Pensions for Sole Traders: Your Complete 2025/26 Guide

When you work for someone else, your employer has to put money into a pension for you. When you are a sole trader, nobody does that. There is no auto-enrolment, no employer contribution, and no safety net. If you do not sort your own pension out, you could reach retirement with nothing beyond the state pension. This guide covers your options, the tax relief available, and how to get started for the 2025/26 tax year.

Why Sole Traders Need to Act

Employees have had auto-enrolment since 2012. Their employer must contribute at least 3% of qualifying earnings, and the employee adds 5%, for a total minimum of 8%. Over a working lifetime, that builds up to a meaningful pot.

Sole traders get none of that. You are entirely responsible for your own retirement savings. And because self-employed income can be unpredictable — a good month followed by a quiet one — pensions often fall to the bottom of the priority list.

But here is the thing: the tax relief on pension contributions is one of the most generous tax breaks available. Ignoring it means leaving money on the table. Every £80 a basic rate taxpayer puts into a pension becomes £100 after tax relief. For higher rate taxpayers, it is even better.

Your Pension Options

As a sole trader, you have three main options: a SIPP, NEST, or a stakeholder pension. Each works differently.

SIPP (Self-Invested Personal Pension)

A SIPP is a personal pension that gives you control over how your money is invested. You can choose from a wide range of funds, shares, bonds, and other investments. SIPPs are offered by most investment platforms — names like Vanguard, AJ Bell, Hargreaves Lansdown, and Interactive Investor.

Pros:

• Wide choice of investments
• Full control over your portfolio
• Easy to manage online
• Can consolidate old pensions into one place

Cons:

• Annual charges vary (typically 0.15% to 0.45% of the fund value, plus fund charges)
• You need to make investment decisions (though most offer ready-made portfolios)
• Some platforms have inactivity fees or minimum contributions

A SIPP is the most popular choice for sole traders who want flexibility and are comfortable choosing their own investments.

NEST (National Employment Savings Trust)

NEST was set up by the government for auto-enrolment, but self-employed people can also join. It is designed to be simple and low-cost.

Pros:

• Very low annual management charge (0.3%)
• Government-backed and regulated
• Simple fund choices (you pick a retirement date and it adjusts automatically)
• No minimum contribution

Cons:

• Limited investment options compared to a SIPP
• Charges a 1.8% fee on each contribution (so £100 paid in becomes £98.20 invested)
• Less flexibility on withdrawals and transfers
• Basic online platform

NEST works well if you want a no-fuss option and do not want to think about investment choices. The 1.8% contribution charge is a downside, but the low ongoing charge partly offsets it over time.

Stakeholder pensions

Stakeholder pensions have capped charges (no more than 1.5% per year for the first 10 years, then 1%) and accept contributions from £20 upwards. They are less common now that SIPPs have become competitive on charges, but they still exist as a reasonable middle ground.

How Pension Tax Relief Works

This is the part that makes pensions worth doing, even when money is tight.

Relief at source

Most personal pensions and SIPPs use a system called relief at source. You pay money in from your after-tax income, and the pension provider claims basic rate tax relief (20%) from HMRC and adds it to your pot.

So if you want £1,000 to go into your pension, you pay £800 and the provider claims £200 from HMRC. You end up with £1,000 in your pension for an £800 outlay.

Higher and additional rate relief

If you pay Income Tax at the higher rate (40%) or additional rate (45%), you get extra relief, but you have to claim it yourself through your Self Assessment tax return. The extra relief comes as a reduction in your tax bill, not as extra money going into the pension pot.

For a higher rate taxpayer contributing £1,000 (gross) to a pension:

• £200 is claimed by the provider (basic rate relief)
• £200 is claimed on your tax return (extra higher rate relief)
• Total tax relief: £400
• Actual cost to you: £600

That is a 40% return before your investments have even grown. It is hard to find a better deal anywhere.

Contribution Limits for 2025/26

There is a cap on how much you can contribute to pensions and still get tax relief.

Annual allowance

The annual allowance for 2025/26 is £60,000. This is the total amount of pension contributions (from all sources) that benefit from tax relief in a single tax year.

However, your tax-relieved contributions cannot exceed your earnings. If your net self-employed profit is £35,000, you can only get tax relief on contributions up to £35,000, not the full £60,000.

If you have no earnings at all in a year, you can still contribute up to £3,600 gross (£2,880 net) and receive basic rate tax relief.

Carry forward

If you did not use your full annual allowance in the previous three tax years, you can carry forward the unused amount. This is useful if you have a particularly good year and want to make a large contribution. We cover carry forward in more detail in a separate guide.

Lifetime considerations

The lifetime allowance was abolished from April 2024, so there is no longer a cap on the total size of your pension pot. However, there are limits on the amount you can take as a tax-free lump sum, generally capped at £268,275 unless you have a higher protected amount.

Protecting Your State Pension

Your state pension is separate from any private pension you set up. For the 2025/26 tax year, the full new state pension is £230.25 per week (£11,973 per year). To get the full amount, you need 35 qualifying years of National Insurance contributions.

Class 2 National Insurance

As a sole trader, you pay Class 2 NI contributions if your profits are above the small profits threshold (£6,725 for 2025/26). Class 2 contributions are £3.45 per week and count towards your state pension entitlement.

If your profits are below the threshold, you can choose to pay Class 2 voluntarily to protect your state pension record. This is almost always worth doing — £3.45 a week for a qualifying year is an incredibly cheap way to build your state pension entitlement.

Checking your NI record

Check your National Insurance record online at gov.uk. It shows your qualifying years, any gaps, and whether you can fill them with voluntary contributions. Do not leave gaps too long — some become too old to fill.

How Much Should You Contribute?

A common rule of thumb is to save 10-15% of your income for retirement. But the right amount depends on your age, your existing savings, and when you want to stop working.

If you are in your 20s and start early, even small contributions grow significantly over time thanks to compound growth. If you are in your 40s or 50s and starting from scratch, you will need to save more aggressively.

The most important thing is to start. Even £100 a month into a pension is better than nothing. With basic rate tax relief, that £100 only costs you £80. As your business grows, increase the amount.

Practical Steps to Get Started

1. Check your state pension forecast at gov.uk to see where you stand.
2. Decide on a provider. If you want simplicity, NEST is fine. If you want more control, open a SIPP with a low-cost platform.
3. Set up a regular contribution. Even a small direct debit each month builds the habit.
4. Claim your tax relief. Basic rate relief happens automatically with relief at source. Higher rate relief needs to go on your Self Assessment return — do not forget this.
5. Review annually. As your income changes, adjust your contributions. A good year is a chance to put more away.

Keeping Track with Accounted

When you are juggling business expenses, tax deadlines, and variable income, it is easy to lose sight of pension contributions. Accounted helps you track your self-employed income and expenses clearly, so you can see what you can afford to put into a pension each month. Penny, the AI bookkeeper, can also remind you to claim higher rate tax relief on your contributions when Self Assessment time comes around.

If you want a clearer picture of your finances so you can plan for retirement properly, start with Accounted's free trial. It takes the guesswork out of your numbers, so you can make confident decisions about your future.

Related Reading

• Tax Guide for Airbnb Hosts: When Rental Income Becomes Taxable
• Allowable Expenses for Self-Employed: What HMRC Lets You Claim

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