In this guide, we explore how umbrella company pensions work, what tax relief is available, and what to look out for when joining a workplace pension scheme.
What is a workplace (occupational) pension scheme?
A ‘workplace’, ‘occupational’, or ‘company’ pension is simply a pension scheme which is set up by an employer for its employees.
Employees pay a percentage of their monthly pay into the scheme, and employers typically make a contribution as well.
Pension contributions are usually eligible for tax relief, making them an attractive way to save for your retirement.
How do you join a workplace pension scheme?
Your umbrella company is like any other employer.
All employers must provide their employees with access to a company pension scheme. Automatic enrolment was introduced under the Pensions Act 2008, with the final staging for small employers completed in 2018.
Most workers are automatically enrolled unless they opt out.
Your employer must enrol you if all of the following conditions apply:
- you’re a worker with a contract of employment. This includes umbrella employees. You can read the official guidance here.
- you’re aged between 22 and the current State Pension age.
- you earn £10,000 or more per year.
- you usually work in the UK.
Many umbrella companies use the Government’s own NEST scheme.
Can you opt out of your umbrella’s pension scheme?
You can opt out of the scheme by telling your pension provider within one month of your enrolment, and any money you have contributed will be returned. Your umbrella can help you do this.
You can still opt out after one month, but you may not receive a refund of your contributions. You typically must wait until retirement age to access any funds you have contributed.
If you want to opt in again later, please contact your pension provider. Your provider may not allow you to rejoin if you opted out within the past 12 months.
Employers will typically re-enrol you into the workplace pension scheme every three years.
How much will I contribute to my pension?
In most automatic enrolment workplace pension schemes, both you (the employee) and the umbrella (the employer) make contributions based on the value of your total qualifying earnings between £6,240 and £50,270 per year (2025/26).
These thresholds are reviewed periodically by the Government.
- your employer pays 3%
- you pay 5%
Together, this means that at least 8% of your earnings is invested in your pension scheme each month.
Bear in mind that if you work through an umbrella company, the 3% employer contribution comes from your assignment rate.
The assignment rate for your contract work includes all employment costs, such as employers’ NICs, the Apprenticeship Levy, the 3% employers’ pension contribution, the umbrella’s margin, and holiday pay (if accrued).
These costs are deducted first to calculate your gross contract rate.
How does tax relief work on pensions?
There are generally two ways that tax relief works on pensions. It depends on the type of scheme you are invested in.
- Net pay arrangement – this is when tax relief is calculated when you make contributions, i.e. when contributions are deducted from your gross pay, before tax. This is the most commonly used method for workplace pensions. This means that you get tax relief on the value of your contributions at your highest rate of tax. And typically, this is all managed automatically, so you don’t need to contact HMRC or fill in a self assessment tax return.
- Relief at source arrangement – this is when contributions to a pension scheme are made after tax has been deducted. The value of any tax relief is calculated at a later date by HMRC.
Can you make extra contributions to your pension?
You can contribute more of your earnings to your pension pot if you want to.
Bear in mind that there are limits to the amount of tax relief you can claim, subject to:
- An Annual Allowance of £60,000 (2025/26).
- If your threshold income exceeds £200,000 and your adjusted income (including pension contributions) is £260,000 or more per year, the Annual Allowance is tapered. It is reduced by £1 per £2 earned above this threshold, subject to a minimum Allowance of £10,000.
- The Lifetime Allowance (LTA) tax charge was abolished from 6 April 2024. However, there are now separate limits for tax-free lump sums and lump sum death benefits, which are tested against the relevant allowances. You can read more in HMRC’s pensions tax guidance here.
- ‘Carry Forward’ rules allow you to use the Annual Allowances from the three previous tax years if you are eligible.
As with all things pension-related, we recommend you speak to a professional tax adviser if you have any questions about pensions and tax relief.
What about Salary Sacrifice schemes?
A small number of umbrella companies operate ‘salary sacrifice’ schemes, which may be particularly attractive if you want to make additional contributions to your pension pot.
Under salary sacrifice, you forgo part of your gross salary and have it directed into your pension instead.
Unlike the method outlined above for contributing to a pension, salary sacrifice contributions are usually made by the employer (in this case, the umbrella) rather than by the employee.
In other words, the contributions are made from the gross funds received by the umbrella company, and therefore, the contributions are not subject to Employers’ National Insurance Contributions.
How will an umbrella company pension affect the State Pension?
With private pensions, you can draw down 25% of your pension pot tax-free from the age of 55 onwards (rising to 57 from 6 April 2028 for most people).
How you receive your ongoing pension income at retirement depends on a multitude of factors, including when you decide to stop working.
So, how does your private pension income affect your entitlement to the State Pension?
The State Pension is completely separate from any workplace pensions you might have. Given that the State Pension provides a mere £230.25 per week if you are eligible for the full amount, this is unlikely to be enough to live on.
The state retirement age keeps on increasing too. It is currently 66 and is set to rise to 67 between 2026 and 2028, with further increases planned beyond that.
This is why investing in a private pension makes sense.
Please always seek professional advice before relying on any of the information contained within this article.
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