Extraction sequencing in the run-up
Freelancers approaching state pension age (66-67 depending on birth year) face different tax questions than earlier-career freelancers. Extraction sequencing (pension vs company retained profit vs personal savings), the interaction of state pension with other income, and the timing of ceasing to trade all become important. This guide covers the specific decisions in the last 5-10 years of freelance work.
Extraction sequencing in the run-up
Working principle: extract from the least tax-efficient wrappers first, preserve the most tax-efficient for last.
Order of extraction (later-life): 1. Personal cash savings (already taxed). 2. Non-ISA investments (some CGT via annual allowance). 3. ISAs (tax-free, but preserves tax-shield for as long as possible). 4. Pension (25% tax-free lump sum, rest taxed as income). 5. Ltd company retained profit (converts to dividends taxed at your income-band rate).
Drawing the pension while still trading can push total income into a higher band. Often better to run down other sources first and draw the pension later — but this depends heavily on your specific income mix.
State pension and its tax interaction
State pension is taxable income but not paid net of tax — it comes gross. If your total income exceeds the personal allowance, you'll owe tax on it via PAYE (if you have other PAYE income) or Self Assessment.
Current full state pension: £11,502/year (as of April 2024). It sits under the £12,570 personal allowance by itself — but combined with £5k of freelance income + £3k of dividends, you'll owe tax on the excess. Freelancers often continue trading past state pension age; the pension just adds to the taxable base.
Ceasing to trade — the mechanics
Sole trader: notify HMRC that you've stopped self-employment. File a final Self Assessment covering the period to cessation. Any losses in the final year can be carried back against prior-year profits (loss relief on cessation).
Ltd company: decide between striking off (dissolution) via DS01 form (~£33, requires no significant assets/activity), Members' Voluntary Liquidation (MVL — more expensive but often more tax-efficient if the company has £25k+ of distributable reserves — extraction as capital rather than dividends), or leaving dormant.
MVL with BADR (Business Asset Disposal Relief) can extract the accumulated retained profit at 10% rather than dividend rates of 33-39%. The tax saving on £100k+ of retained profit can exceed £20,000.
Worked example
Simon runs a Ltd, plans to stop trading at 67. Current year (age 63): £70k profit, extracts efficiently as salary+dividend. Ages 64-66: reduces workload, extracts £40k/year while retaining some profit inside the company. At age 67: ceases trading. Company has £120k retained profit + £30k cash. Option A — extract as dividends over 2 years: £150k over 2 years = ~£47k dividend tax total. Option B — MVL with BADR: £150k treated as capital disposal, 10% CGT (BADR) = £15,000 tax. Saves £32,000. He engages an insolvency practitioner (~£2,500 fee) to run the MVL. Net saving after fee: ~£29,500.
Reference table
| Situation | Retirement-relevant lever | Typical saving |
|---|---|---|
| Ltd with £50k+ retained profit at cessation | MVL + BADR | £10-30k |
| Approaching state pension age | Delay pension drawdown | Depends on other income |
| Losses in final trading year | Carry-back to prior years | Refund of prior tax paid |
| Ltd + spouse both directors | Spouse's separate BADR cap | Up to £100k additional |
| Sole trader with capital equipment | Balancing allowance on disposal | Depends on kit value |
Approaching retirement — freelance planning checklist
- Model total income at state pension age including pension + drawdown + freelance
- Consider MVL vs dividend extraction for Ltd retained profit
- Confirm BADR eligibility if MVL route taken
- Time state pension deferral if it pushes you into higher-rate income
- Coordinate ISA + pension drawdown across multiple tax years
- Review will and shareholder agreements before ceasing to trade
- Notify HMRC / Companies House at correct point in the cessation timeline
Yes — no upper age limit. You may pay less NI (Class 4 stops at state pension age) but still pay income tax as normal on freelance profit. State pension is added to your taxable income.
Members' Voluntary Liquidation is a solvent wind-up. Retained profit is distributed as a capital disposal rather than dividend, potentially qualifying for BADR (10% CGT) instead of dividend tax rates (up to 39.35%). Best for £25k+ retained profit.
Deferring earns you 1% extra per 9 weeks (roughly 5.8%/year). Worth doing if you'd otherwise be taxed on the pension at higher rate. Break-even is ~17 years — deferral pays off if you expect to live long past the state pension age.
Yes — if you meet the criteria: 2+ years as director, 5%+ shareholding, trading company. MVL is one of the standard routes to trigger the BADR claim.
Pension pots are generally outside your estate for IHT (up to the lifetime allowance considerations that were in place; check current rules). Beneficiary nominations matter — update them alongside your will.
Sources & official references
Related on FreelanceToolkit UK
This guide is general information based on UK rules for the 2025/26 tax year. It is not personal tax or legal advice. For decisions affecting your tax position or legal exposure, consult a qualified accountant or solicitor.