This concise guide provides an overview of umbrella company workplace pension schemes, including information on tax relief and opting in or out of a scheme.
What is a ‘workplace’ pension scheme?
A workplace pension, also known as an occupational or company pension, is set up by an employer for its employees.
Employees typically pay a percentage of their monthly salary into the scheme, while employers usually contribute as well.
Pension contributions are usually eligible for tax relief, making them an attractive way to save for your retirement.
If you work for an umbrella company, your employer is required to provide access to a workplace pension scheme, and most workers are automatically enrolled, unless they opt out.
To be enrolled, you must be a worker with a contract of employment, aged between 22 and the current State Pension age, earn at least £10,000 per year, and usually work in the UK. These criteria will apply to almost all umbrella workers.
Can you opt out of your umbrella’s pension scheme?
If you wish to opt out of the scheme, you must inform your pension provider within one month of your enrolment.
You can still opt out after one month, but may not receive your contributions back until retirement age.
Employers typically re-enroll workers into the scheme every three years.
How do contributions work?
In most automatic enrolment workplace pension schemes, employees and employers make contributions based on the value of qualifying earnings between £6,240 and £50,270 per year (2023/24).
Employers typically contribute 3% while employees contribute 5%, totalling a minimum of 8% of earnings invested in the pension scheme each month.
If you contract through an umbrella company, the 3% employer contribution comes from your assignment rate. Your assignment rate is your gross pay, plus all employment costs.
These employment costs include employers’ NICs, the Apprenticeship Levy, the employer’s pension contribution, the umbrella’s margin, and holiday pay (if accrued).
Tax relief and umbrella pensions
Tax relief on pensions works in two ways, depending on the type of scheme you are a member of.
In a net pay arrangement, tax relief is calculated when contributions are deducted from gross pay.
In a relief at source arrangement, contributions are made after tax is deducted, and tax relief is calculated later by HMRC.
You can contribute more of your earnings to your pension pot, subject to Annual Allowance and Lifetime Allowance limits. ‘Carry Forward’ rules allow you to use Annual Allowances from the three previous tax years if you are eligible.
These limits were significantly increased in the March 2023 Budget. The Annual Allowance limit is now £60,000, and the Lifetime contribution limit is set to be abolished completely from April 2024 onwards.
What about ‘salary sacrifice’ schemes?
A small number of umbrella companies offer ‘salary sacrifice’ schemes, where you forgo some of your gross salary, which is directed into your pension instead.
Salary sacrifice contributions are usually made by the employer and are not subject to Employers’ National Insurance Contributions.
Why investing in a pension makes sense for contractors
Contracting is a rewarding but uncertain career choice, so the younger you are when you start contributing, the better. And when times are good, you might consider putting surplus earnings into your pension pot.
Your private pension income is separate from the State Pension, which provides a maximum of £203.85 per week.
Investing in a private pension makes sense as the state retirement age is gradually increasing from 65 to 68 over the next few decades.
We recommended you seek professional advice before relying on any of the information contained in this article.
