As a contract, you may not be able to rely on a workplace pension, but a personal or private pension allows you to choose how, when and how much to contribute. You still benefit from tax relief, investment growth and the option to combine old pots. Whether you’re a sole trader, limited company director or contractor working through an umbrella company, there’s a pension that can work for you.
What’s a contractor pension?
A contractor pension isn’t a specific product, but a broad term for the flexible pension options you can use to save for retirement. As a contractor, there are two main options when it comes to opening a pension:
There are three main ways to contribute to these types of pension:
- from your personal income;
- as an employer contribution from your limited company; and
- through salary sacrifice if you work under an umbrella company.
No matter how you choose to contribute, saving into a pension offers long-term financial security, flexibility and tax benefits.
Why do contractors need their own pension?
If you’re a contractor, you probably don’t have access to a standard workplace pension. And if you’re not saving into a pension, you may struggle to save efficiently for your retirement.
Here’s why setting up your own contractor pension makes sense.
Tax relief gives your savings a boost - most UK taxpayers get tax relief on their pension contributions, which means that the government effectively adds money to your pension pot. Usually basic rate taxpayers get a 25% tax top up so HMRC adds £25 for every £100 you pay into your pension making it £125.
You keep full control - with a private pension, you can choose where your money’s invested and how much to pay in and when.
You can combine old pensions - you can bring together pots from previous roles, so you don’t lose track of any existing savings.
You’re future-proofing your lifestyle - starting to save now can give yourself more options later, whether that’s retiring early or cutting back to part-time work.
Understanding your pension options as a contractor
The right pension for you depends on how you earn your money and run your business.
If you’re a sole trader
With a private pension or a SIPP, you can make direct personal contributions. Basic rate tax relief is added automatically, and higher and additional rate taxpayers can claim additional relief via their Self-Assessment.
If you’re the Director of a limited company
Many contractors choose to contribute to their pension through their limited company. This can be a tax-efficient route, as:
- contributions count as a business expense;
- they can reduce your corporation tax bill; and
- they’re not subject to Income Tax or National Insurance (NI).
If you use an umbrella company
As a contractor working through an umbrella company, you may be auto-enrolled into a workplace pension. However, you must meet the usual criteria. To qualify for Auto-Enrolment you:
- must work in the UK;
- be at least 22 years old and not yet State Pension age (66 rising to 67 from 2028);
- earn more than £10,000 a year; and
- mustn’t already be a member of a suitable workplace pension scheme.
What about IR35?
If your contract falls inside IR35, pension contributions can be a smart way to reduce your taxable income. IR35 is a complex bit of legislation that determines a contractor’s tax liabilities.
While most of your earnings will be taxed through PAYE, pension contributions usually sit outside IR35 rules. This means you can often contribute before tax is applied and still benefit from tax relief.
How tax relief boosts your pension savings
Tax relief is one of the biggest benefits of pension saving. Here’s how it works.
- Basic rate taxpayers - usually get a 25% tax top-up from the government.
- Higher rate and additional rate taxpayers - can claim back even more through their Self-Assessment tax return.
- Limited company contributions - are counted as tax-deductible business expenses.
If you’re not using your full annual allowance - up to 100% of your annual earnings, capped at a maximum of £60,000 (2025/26) - you may also be able to carry forward unused allowance from the past three years.
What happens to your contractor pension at retirement?
When you reach retirement age, thanks to pension freedoms, you can:
- take up to 25% of your pension tax-free;
- withdraw income flexibly to suit your lifestyle; and
- keep working part-time while topping up your pot.
If you’re thinking of withdrawing from your pension and continuing to contribute, your annual allowance will change. Once you start withdrawing, the money purchase annual allowance (MPAA) reduces the amount you can contribute to your pension (while still receiving tax relief) to £10,000 (2025/26).
The flexibility available when accessing pensions is especially useful for contractors, many of whom move into advisory or part-time roles later in life.
What happens when you pass away?
Pensions can be a tax-efficient way to pass on wealth. If you die before age 75, your pension can usually be passed on tax-free. After 75, your loved ones may pay Income Tax when they start taking money from the pot. Currently, pensions are considered to sit outside your estate, which means that when you die your beneficiaries can access your retirement savings without having to pay Inheritance Tax (IHT). However, this position is set to change from April 2027.
Things to consider before setting up a contractor pension
Before you get started, it’s worth thinking about:
- how much you can comfortably afford to contribute;
- your retirement goals and timeframe;
- your attitude to investment risk;
- whether you want to consolidate old pots; and
- how flexible your contributions need to be.
Most pensions let you increase, pause, or change contributions to suit your circumstances, which is helpful if your income tends to go up and down.
If you’re a contractor looking for a simple way to get started with retirement planning, PensionBee offers a curated range of pension plans. With their self-employed pension, you can make flexible contributions, pay one simple annual fee and you have the option to combine any old pensions.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 06-08-2025
