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Guide to umbrella company pensions

If you are considering working through an umbrella company in 2023, you will need to understand how umbrella company pensions work.

After all, there are many benefits to using an umbrella company, from being paid a salary and not worrying about IR35 to receiving statutory benefits, including a workplace pension.

But how exactly do umbrella company pensions work? Umbrella Search has put together this handy guide to help contractors learn about umbrella company pensions and how to make the most of them.

What is a workplace pension?

In the UK, employees are entitled to a workplace pension designed to help them save for retirement.

The pension scheme puts a percentage of the employee's salary directly into a pension pot.

Employees are entitled to a workplace pension under the following circumstances:

Suppose this applies to you as a contractor. In that case, you will be entitled to a workplace pension through your chosen umbrella company. So, how exactly does this work?

What is an umbrella company?

How umbrella company pensions work

When a contractor signs up with an umbrella company, they will be automatically enrolled in a pension scheme by the umbrella provider.

Following this, the contractor will be sent all the relevant information relating to the pension scheme and the details directly.

The umbrella company must legally enroll the contractor in a pension scheme. The contractor must pay the first month of pension contributions but can opt out of it after this point at any time. However, if you decide that you want to opt out of the scheme, then you can do this by contacting the pension provider directly.

If a contractor decides to leave the pension scheme, they can rejoin at any time.

Most contractors will stay enrolled in the pension scheme as it helps them save for the future. As well as paying into the umbrella company pension scheme you are enrolled in, contractors can also pay into a private pension scheme if they wish.

The pay slip you receive from your umbrella company will outline how much you pay in pension contributions each month, so you're always up to date with your contributions.

Usually, the contractor will contribute around 5% of their salary. However, you can choose to contribute more or less. The umbrella company will pay the employer's contribution of around 3%, but this can differ from company to company.

This means that umbrella company contractors benefit from employer contributions towards their pensions, unlike limited company contractors who don't receive an employer's contribution.

Instead, limited company contractors have to pay their pension contributions directly out of the fee they receive from the client. They won't be automatically enrolled in a pensions scheme, meaning they must take the time to enroll themselves and deal with the admin involved.

Salary sacrifice

Some umbrella companies allow salary sacrifice, which means contractors can contribute more to their pension in a more tax-efficient way.

Salary sacrifice enables contractors to pay more into their pension scheme rather than directly into their pockets. The part of their salary paid into their pension pot is paid before tax is applied, meaning the contractor pays less in tax and National Insurance as their taxable pay is less.

This is an excellent way for contractors to be more tax-efficient, so it's always worth talking to your umbrella provider to see if they can help with salary sacrifice.

Lifetime allowance and annual allowance

A lifetime allowance is an amount a worker can save before a tax is applied.

As well as a lifetime allowance on how much you can save before tax is applied, there is also an annual allowance which currently stands at £40,000 per year.

When can contractors access their pensions?

As with any other employee in the UK, contractors can dip into their pension pots once they reach the age of 55, although this is set to increase to 58 in 2028.

Once contractors reach the age of 55, they can take up to 25% of the pension fund out without being taxed on it. Contractors can take more than this. However, it will be classed as taxable income. In this case, contractors will have 6 months to take the rest of the 75% of their pension pot.

Let Umbrella Search help

Suppose, like thousands of other contractors across the UK, you have decided that contracting through an umbrella company is the best move for you in 2023. In that case, Umbrella Search is here to help.

Now you know precisely how umbrella company pensions work and the benefits of this, Umbrella Search is here to help you find the best umbrella company for your contracting needs.

Our team works closely with contractors to find out what they require from an umbrella provider to find the best fit for them. Whether you want to benefit from things like salary sacrifice or require same-day payments, we will take the hard work out of finding the best umbrella company for you.

Why not get in touch with our team today and take the first steps to boost your contracting career this new year?


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