Can you get the State Pension if self-employed?

Self-employed? Wondering what that means for retirement?

Well, we have some good news for you: if you’re self-employed, you’re entitled to the State Pension just like everyone else. Hooray! Here’s everything you need to know about getting that sweet, sweet State Pension if you’re self-employed. But first…

What is the State Pension?

The State Pension is a weekly payment you can get from the government when you hit State Pension age (currently 66, but gradually climbing to 68). That’s right, once you hit State Pension age, the UK government will give you money to help tide you over when you’re old and grey. Get in!

At the moment, the full State Pension is £221.20 per week. We know, we know, it’s not a lot. But the great thing is that you can claim this weekly payment on top of any income you get from your other pensions, like workplace pensions and personal pensions. So, it’s a really nice extra! 

A personal pension is a pension set up and managed by you, rather than an employer, or the government. It’s a type of private pension, just like a workplace pension, and has all the same benefits. The government pension is called a public pension.

Personal pensions are perfect for self-employed people. You’ll get massive tax-free benefits to surcharge your pension savings and retirement income.

If you don’t yet have any other plans for an income when you retire, you might want to think about other ways that you can help support yourself financially when you’re older – such as setting up a personal pension yourself. We’ll tell you more about that in a bit.

Do self-employed people qualify for the State Pension?

If you’re self-employed, you’ll be pleased to hear that you’re still entitled to the State Pension, just like everyone else.

In fact, whether or not you’re self-employed has nothing to do with whether you qualify for the State Pension or not. Instead, anyone can get the State Pension if they’ve made enough National Insurance contributions throughout their working life (National Insurance is a payment you make alongside your taxes to cover things like healthcare).

Most people have to make National Insurance contributions by law, so will have no problem qualifying for the State Pension. However, if you earn very little, you don’t have to pay National Insurance. Which might sound great until you realise that this means you won’t qualify for the State Pension! Here’s the full lowdown.

If you earn more than £184 per week

If you earn more than £184 per week, or you make a profit of at least £6,515 a year, you have to pay National Insurance. This means you’ll be well-placed to qualify for the State Pension when you’re older. Nice!

Just bear in mind that you need to make National Insurance contributions for at least 10 years to qualify for the State Pension at all. But you’ll only get the full £221.20 per week if you make National Insurance contributions for at least 35 years! To check how many qualifying years you’ve worked, you can use the government’s handy State Pension forecast tool, which will check your National Insurance record. (Your National Insurance record is simply how many years you have paid National Insurance for).

If you earn more than £120 per week

Do you earn more than £120 per week but less than £184 per week? Then you fall into a lovely sweet spot when it comes to National Insurance contributions!

You don’t have to pay National Insurance. But your National Insurance record still gets marked as paid. Woohoo!

That means that you get away scot-free – you won’t have to empty your pockets to afford those National Insurance payments but you’ll still be able to qualify for the State Pension. How awesome is that?!

If you earn less than £120 per week

If you earn less than £120 per week then you also don’t have to pay National Insurance contributions. But before you celebrate, there’s some less good news. 

Unlike those who earn more than £120 per week (but less than £184), your National Insurance record will be marked as unpaid. And sadly, too many years of unpaid National Insurance contributions on your record will mean no State Pension when you’re older. Urgh. Seems a bit unfair, doesn’t it?

Luckily, there is a way around it – if you can afford to, you can voluntarily pay National Insurance contributions to make sure you still qualify for the State Pension. We know, we know, paying for something you don’t have to doesn’t exactly sound fun, especially if you’re strapped for cash. But if you’re not overstretching yourself, it’s worth making voluntary contributions. Your older self will thank you for it!

You can also make voluntary contributions for the last 6 years too. So if you know you’ve missed a few years, or think you’ll earn more in future, you could consider paying more now to cover the past few years, or pay more in the future for now. It’s great if you’re self-employed and your income fluctuates year-on-year. Learn more on the GOV.UK website.

Can being self-employed affect the State Pension?

