Last updated: August 2026 | Tax year 2026/27
“Self-employed” covers two quite different legal setups — trading as a sole trader, or trading through your own limited company — and the difference matters more for pensions than almost anywhere else in your finances. The rules aren’t just administratively different; the mechanics of what you can contribute, and how much tax relief you actually get, genuinely diverge.
This is general information, not personal advice — your own numbers will determine which position you’re in, and it’s worth running them past an accountant, particularly if you’re deciding whether incorporating makes sense partly for this reason.
The core difference: what counts as “relevant earnings”
Personal pension contributions only attract tax relief up to 100% of your relevant UK earnings — this rule is the same for everyone, but what counts as relevant earnings depends entirely on how you trade.
As a sole trader, relevant earnings are your taxable trading profit — broadly, what you report as profit on your Self Assessment return. If your profit is £45,000, your tax-relievable pension contributions are capped at £45,000, regardless of the £60,000 annual allowance.
As a limited company director, relevant earnings are your salary only — dividends don’t count at all. Most owner-directors deliberately keep salary low (often around the £12,570 personal allowance threshold) and take the rest as dividends for tax efficiency. That means personal pension contributions are capped by a much smaller number than a sole trader with equivalent take-home income would face.
On the surface, that looks like a disadvantage for company directors. It isn’t — because directors have a second route sole traders don’t.
The route only a limited company gives you
A limited company can make employer pension contributions directly into a director’s pension, and — as covered in the previous piece in this series — that route isn’t capped by salary at all. The company can contribute up to the full £60,000 annual allowance on a director’s behalf even if their salary is only £12,570, provided company profits support it.
A sole trader has no equivalent. There’s no separate legal entity to make an “employer” contribution on their behalf — there’s just the individual and their trading profit. Every pension contribution a sole trader makes is a personal one, capped by that year’s profit, and — unlike a limited company’s employer contributions — sole trader pension contributions aren’t treated as a deductible business expense; they reduce your income tax bill through the personal relief system instead, not by lowering your assessable trading profit.
Working through the practical difference
Take two people earning the equivalent of £70,000 a year:
- Sole trader, £70,000 trading profit: relevant earnings are £70,000, so pension contributions up to £60,000 (the annual allowance itself, since it’s lower than earnings) attract full relief. Contributions come from post-tax-position income and reduce the amount taxed at higher rates through Self Assessment.
- Company director, £12,570 salary + remainder as dividends: relevant earnings for personal contributions are only £12,570 — a personal SIPP contribution beyond that gets no relief. But the company can make an employer contribution of up to £60,000 directly, as a business expense, without the salary cap applying, saving Corporation Tax and avoiding National Insurance in the process.
In this comparison, the director’s route is arguably more efficient overall — Corporation Tax relief plus no NI, versus income tax relief alone for the sole trader — but it depends on the company actually having the profit to support the contribution, and on being comfortable with money leaving the business rather than being retained or extracted another way.
What’s the same either way
A few rules apply identically regardless of structure:
- The £60,000 annual allowance is the ceiling either way — it’s just what counts toward it, and how it’s capped, that differs.
- Carry forward works the same for both: unused allowance from the previous three tax years can be added to the current year, provided you were a member of a registered pension scheme in those years.
- The £3,600 gross floor applies to everyone — even with little or no relevant earnings, you can contribute £2,880 net and still receive basic-rate relief, taking the gross contribution to £3,600.
- Neither has auto-enrolment. Employees get a workplace pension by default; sole traders and directors of their own one-person company do not, which is precisely why this is a decision that has to be made deliberately rather than defaulted into.
Does this change whether you should incorporate?
Pension efficiency alone is rarely a strong enough reason to incorporate a sole trader business, or stay as one — there are bigger factors at play (liability, administration, how profits are actually used, IR35 exposure for some trades). But for anyone already weighing up incorporation, or already trading through a limited company without realising the employer-contribution route exists, it’s a genuinely material factor worth putting real numbers against rather than leaving on the table.
Once you’ve settled on a structure, the next question is usually how to split what you take out between salary, dividends, and pension contributions — covered in detail separately.
This article is for general information only and does not constitute financial or tax advice. Tax rules can change, and how they apply depends on your individual circumstances. Speak to a qualified accountant or FCA-regulated financial adviser before making decisions about business structure or pension contributions. Where a product or provider is mentioned on this site, we may earn a commission — see our [editorial policy] for details.