Guide to Umbrella Company Pensions

Everything you need to know about Umbrella Company pensions

Workplace pension explained

Every UK employee is legally required to enroll their employees onto a workplace pension scheme. This means that employees can save for their retirement.

The schemes work by taking a percentage of an employee's pay and putting it into a pension pot.

All employers must automatically enroll their staff onto a workplace pension scheme if they meet the following criteria:

Therefore, as an umbrella company contractor, if the above applies to you then you will qualify for a workplace pension.

How does an umbrella company pension work?

When you start working with the umbrella company, they will auto-enroll you onto a pension scheme.

Once you have been enrolled, you will be sent relevant information relating to the pension scheme such as who the pension is with and other key information.

The umbrella company payslip you will receive will also outline how much you pay in pension contributions so you always know how much you are paying in.

Typically, umbrella company employees pay a contribution of 5% of their salary and the umbrella company will pay the employer's contribution of 3%.

Although it is compulsory that the contractor is enrolled onto the scheme, if a contractor wishes to opt out of the pension scheme then they can do this by contacting the pension provider directly. It is worth noting that contractors have to pay the first month of pension contributions, after which they can leave at any time.

If you do decide to opt out, but then wish to re-join the scheme in the future you can choose to do so at any time.

Salary sacrifice

Some umbrella companies allow salary sacrifice pension contributions which is a way for contractors to contribute more to their pension in a tax-efficient way.

This allows contractors to voluntarily give up a part of their salary which is instead paid into their pension. As the money you are putting into your pension is deducted before tax is applied, the contractor will pay less in tax and National Insurance contributions.

Is there a lifetime allowance?

Yes – the lifetime allowance refers to the maximum amount someone can save up during the lifetime before a tax charge is applied.

For the tax year 2021 – 2022 the lifetime allowance stands at £1,073,100.

What about an annual allowance?

As well as a lifetime allowance, there is also an annual allowance of how much you can accrue each year.

For the current tax year, the current annual allowance is £40,000 which includes both your own and employer’s contributions.

When can I access my umbrella company pension?

Once contractors reach the age of 55 they will be able to access their pension pot. This age is set to increase to 58 in 2028.

Currently, at age 55 contractors can take up to 25% of their workplace pension fund tax-free.

If you take out more funds and go over the 25% threshold then this will be treated as taxable income.

What are the benefits of umbrella company pensions?

There are many benefits to taking advantage of your umbrella company pension scheme.

Firstly, everything that goes in to your pension pot is being saved for the future, meaning you can have a comfortable retirement when the time comes.

What’s more, there are benefits to paying your pension contributions through the umbrella company rather than directly out of your bank account.

This is because of the salary sacrifice scheme we have already touched, which can lead to tax savings for umbrella company contractors.

After all, a contractor’s pension contributions are taken before tax and National Insurance are calculated, meaning you will get tax relief on your pension payments.

As well as paying into the pension scheme they are enrolled into, umbrella company contractors are also free to pay into any private pensions schemes if they choose. They can do this instead or as well as paying into the umbrella company pension scheme.

Finally, umbrella company contractors benefit from receiving umbrella employer contributions of 3% too.

Limited company contractors, on the other hand, will not receive employer pension contributions, meaning they have to take their pension contributions directly out of their fee. What's more, they are not auto-enrolled on a pension scheme. For this reason, many of these contractors forget or don't find the time to set themselves up with a pension scheme. Finally, these contractors can't take advantage of the salary sacrifice scheme and subsequent tax relief.

Next steps – find an umbrella company that’s right for you

As well as receiving an umbrella company pension, there are also many other benefits to working through an umbrella company. Umbrella company contractors receive a salary, their tax and National Insurance contributions are calculated for them and taken off their pay, they qualify for statutory rights such as holiday and sick pay, they are covered with the correct levels of contractor insurance and the umbrella company takes care of all their admin and paperwork for them.

If, like many other contractors across the country, you have decided that going umbrella is the best move for you, the next step is to find the best provider for your needs.

Thankfully, Umbrella Supermarket make this quick and easy to do.

Simply head over to our umbrella company calculator, enter a few key details and hit go. In just 60 seconds we will generate a list of the best-suited umbrella companies for your needs.

To give it a go for yourself today head over to our contractor calculator to take the next steps in your contracting career.

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