Like we’ve already said, whether or not you’re entitled to the State Pension is to do with your National Insurance records rather than whether or not you’re self-employed. But there are a couple of things that you may need to be aware of if you’re self-employed and you want to make sure you qualify for the State Pension. Here’s the lowdown.

Fluctuating income

One of the great things about being self-employed is being able to work on your own terms. But that can mean your income goes up and down from month to month, and from year to year – unlike an employee, who’ll normally know exactly how much money is going to hit their bank account each month.

So, what does that mean for the State Pension?

Well, nothing bad. Just that you might have some years where you’re legally obliged to pay National Insurance, and others where you fall under the threshold. So, it’s important to keep track of how many qualifying years you have. That way, if you have some years where you don’t legally have to pay National Insurance, you’ll be able to work out whether it’s worth making voluntary contributions.

Remember, you need to have your National Insurance contributions marked as paid for at least 10 years to qualify for the State Pension at all. But if you want to get the full State Pension (that £221.20 per week we were telling you about), you need 35 qualifying years! You can use the government’s State Pension forecast to check how many qualifying years you have under your belt already.

Reducing your salary

There are two main ways of being self-employed. You could be…

1. A sole trader. This is someone who owns and runs their own business as an individual.
2. The partner or director of a limited company. This is someone who owns and runs their own business as a company, either by themselves or with other people.

If you’re a sole trader, all the income you make will normally go directly into your own bank account. However, if you run your business through a limited company, then the money you make will go into your business’ bank account. You can then choose how to pay yourself.

If you’re like most people who run a limited company, then you probably pay yourself a salary and take the rest of your income from the company as dividends (that’s what it’s called when you transfer the profit into your own personal bank account). But why are we telling you all this?

Well, you might well pay yourself a teeny tiny salary so that you can avoid paying National Insurance and save money. That’s what lots of people do. But if this is the case, you’ll just need to be careful that you don’t reduce your salary so much that your National Insurance contributions don’t get marked as paid. 

Remember, there’s a sweet spot where you don’t have to pay it but your contributions still get marked as paid (if you earn more than £120 per week but less than £184 per week). If you pay yourself less than £120 per week, you could risk losing out on the State Pension, which is bad news for your sunset years!

Deferring your State Pension

If you’re self-employed and you love what you do, you might not want to retire at State Pension age. Instead, you might choose to keep working long after every hair on your head has turned grey or fallen out!

Well, guess what? You don’t actually have to retire to start taking your State Pension. That’s right, as long as you hit State Pension age (remember, that’s currently 66 but gradually climbing to 68), you can claim that weekly payment even if you’re still working!

However, if you don’t need the extra cash right now, you can also do something called ‘deferring your State Pension.’ That’s when you put off receiving your State Pension until later on. As long as you defer taking it for at least 9 weeks, your State Pension will increase every week you defer it (exactly how much it increases by will depend on when you reach State Pension age and how long you defer it for). Kerching!

There’s just one thing to bear in mind. What happens to your pension when you die?

Well, you used to be able to pass your extra State Pension onto your loved ones when you died. But if you haven’t yet reached State Pension age, that’s no longer going to be the case. So, if you die before taking it, all that extra cash you build up by not taking your State Pension will sadly go down the drain!

This means that there’s a careful balance to be had when you’re working out when you should start taking it. Of course, if you can gain some extra State Pension by deferring it for a few years then that sounds like a good deal. But don’t wait decades before claiming it or you’re increasing the likelihood of all that extra State Pension you’re building up going to waste. Makes sense, right?!

How to claim your State Pension if you’re self-employed

You might be wondering how you actually get your State Pension if you’re self-employed. Well, the money won’t just magically appear in your bank account once you reach State Pension age. But it’s still almost as easy!

If you qualify for the State Pension, a couple of months before you reach State Pension age, you should receive a letter. This will give you super clear details on how to claim your State Pension.

