Reaching retirement age can give you more time to try new things, but that doesn’t mean you have to stop working if you’re not yet ready to. Whether you want to supplement your pension by earning extra cash or explore new skills, there are lots of opportunities available – including self-employment.

But what does this mean for your pension and paying tax? We look at what to consider if you’re planning to be your own boss after retiring.

What are the advantages of being self-employed after retirement?

There are all sorts of reasons why you might want to become self-employed after you’ve retired.

Find a new focus

Retirement often opens doors to new interests and hobbies that you just didn’t have time for before. Many retired people find themselves drawn to self-employment as a way of staying active, engaged, and financially independent. Whether it’s consulting in a field of expertise or launching a startup, self-employment can be a great way to explore newfound passions and discover a renewed sense of purpose.

Supplement retirement income

With the cost of living ever rising, you might want to find additional sources of income to supplement your retirement fund.

Get a sense of flexibility and autonomy

One of the most enticing aspects of self-employment is the freedom it gives you. You can pick your own projects and working hours, and work from anywhere. It can be the perfect work/life balance, with plenty of time left to do what you want to do, without the constraints of a traditional job.

Turn hobbies into cash

Whether you really need the cash or not, it can be fun to turn hobbies and interests into profitable ventures. Basically, it’s great to get a kick out of making money from something you love doing! Not only that, but it can also enhance overall wellbeing and satisfaction in retirement.
 

Will my pension be affected if I become self-employed after retiring?

Deciding to work for yourself after you retire won’t affect the pension payments you’re entitled to, but it might affect the amount of tax you pay.

Pensions (including the State Pension) are taxable, so any you receive will be added to your self-employment income to work out how much tax you need to pay. You’ll pay tax on any earnings you receive above the £12,570 tax-free personal allowance.

How much tax will I pay?

The amount of tax you pay depends on how much you earn during the tax year. Self-employed people pay income tax based on the same rates and thresholds as employees, so that won’t change.

Thanks to the Trading Allowance you can receive up to £1,000 of trading or casual income in a tax year and you won’t need to pay tax on it, or even tell HMRC. You’re entitled to the Trading Allowance even if you receive money from other sources, such as wages from an employer or pension payments.

What about National Insurance?

The good news is that you won’t pay National Insurance once you reach State Pension age. If you’re already self-employed, you’ll continue paying Class 4 National Insurance contributions until the end of the tax year in which you reached State Pension age. A tax year runs from 6th April to 5th April.

Before becoming self-employed after retirement, it’s worth thinking about your financial situation and what you’re hoping to achieve. Consider your retirement savings, pensions, benefits, and outgoings. Creating a realistic budget and financial plan will help mitigate risks and make sure you’ve got all financial bases covered.

How do I pay tax if I work for myself after retiring?

Self Assessment is the system HMRC use to collect tax on earnings that haven’t already been taxed elsewhere. If you become a self-employed sole trader and earn more than the Trading Allowance, you’ll need to submit a Self Assessment tax return to tell HMRC about all of the money you earn (from every source).

HMRC will use this information to calculate your tax bill, but you won’t be taxed again on pension income which your provider has already deducted tax on. Your pension provider will issue a P60 end of tax year certificate to show how much tax you’ve paid (if any).

Can I continue making pension contributions?

Some pension providers do allow you to carry on making contributions after retirement age, so it’s worth checking the terms of your policy if this is something you’re interested in.

It could potentially increase your retirement savings, but if you’re drawing from your pension while self-employed, you may need to carefully manage your withdrawals to make sure you balance your income needs against your tax liabilities.

How do I become self-employed?

The route to self-employment involves lots of decisions based on your individual circumstances, so it looks a bit different for everyone. There’s certainly lots of think about! From what kind of business you want to start, to pension and tax implications, it can all be a bit of confusing.

Business mentoring and networking

Organisations like the Federation of Small Businesses (FSB), Business Gateway, and local chambers of commerce offer mentoring programs, networking events, and workshops tailored to aspiring entrepreneurs. Connecting with experienced business mentors and getting yourself out there can help you navigate the road to becoming self-employed.

Government grants and funding

Speaking of funding, retired people who are launching a new business may be eligible for a range of funding options, including government grants, loans, or schemes designed to support startups and small enterprises.

There’s a wide range available for different types of small businesses across the country, so start with the ‘Finance and support for your business’ page of the Gov.uk website.

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