What the self-employed should know about their CPF contributions

In Singapore, more than 276,000 Self-Employed Persons (SEPs) had made CPF contributions totalling S$760.6 million, according to CPF’s 2023 Annual Report. 

Under the Self-Employed Scheme, self-employed individuals in Singapore have to fulfill several CPF contributions-related obligations. In this article, we will cover the following:

1. The two CPF contribution schemes specific to the self-employed
2. Why you should make CPF contributions
3. Considerations before making a voluntary contribution

Understanding CPF contributions for self-employed individuals and freelancers

Unlike salaried employees, self-employed individuals do not have employers contributing to their CPF accounts. However, under the CPF Act, self-employed persons earning more than $6,000 in Net Trade Income (NTI) are legally required to contribute to their MediSave Account (MA), while other contributions, such as to the CPF Ordinary Account (OA) and Special Account (SA), remain voluntary. 

Failure to contribute to MediSave can result in legal consequences, including fines of up to $5,000, imprisonment, or both for first-time offenders, as well as restrictions on registering or renewing business licenses with ACRA.

Two CPF contribution schemes specific to the self-employed

1. Mandatory contributions into your MediSave Account (MA)
2. Voluntary CPF contributions

Mandatory MediSave contributions

The Government mandates that all self-employed personnel have to contribute to their MediSave Account as long as they earn more than $6,000 in NTI for the year. For many self-employed people, this means they will have to contribute as much as their employed peers.

MediSave contribution rates and calculations for self-employed individuals:

Here are the calculations for the CPF MA mandatory contributions based on two examples:

Example 1:

Age: 30 years old, NTI: $60,000, CPF MA mandatory contribution rate: 8%

CPF MA mandatory contribution = NTI * Contribution rate

= $60,000 * 8%

= $4,800

Example 2: 

Age: 45 years old, NTI: $70,000, CPF MA mandatory contribution rate: 10%

CPF MA mandatory contribution = NTI * Contribution rate

= $70,000 * 10%

= $7,000

The principle behind this policy is that if you were to make a reasonable salary ($18,000 per annum, or $1,500 a month), you will have to contribute as much into your own MediSave as your peers who are employees, so that you squirrel away a sum of money for your own Integrated Shield Plan Premiums and any healthcare costs that you may incur.

Want the quickest way to find out your payable amount? Simply use CPF’s Self-Employed MediSave Contribution Calculator.

Benefits of mandatory MediSave contributions:

One key advantage of mandatory MediSave contributions is the healthcare subsidies and support it provides. Contributions to MediSave ensure you have sufficient funds to cover medical expenses, including hospitalisation, surgery, and premiums for Integrated Shield Plans. 

Additionally, MediSave contributions enable you to benefit from healthcare schemes such as MediShield Life, which offers comprehensive coverage for large hospital bills. This not only protects you in emergencies but also helps you avoid significant out-of-pocket costs in the future.

Voluntary CPF contributions 

Any voluntary CPF contributions made to CPF by the self-employed have to be allocated across all 3 CPF accounts (OA, SA and MA). The allocation ratios are the same as for employed CPF members.

Source: CPF, accurate as of 31 October 2024. 

Here are two scenarios. 

1. A 25-year-old self-employed person decides to top up $10,000 through voluntary CPF contributions. 
2. An employed person is earning a gross salary of $27,027, resulting in a total CPF contribution of $10,000 (37% of $27,027) from both the employee and employer.

The breakdown of the CPF contributions will be the same for either scenario:

CPF OA: ~$6,217

CPF SA: ~$1,621

CPF MA: ~$2,160

Benefits of voluntary CPF Contributions:

Voluntary CPF contributions allow you to build up your savings for housing, retirement, and medical costs—mirroring the benefits enjoyed by salaried employees. 

Earning annual interest of at least 2.5%, your OA can be used for housing schemes, such as financing your mortgage, while your SA accumulates savings for retirement at about 4% interest p.a. Additionally, voluntary contributions grant tax relief, enabling you to lower your taxable income and thus reduce the amount of taxes owed.

Now, let us move on to why the self-employed should or should not make a voluntary contribution.

Why should the self-employed contribute to CPF?

1. You get to save on taxes

You can get tax relief based on the MediSave and voluntary CPF contributions that you make, but capped at the lowest of:

• 37% of your NTI assessed; or
• CPF annual limit of $37,740; or
• The actual amount contributed by you.

