Pension contributions for self-employed people in the UK work differently from those for employees, but they can still benefit from tax relief. Here’s a full breakdown using your example.
Assumptions:
- Contributions are made to a private personal pension (SIPP or stakeholder pension).
- The individual is UK resident for tax, not in Scotland (for simplicity).
- The contributions are gross (£10,000), meaning they include basic rate tax relief already.
- Income is before personal allowance and tax.
- We’re looking at 2025/26 tax rules (assumed to be the same as 2024/25 for this example).
How Pension Contributions Work for the Self-Employed
Self-employed people:
- Make contributions net of basic rate tax (i.e. they pay 80% of the gross amount).
- The pension provider claims back 20% tax relief from HMRC and adds it to the pension pot.
- Higher or additional rate relief (if applicable) must be claimed via Self-Assessment.
EXAMPLE 1: Income = £40,000, Contribution = £10,000 (gross)
Step 1: Payment to Pension
- Person pays £8,000 net to their pension provider.
- Pension provider adds £2,000 tax relief (20%) = £10,000 gross contribution goes into the pension.
Step 2: Tax Relief
- This person is a basic rate taxpayer (2025/26 bands):
- Personal Allowance: £12,570
- Basic Rate (20%): £12,571 – £50,270
- Entire income of £40,000 is within basic rate band → no higher-rate relief due.
- No further tax relief needs to be claimed via Self-Assessment.
Outcome:
- £8,000 paid → £10,000 in pension.
- No further tax reclaimed.
- Total cost to individual: £8,000 for £10,000 in pension.
EXAMPLE 2: Income = £60,000, Contribution = £10,000 (gross)
Step 1: Payment to Pension
- Same as above: pays £8,000 net, provider adds £2,000 → £10,000 in pension.
Step 2: Tax Relief
- Tax bands:
- First £12,570: 0% (Personal Allowance)
- Next £37,700: 20% (basic rate) → up to £50,270
- Above £50,270: 40% (higher rate)
- £60,000 income:
- £9,730 of it is in the higher-rate band.
- So part of pension contribution qualifies for higher-rate relief.
Step 3: Claiming Extra Relief
- Already received 20% relief (£2,000 added by provider).
- Can claim extra 20% on higher-rate portion via Self-Assessment.
Calculation of additional relief:
- First £50,270 of income is basic rate – no extra relief.
- Next £9,730 is higher rate → so, £9,730 of the £10,000 contribution can get extra 20% relief:
- £9,730 × 20% = £1,946 extra tax relief.
- This comes back as a tax refund or reduces your tax bill in Self-Assessment.
Outcome:
- £8,000 paid → £10,000 in pension.
- Additional £1,946 refunded or deducted from tax bill.
- Effective cost to individual: £8,000 – £1,946 = £6,054 for £10,000 in pension.
How to Claim Higher-Rate Relief
For self-employed individuals:
- File a Self-Assessment tax return.
- Include your gross pension contributions.
- HMRC adjusts your tax liability and refunds or reduces your bill.