The quickest and easiest way is to apply online on the GOV.UK website. You just need:

• Your bank account details.
• The date of your most recent marriage, civil partnership or divorce.
• The dates of any time you’ve spent living or working abroad.
• The invitation code from that letter you should have received in the post.

Didn’t get your letter? Don’t worry, you can still claim your State Pension – you’ll just need to request an invitation code on the GOV.UK website.

Want to save more for retirement?

As great as the full State Pension is, don’t forget it’s only £221.20 per week (that’s just £11,502 per year). So, it’s probably not going to be enough for you to live off when you’re older unless you have another source of income to rely on as well. That could be another pension, a savings account (like an ISA, Stocks and Shares ISA, or Lifetime ISA), selling a home or renting out a property.

As a self-employed person, you won’t have an employer to set up a workplace pension scheme for you. So, it’s a great idea to start a pension yourself, known as a personal pension (you’ll also see it referred to as a self-employed pension, but anyone can set one up, including people who are employed). They're also called self-invested personal pensions (SIPPs).

They have massive tax-free benefits, to help you boost your retirement savings. First of all, everything you save inside one is free of Capital Gains Tax, Income Tax and Dividend Tax. So your money will grow much faster.

And even better, you’ll get a massive 25% bonus from the government of any money you save. All added automatically. We’re not joking!

This is to refund any tax you’ve paid on your income (called tax relief), as saving for a pension is intended to be tax free. Pretty great right?

And if you’re a higher rate or additional rate taxpayer, you can claim tax back at those rates too (40% and 45%). It’s easy to do, it’s all via your Self Assessment tax return. 

Anyway, we’d recommend starting a pension as early as possible, and paying as much into it as you can comfortably manage. Remember, the more you put aside for retirement now, the more financially secure you’ll be later on in life.

Setting up a pension is super easy. Here’s how to do it.

Setting up a pension is super easy. Here’s how to do it.

1. Find a pension provider

First things first, you’ll need to choose a pension provider (those are the people who give out and manage pensions). They all offer similar things, but some will spend more time trying to grow your money than others, and some will charge higher fees. So, you’ll need to choose the one that best suits you.

We love the modern pension providers that are on a mission to make saving for retirement even easier. Normally, they have handy mobile apps that let you track your money and watch it grow. And they’re often really cheap too! Here are our favourites.

2. Pick a plan

Next, you’ll need to pick a pension plan, which means choosing how you want your money to be looked after and what you’ll pay for the pleasure. 

Don’t worry, your pension provider will help you to choose the right plan for you. Normally, they’ll do this by just asking you a couple of questions about how old you are and when you want to retire. Easy!

Some providers, like PensionBee and Moneyfarm, have other plans too, like ones that only invest your money in ethical or socially responsible companies. That way, you can save the world at the same time as saving for retirement – what’s not to love about that?!

We’ve also put together a list of the best personal pension providers in the UK.

3. Start saving!

Now you’ve signed up with your pension provider, there’s only one thing left to do – start paying into your pension pot! Most personal pension providers are really flexible and will let you pay in as much or as little as you want. 

Want to make regular payments? You can set up a direct debit so that you automatically pay into your pension each month. Strapped for cash? You can just add small payments into your pension pot every now and then, whenever you have the cash to spare.

We’d recommend paying as much into your pension as you can without overstretching yourself. The more you can put aside for retirement, the more financially secure you’ll be later on. But it’s also important that you leave yourself enough money to live on comfortably now. After all, you won’t be able to get the money back out of your personal pension until you’re at least 55!

Over to you

Hopefully, if you’re self-employed, you’re now feeling very chipper indeed. As long as you make enough National Insurance contributions throughout your working life, you’ll have that lovely State Pension to help tide you over when you’re older. Pass the champagne!

Just remember that as wonderful as the State Pension is, it’s probably not going to be enough for you to live off on its own. So, we’d always recommend starting a personal pension as well. That way, you can take control of your savings and make sure you can live a comfortable life in your sunset years (cruises around the Caribbean, anyone?!).

Not sure where to find a personal pension? Here’s the best pension providers.