Pensions represent one of the last ‘tax breaks’ available to contractors. They provide the opportunity to reduce your tax liabilities while saving for retirement.
Following significant changes introduced by the government in April 2015, you can decide how and when to draw down your pension income.
This means you can tailor your retirement strategy to your personal needs and lifestyle.
In this guide, we examine the key pension rules and allowances, stakeholder pensions vs SIPPS, how to invest in a pension fund, and your options when you reach retirement age.
What’s in this guide?
- Key pension facts for contractors
- Accessing your pension
- What types of pension are there?
- Pensions for umbrella contractors
- Contractor pension FAQs
- Seek professional advice from our specialist broker
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Key pension facts for contractors
Pensions offer contractors flexibility at retirement, alongside the upfront tax benefits that they receive on their investments today:
Annual Allowance
Each individual has an annual tax relief allowance up to which pension contributions can be made in the tax year.
This is currently set at the higher of £60,000 or 100% of total taxable earnings in the current tax year.
You can make employer contributions up to the £60,000 limit from your own limited company, regardless of the split between salary and dividend income.
Lifetime Allowance
The Lifetime Allowance (LTA) for pension contributions – £1,073,100 during the 2023/4 tax year – was abolished from 6th April 2024 onwards.
Employer vs. Personal Contributions:
Alternatively, you may decide to make personal contributions to your pension.
Under current legislation, higher and additional rate taxpayers benefit from full tax relief at 40% or 45%.
You should talk to a financial adviser to decide whether to make contributions via your company, or personally (out of post-tax income).
Read our comprehensive guide to pension contributions and tax relief for limited company owners.
Carry forward rules
If you want to make a large one-off contribution, you may be able to take advantage of the UK’s carry forward rules, which allow you to use any unused pension Annual Allowance from the previous three tax years in addition to this year’s allowance.
Annual Allowance for recent tax years (standard, non-tapered):
- 2022/23: £40,000
- 2023/24: £60,000
- 2024/25: £60,000
- 2025/26 (current): £60,000
If you didn’t use all of your allowance in the last three years (2022/23–2024/25), you could potentially contribute:
£60k (current) + £60k + £60k + £40k = £220,000
However, to be eligible to use the carry forward rules, you must have been a member of a UK-registered pension scheme in the years in question, but you don’t have to have been an active member during this period.
You can use this handy GOV.UK calculator to work out how much unused allowance you have to carry forward.
Accessing your pension
Pension income can be drawn from the age of 55, as a lump sum or regular income, without restriction, but subject to your marginal rate of income tax.
This minimum age is set to rise to 57 from April 2028 for most schemes, so plan accordingly if you’re under 50.
A Pension Commencement Lump Sum (PCLS), also known as Tax-Free Cash, can be taken from any pension, usually up to a limit of 25% of each withdrawal.
The remaining 75% can be taken as a regular income or as a lump sum and will be subject to income tax at your marginal tax rate. You can choose flexible drawdown, uncrystallised fund pension lump sums (UFPLS), or a mix of both depending on your provider.
The traditional option of purchasing an annuity is still available, and the 25% PCLS can be taken before setting this up.
Annuities provide a guaranteed income for life but have become less popular since the 2015 ‘A day’ pension freedoms were introduced in 2015.
Triviality rules
Under Triviality rules, members of Final Salary schemes whose pension funds are valued under £30,000 can take a lump sum, instead of a regular income. This is only available under certain conditions and must meet HMRC limits at the time of taking benefits.
PCLS is available, and the remainder is subject to marginal income tax.
Death benefits
Upon death under 75, any remaining pension funds can be paid tax-free to beneficiaries as either a lump sum or drawdown pension. If death occurs after age 75, the beneficiary pays income tax at their marginal rate on withdrawals.
Bear in mind that the government has proposed bringing unused pension pots under Inheritance Tax (IHT) from April 2027 onwards.
Pensions for limited company contractors
Most limited company owners contribute to either a stakeholder pension or a SIPP, although you can join the government-run NEST scheme if you’re a sole employee of your company.
Stakeholder pensions
Stakeholder Pensions are suited for contractors and other limited company owners seeking a straightforward and cost-effective approach to pension saving.
Typically, charges are capped at a maximum of 1.5% of the fund value per year, which helps to ensure that fees remain manageable and predictable.
Investment options are somewhat limited compared to Self-Invested Personal Pensions (SIPPs); the provider usually manages pre-selected funds, which means less individual control over specific investments.
Self-invested personal pensions (SIPPs)
If you want access to a broader range of investments and more involvement in your pension planning, a SIPP might suit you. It is a popular choice for contractors.
You have greater control over investment decisions, which can be attractive for knowledgeable investors
ii offers a Which? Recommended SIPP. Unlike many other providers, ii charges a fixed monthly fee rather than a percentage of your pension pot.
You can find out more about SIPPs and the ii scheme here.
Stakeholder vs SIPP – key differences
| Feature | Stakeholder Pension | SIPP |
|---|---|---|
| Charges | Capped at 1.5% (typically lower now) | Flat fees or % of pot (varies by provider) |
| Investment choice | Limited – mostly managed funds | Wide range – shares, ETFs, property, funds |
| Control level | Low – provider manages it | High – self-managed or advised |
| Ease of use | Simple – suitable for hands-off savers | More complex – better for engaged investors |
| Contractor suitability | Good for basic tax-efficient saving | Best if you want investment flexibility |
Pensions for umbrella company contractors
If you’re an umbrella company contractor, your provider will offer you access to their workplace pension via auto-enrolment.
All employers have to offer their employees access to a pension scheme.
This is often the best way to contribute to a pension scheme as an umbrella employee. However, you can opt out if you want to and make your own arrangements.
Read our pensions guide for umbrella company employees.
Can you consolidate old pension pots?
If you’re a contractor, chances are you have at least one workplace pension from an old employer. Many contractors have three or more.
More and more pension providers now offer consolidation services, whereby you transfer your old pensions into one easy-to-manage pot.
Read our guide to consolidating your old pensions.
Contractor pension FAQs
Contractor pensions: always seek professional advice
Most people do not save enough to provide for a comfortable retirement, which may mean that you will have to work longer to support your family and personal needs.
The state pension (currently £230.25 per week) is unlikely to cover even your basic needs.
Investing in a pension is a tax-efficient way to save money, whether through your company (contributions are an allowable business expense) or by taking advantage of tax relief on personal contributions.
Find out more about how pension tax relief works, and compare the pros and cons of personal vs. company contributions here.
Retirement income options are not limited to pensions alone. They can include alternative investments such as ISAs and buy-to-let property, which can be combined to provide a bespoke, tax-efficient retirement strategy.
This guide provides an overview of how pensions work for limited company contractors. For professional advice, we recommend you contact an IFA