Assuming that you are making a salary of $102,000 in net trade income in the year of assessment, assuming no tax reliefs on this amount, you will be paying around $5,880 in taxes. However, if you were to contribute the maximum CPF voluntary amount, which is 37%*$102,000 = $37,740, then your taxable income would be reduced to $64,260 and you will be paying around $2,248 in taxes, less than half of what you would have paid if you did not do any CPF contributions. One way to look at the tax savings is that you save $3,632 for the $37,740 contribution, saving you 9.6% with the CPF contribution. That is on top of the other benefits stated below.

2. You can get higher interest rates on the CPF monies compared to bank rates

The monies in CPF yield an attractive interest rate relative to bank interest rates. Also, for the first $60,000 in your CPF monies (with up to $20,000 from the OA), you will get an additional 1% interest for your CPF monies. That means you get 3.5% p.a. to 5.08% p.a. interest, compared to as low as 0.05% p.a. interest that bank accounts give.

3. You will use the monies for housing, retirement, medical or investment purposes anyway.

Most self-employed people have the same housing, retirement and medical needs as their employed peers, wanting to own a house, save up for retirement, and pay for their Integrated Shield Plan Premiums. It should not matter whether they do it with cash, or with CPF monies.

From that perspective, it makes more sense to do a voluntary contribution into your own CPF since the monies can be used for housing, retirement, medical and investment purposes regardless. You even get to enjoy tax relief and higher interest rates in the process! As the monies contributed is on a voluntary basis, the self-employed CPF member can have full control of the amount contributed.

4. Your CPF monies will be safe from debtors.

As a business owner, you may be taking significant personal liability in your work and could be sued for Liquidated Damages. Thankfully, any savings in the CPF are protected from creditors and/or the Official Assignee, regardless of how much you may have been sued for.

You will still be able to apply for the withdrawal of your CPF savings as an undischarged bankrupt when you turn 55 or under medical grounds. Putting money into your CPF is a great way to protect your retirement money from the risk of your own business.

Considerations before making a voluntary contribution

1. You could face liquidity concerns

When you have transferred money into your CPF, you cannot reverse the decision. For CPF OA and SA monies, the earliest you can withdraw it in cash is when you reach 55, and there are certain restrictions tied to it. Any transfer to CPF MA cannot be reversed, you can only use the MediSave funds.

If you plan to contribute to your CPF accounts, be very sure that you are using money that you do not need in the short or mid-term. You may want to make sure that you have your emergency funds in place, and be comfortable with the stability of your income before you commit to putting cash into your CPF.

2. Your ability to capitalise on business opportunities is reduced

Being a business owner and managing your business' finances may mean that you have opportunities to invest in equipment and working capital to grow your business more. Some of these opportunities may sporadically present itself. If you feel that these opportunities can yield high returns then you may want to reconsider topping up your CPF.

In conclusion

The volatility of the employment market and economy as a whole may be scary to business owners and the self-employed, but the need to plan for retirement remains. We believe that CPF and CPF LIFE have many benefits such as keeping our money safe and saving on taxes. In these uncertain times, it is more important than ever to take deliberate steps toward our financial planning so that we get the best value for our money. 

Frequently Asked Questions (FAQs)

Do self-employed persons need to contribute to CPF?

Yes, if you are self-employed and earn more than S$6,000 in net trade income (NTI), you are required to contribute to your MA. Contributions to other CPF accounts (OA and SA) are voluntary but can be beneficial for retirement savings.

How do self-employed individuals contribute to CPF?

Self-employed individuals contribute to CPF first through their MA. This can be done electronically through the e-CPF portal or by setting up GIRO for a seamless process. The required contribution is based on your NTI, and voluntary contributions to other CPF accounts are also possible. 

How much should I contribute to CPF as a self-employed person?

The required contribution to MediSave is determined by your NTI and age, starting at 4% for NTIs over S$6,000. Voluntary contributions to OA and SA are encouraged for those planning for retirement, as they offer additional savings opportunities.

What is the minimum CPF contribution for self-employed individuals?

The minimum contribution to MediSave is 4% of your NTI for those earning above S$6,000. This percentage increases depending on your income and age, with higher rates applying to older age groups.

What is a composition offer for self-employed individuals?

A composition offer is a settlement option provided to self-employed individuals who have defaulted on MediSave contributions. It allows them to resolve their outstanding payments by paying a reduced fine or penalty, thus avoiding legal action.