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 usually make a contribution too.
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. This has been the law since 2018.
In fact, most workers are automatically enrolled, unless they decide to 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 will be able to help you do this.
You can still opt out after one month, however you might not get your contributions back. You will typically have to wait until you reach retirement age to access any funds you have contributed.
If you want to opt in again later, simply get in touch with your pension provider. Your provider may not permit you to rejoin if you have opted out within the previous 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 (2022/23)
- your employer pays 3%
- you pay 5%
Together, this means that a minimum of 8% of your earnings are invested into 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, in order 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 (2023/4).
- If your adjusted income + pension contributions equal £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.
- There is also a Lifetime Allowance (LTA) of £1,073,100 (2023/4). Due to recent changes, you will no longer be charged for withdrawals if your pension fund is worth more than this amount. The LTA will be abolished for the 2024/25 tax year.
- ‘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 some of your gross salary, which is directed into your pension instead.
Unlike the method used to contribute to a pension outlined above, salary sacrifice contributions are usually made by the employer (in this case, the umbrella), rather than 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. 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 £203.85 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 gradually rising from 65 to 68 over the next couple of decades.
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.