a mis-match of earnings against relief claimed. Alternatively, you can contact your pension provider directly, advising that you have overpaid and they will arrange a refund of the net overpaid contributions.

Tax Relief

Personal pension contributions are normally made net of basic rate tax. Higher rate tax relief can be claimed through your self-assessment tax return.

If there are no relevant earnings a gross amount of £3,600 can still be contributed and receive tax relief. More than 100% of NRE can be contributed but no tax relief will be given.

Ignoring any other income sources, you can personally contribute a gross amount equal to your net relevant earnings (business profits and/or salary) and obtain tax relief at your highest rate(s).

Other issues

The personal pension contributions are invested within the pension scheme and profits are accumulated free of tax. While you are able to take a proportion of the pension fund tax-free when you retire, the income paid out to you on retirement will be subject to Income Tax.

If you wish to consider pension planning further, please contact Brookson Financial on 0345 058 1280 or email [email protected].

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income will depend on the size of the fund at retirement, future interest rates and tax legislation.

For more information on Brookson Financial and its range of financial services for freelancers, contractors and self-employed professionals, visit, or call them today on 0345 058 1280.

The guidance provided on this page is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. Brookson Financial Limited is authorised and regulated by the Financial Conduct Authority. Brookson Financial Limited is entered on the Financial Services Register ( under reference 179752 Registered in England and Wales under reference 03186438, Registered Office: 320 Firecrest Court, Centre Park Warrington, WA1 1RG.
© 2018 Brookson Financial All rights reserved.

Get in touch

Please select your type of enquiry:

Brookson on Twitter

Brookson is an APSCo Affiliate Member
Self-Employed / CIS Accredited Member
Limited Company Accredited Member
Umbrella Accredited Member
Brookson is a REC business partner
Brookson has achieved ISO27001 for information security management