As a contractor, you can benefit from significant tax breaks on pension investment whilst providing a nest egg for your retirement.
Umbrella company employees
You can invest a portion of your contract income – or even the majority of it – and reduce both income tax and national insurance deductions by using a salary sacrifice (or salary exchange) arrangement.
This is a popular option for contractors who operate via an umbrella company, as the umbrella can often invest part of your income directly into a pension before it becomes taxable salary.
Because contributions are made before tax and NIC are calculated, you will often save significantly more than if you made personal pension contributions from your bank account.
That is because you avoid both Employee and Employer National Insurance on the sacrificed amount.
Here is a worked example for 2025/26:
On a £40,000 umbrella salary, sacrificing £10,000 into a pension could save around £2,000 in income tax and £800 in employee NIC.
If the umbrella passes on the full 15% employer NIC saving, that’s an additional £1,500 uplift into your pension.
Total potential benefit: £4,300 – a 43% uplift on your £10,000 contribution.
However, not all umbrella companies offer full salary sacrifice, and some may retain part of the employer’s NIC savings or charge administrative fees (e.g., £5–£10 per week). Always check how the arrangement works in practice.
There are also some important rules and caveats:
Your gross pay after sacrifice must remain above the National Minimum Wage – otherwise, the arrangement may be invalid.
Reducing your gross salary could impact your mortgage affordability, statutory payments, or state benefit entitlements.
Once processed, a salary sacrifice agreement cannot usually be reversed for that pay period, so plan carefully.
Some umbrellas default to workplace schemes (e.g. NEST), but others allow contributions into your own SIPP. This can offer better investment flexibility, though fees may apply.
As a contractor, you need a pension that is as flexible as your working life. That means being able to adjust contributions as contracts come and go.
If your umbrella provides access to a workplace pension, check how easily you can change contribution levels or opt in and out. If you are unsure, a contractor-savvy IFA should be able to review the scheme and help you plan accordingly.
Are you a limited company contractor?
If you run your own limited company, you also have access to generous pension tax relief – but salary sacrifice does not usually apply. Instead, the company itself can make employer contributions.
Company pension contributions can be paid directly from your business bank account and are treated as an allowable business expense. This reduces your Corporation Tax bill and offers a tax-efficient way to extract profits from the company.
You do not have to pay income tax or NIC on employer contributions, and you are not limited by your personal salary – just the overall Annual Allowance.
For the 2025/26 tax year, the standard Annual Allowance is £60,000. You may be able to contribute more using the carry forward rules if you have not used your full allowance in previous years.
However, if you earn over a certain threshold, your Annual Allowance may be tapered.
If you are aged 55 or over (rising to 57 from 2028), you can usually access 25% of your pension pot as a tax-free lump sum – making company contributions an attractive way to build long-term wealth with short-term flexibility.
You can also make personal contributions, but these are capped at 100% of your salary.
For many contractors who take a low salary for tax efficiency, this route can be more limiting, which is why employer contributions are often preferred.
Most pensions allow you to choose how your funds are invested, ranging from cautious to high-growth options, giving you control over your retirement planning.
A specialist independent financial adviser (IFA) can help you choose the right provider and investment strategy to match your goals, risk tolerance and contract income.
Please use this article as a guide only. You should seek professional advice when evaluating your pension options.
