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Pension Provision for Umbrella Company Employees

Umbrella Company

The state pension will only cover your basic needs when you retire and it’s safe to say that everyone wants to have a comfortable and enjoyable retirement, so additional pension provision will be required. Most umbrella company employees will either save using their umbrella’s workplace pension or make their own provision in a private pension scheme. In this article we’ll look at the difference between those two options, and how they will work in practice.  

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About pensions in general

Pensions are often thought of as being complicated, but in essence they are quite simple. Your pension consists of a pot of cash that you and your employer pay into. You can get tax relief on your contributions, and it grows largely tax free. At retirement you can draw money from your pension pot, or you can buy an annuity from an insurance company to give you a regular income for life.

Workplace pensions

As your employer, your umbrella company has to provide a workplace pension scheme. They must automatically enrol you if you’re aged between 22 and state pension age, and you’re earning £10,000 or more.

The minimum contribution is 8% of your salary, at least 3% of which must be an employer contribution. 

If you don’t want to join your umbrella company’s pension scheme, you are allowed to opt out, but only after you’ve been automatically enrolled. It’s a good idea to at least look at the scheme and make a deliberate decision, rather than dismissing it out of hand.

If you fall outside the criteria, you may be able to join the scheme if you choose, but you won’t be automatically enrolled.

Private Pensions

A private pension works the same way as a workplace pension, but you arrange it yourself and your umbrella company is not obligated to help you contribute. Some umbrella companies may support your choice to make your own pension provision and allow you to contribute via salary sacrifice, but this is a matter of internal policy. If you’re not sure, check with your umbrella.

Tax relief on private pensions

Assuming you’re contributing from taxed income, rather than using salary sacrifice (see below), tax relief on your private pension contributions comes in two forms depending on whether you’re a basic or higher rate tax payer.

  • The Government automatically contributes an additional 20%. Your pension provider will claim this without you having to do anything.
  • Higher rate tax payers can claim the remaining 20%, and additional rate tax payers can claim 25%. This can be claimed by completing a self-assessment tax return at the end of the tax year.

How tax relief is calculated:
Tax relief on your pension contributions is calculated using pre-tax earnings. For example, a 20% tax payer investing £80 in a pension would have earned £100 before tax.
They get tax relief of 20%, which is £20, making their contribution up to £100.

The limits on pension tax relief

There are three limits on the amount you can contribute to your pension tax free. Technically, you can invest more if you like, but you will not get tax relief on anything over these limits.

The earnings limit

Tax relief is available up to 100% of your annual earnings, as long as you’re still below the other limits. If you have savings that you’d like to move into your pension, you won’t get tax relief on anything over the amount you earn.

The annual limit

You can get tax relief on contributions up to this years’ annual limit, which is currently £40,000 (2021/22), and any unused allowance from the previous three tax years. This allowance is reduced by £1 for every £2 you earn over £240,000.

The lifetime limit

The lifetime allowance currently stands at £1,078,900 (2021/22). If your total pension savings, including gains and interest, exceed this amount you will have to pay a tax charge.   

Salary sacrifice

As the name suggests, salary sacrifice is where you give up part of your salary in return for a benefit – in this case a contribution to your pension. If your umbrella company is willing and able to offer salary sacrifice, it’s is an easy way to decrease the cost of your pension contributions.

Because your contribution comes out of your pre-tax salary, you don’t pay income tax or National Insurance on your contributions. It also means higher and additional rate tax payers don’t have to claim any tax relief, as they are never taxed on their contributions in the first place.

  A £100 pension contribution costs:
Basic rate tax payer £68
Higher rate tax payer £58
Additional rate tax payer £53

If you’re employed by Orange Genie Umbrella

As well as offering a carefully chosen workplace pension scheme to our umbrella company employees, we can contribute to your choice of pension via salary sacrifice. It will be a 100% employer contribution, which means it comes out of the income we receive from your client or agency before our employment costs are calculated. This further reduces the cost, as we don’t have to pay Employer’s NI or Apprenticeship Levy on the contributions.

Can you use a private pension and a workplace pension?

There is nothing stopping you saving into your umbrella company’s workplace pension scheme and making your own provision as well. If you have more than one pension, the tax relief limits apply to your total pension savings.

It’s a good idea to seek expert advice before deciding if it’s better for you to use a single pension scheme, or save across more than one. This will be affected by your circumstances and the individual schemes involved.

Making changes to your pension contributions

Obviously, contributing to a pension via salary sacrifice will reduce your disposable income, and your umbrella company cannot allow you to make changes at will, because this will lead HMRC to disallow any tax and NIC advantages. You should therefore carefully consider the amount you want to sacrifice, and only make changes where necessary because a “lifestyle change” has altered your financial circumstances.

If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.

 

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