5 big tax breaks the self-employed miss out on

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Entrepreneurs and freelancers are often meticulous about making sure their business runs as tax-efficiently as possible. And yet hundreds of thousands of them miss out on valuable tax breaks when it comes to their personal finances.

Our own Fidelity analysis found that self-employed workers get just 2p in every £1 of pensions tax relief - even though they make up one in every eight workers. The remaining 98p goes straight into the pockets (well, pensions) of employees.

By making themselves aware of these valuable tax perks, self-employed workers can keep a greater share of their profits while creating a bedrock of financial security for the future.

Here are five major tax-saving opportunities many entrepreneurs overlook - plus how to make the most of them.

• Get our updates on markets, ISA funds, pension saving and much more

1. For every 80p put into a pension, the government will add at least 20p

Pension tax relief is one of the most generous incentives available to the self-employed. When you contribute to a pension, the government effectively refunds the income tax you’ve already paid.

• Basic-rate taxpayers get 20% tax relief: Pay in £100, and it only costs you £80. HM Revenue & Customs (HMRC) automatically adds £20.
• Higher-rate taxpayers get 40% tax relief: You can claim back an extra £20 via your tax return, meaning £100 of pension savings could cost you just £60.
• Additional-rate taxpayers get 45% tax relief: You can claim back an extra £25 via your tax return, meaning £100 of pension savings could cost you just £55.

This is one of the most effective ways to reduce your tax bill if you're self-employed, and it’s available whether you’re a sole trader or a company director.

2. Pension contributions reduce your taxable profits if you have a limited company

Limited company directors can pay into their pension via their company and, because these contributions count as a business expense, they can reduce your corporation tax bill.

For example: you run a limited company and earn £50,000 in profit before tax. You decide to contribute £10,000 of that into a director’s pension. Without the pension contribution, your taxable profits would be £50,000 resulting in a corporation tax bill (at 25%) of £12,500.

With the £10,000 pension contribution, your profit is now £40,000, resulting in a corporation tax bill (at 25%) of £10,000. The pension contribution has reduced your tax bill by £2,500.

This government-approved method allows you to pay yourself while reducing your tax liability. If your company (i.e. the employer) is paying into your pension, you don’t get income tax relief, as outlined above, on top of that.

You could have the company pay into your pension to benefit from corporation tax relief and then pay into the pension yourself out of your personal income to benefit from income tax relief.

In most cases, company contributions are more tax-efficient, because:

• They reduce corporation tax.
• They don’t require you to take money out of the company (so no income tax or dividend tax).
• You avoid paying employer and employee National Insurance.

3. Your pension pot grows free of income and capital gains tax

Unlike savings in a standard account, your pension investments grow in a tax-sheltered environment. That means:

• No tax on dividends
• No tax on interest
• No capital gains tax

This makes pensions one of the most tax-efficient vehicles out there. Over time, investment growth in a tax-free wrapper can significantly boost your retirement pot, especially if you start early.

Savings in an ISA can also grow tax-free. For information on whether it’s better to save into an ISA or pension when you’re self-employed, check out the following article:

• Read: Pension, ISA or property for the self-employed: which is better?

4. You can carry forward unused tax relief for up to three years

For most self-employed people, their income can fluctuate significantly from year to year - making this a very helpful rule. You can usually contribute up to £60,000 per year into a pension and use any unused pension allowance from the past three tax years to make larger contributions now. That means you could potentially put up to £180,000 into your pension if you qualify.

This is ideal for freelancers or business owners who had lean years and now want to catch up while still benefitting from tax relief.

You cannot carry forward unused allowances from any tax year where you were not a member of at least one UK registered pension scheme, or a qualifying overseas pension scheme.

5. No National Insurance on pension contributions

If you run a limited company, making pension contributions directly from the business can be significantly more tax-efficient than paying yourself a salary and then contributing personally.

When your company pays into your pension, it avoids both:

• Employer National Insurance (15%)
• Employee National Insurance (around 8%)

That’s a combined saving of more than 20%.

Bonus self-employed tax saving tip: pension contributions can preserve other tax allowances

Large pension contributions can reduce your adjusted net income, helping you to:

• Restore your personal tax allowance if you earn £100,000–£125,140.
• Avoid the child benefit tax charge (which starts when you earn £60,000 or more)
• Retain eligibility for the Marriage Allowance or other means-tested benefits

In short, pensions aren’t just about retirement: they’re one of the most versatile tools to reduce your tax bill if you're self-employed.

Check out our other articles in this series:

• Read: I’m self-employed - how much should I save for retirement?
• Read: Pension, ISA or property for the self-employed: which is better?
• Read: Best investments for a self-employed pension - whatever your age