As a contractor, it is important to start saving for your retirement as early as possible. While most contractors are unable to access the advantages that employee-style workplace pensions provide, umbrella company contractors are reaping the benefits.
In this extensive guide, we’ll run through what a workplace pension is, how the scheme works, and how you could benefit as an umbrella company contractor.
1. What is a Workplace Pension Scheme?
Workplace pensions are a common way of saving for retirement. Also referred to as ‘occupational’ or ‘company’ pensions, your workplace pension is arranged and operated by your employer. It’s now a legal requirement for all UK employers – including umbrella companies – to offer workplace pension schemes.
There can be certain tax advantages to contributing to a workplace pension scheme as an umbrella company contractor – advantages that you won’t receive if you use your own, private pension plan. What’s more, some schemes also offer additional benefits such as ‘life insurance’ and ‘death in service’.
2. How do Workplace Pension Schemes work?
If you’re eligible for your umbrella company’s workplace pension scheme, enrolment is compulsory. However, you can opt-out of your workplace pension within the first month if you don’t want to take part. Thereafter – if you have remained a member – you can choose to stop contributing at any time – but more on that later.
Once you’re enrolled in a workplace pension scheme, a percentage of your pay will get deducted each payday and put straight into your pension.
3. Am I eligible for a Workplace Pension as an Umbrella Company Contractor?
Yes. As an umbrella company contractor, you are eligible for a workplace pension if:
- You earn more than £10,000 per annum (£833 per month / £192 per week)
- You’re aged between 22 and the current State Pension age
- You’re not already enrolled in another workplace pension
You should receive information about your umbrella company’s workplace pension within the first six weeks of starting a new job. If not, contact your umbrella company’s HR department.
4. How do Umbrella Company Pension Contributions work?
As an umbrella company contractor, your employer’s contributions to your workplace pension get deducted from the contracted rate. This is the total amount that the umbrella company receives from your end client or agency for the services provided. Other employer’s expenses deducted at this stage include:
- Employer’s National Insurance contributions (NICs)
- The Apprenticeship Levy payment
- Your umbrella company’s margin
Some umbrella companies pay the full pension contribution as an employer payment. That way you’ll save both tax and NICs on the whole contribution before receiving your PAYE income from the umbrella company.
5. How much can I pay into my Workplace Pension?
The minimum amount that is payable to your workplace pension is 8% of your earnings. That’s:
- 3% employer’s contributions
- 5% employee’s contributions
To gain tax relief on your workplace pension contributions, there’s a ceiling on the amount you can pay into the scheme each year. Referred to as the ‘annual allowance’, this generally equates to the lower of either:
- £60,000 per annum
- 100% of earned income
The more you pay in, the greater the benefits will be come your retirement.
6. What is the Lifetime Allowance?
The Lifetime Allowance is the maximum amount you can accrue during your lifetime before a tax charge applies. As per the 2023-24 tax year, the Lifetime Allowance currently stands at £1,073,100.
For those whose pension pot may exceed the Lifetime Allowance, protection to avoid the excess tax charge is available under certain circumstances. If you think this may apply to you, you should discuss the situation with your umbrella company.
7. What is my ‘Annual Allowance’?
The Annual Allowance is personal to you. It includes payments towards all your pension funds in any given tax year. As per the 2023/24 tax year, the current annual allowance is £60,000. This includes both personal and employer contributions. However, there are several instances where you may not have the full £60,000 allowance, for example:
- If you’ve taken any income from your pension by way of ‘flexible access’ (or, drawdown), then your Annual Allowance may be lower.
- If you’re a higher earner (generally above £260,000 pa), your allowance is ‘tapered’.
Furthermore, if you make payments above the Annual Allowance, then you will be liable to pay a tax charge on the excess. If you’re unsure of your position in relation to the Annual Allowance, you should take further advice from a qualified advisor.
8. Can I ‘carry forward’ unused allowance?
Yes. It is possible to ‘mop-up’ unused allowance from up to three years before the current tax year, providing you meet the following criteria:
- You must first use your full allowance for the current tax year.
- You must have had a UK registered pension scheme that you could have paid into for any of the tax years from which you’d like to carry forward your unused allowance.
If you’d like to mop-up your unused allowance, your employer or pension provider should have evidence that you had a plan in place for any years in question and that you had an unused allowance for those years.
9. When can I take money out of my Workplace Pension?
You do not need to retire to draw on your workplace pension fund. You can start to take the benefits from the age of 55. This will increase to 57 from 2028. Once you reach 55, you’re entitled to take up to 25% of your workplace pension fund as a tax-free, lump-sum payment.
Anything you withdraw over that 25% threshold gets treated as taxable income. If you’re still working, you may continue to make contributions while simultaneously drawing your benefits. Bear in mind though, that if you’ve taken any income from any money purchase pension fund, your Annual Allowance may be reduced.
Extreme care should be taken if you carry on contributing, or increase contributions, to make sure that you do not inadvertently fall foul of pension lump sum recycling rules.
Note, though, that if you take your pension early – and therefore reduce the length of time that you invest funds into the scheme – the benefits may not be as high as anticipated.
10. How do I take money out of my Workplace Pension?
How you take your pension benefits will be determined when you make the arrangements to draw them. You may transfer your pension fund to another provider if, for instance, better rates of income are available elsewhere.
To discuss private pension policies, or long-term financial planning in general, click here.
As explained above, you’re entitled to take up to 25% of your workplace pension fund as a tax-free lump-sum. Anything else you withdraw will get treated as income and is liable to Income Tax at your highest marginal rate.
The size of your fund – and the benefits you receive – depend upon several factors, including:
- The amount you pay into the scheme.
- The length of time funds are in the scheme before you draw your benefits.
- The investment performance of the funds within your scheme.
- The charges deducted for operating the scheme.
11. Can my Workplace Pension save me money on Tax & NICs?
Yes. As a contractor, paying pension contributions via your umbrella company could create greater tax savings than making contributions direct from your bank account. Providing your umbrella company has such a scheme in place, you can use ‘salary sacrifice’ (or ‘salary exchange’) to contribute income to your pension pot before it gets subject to Income Tax and NICs.
With salary exchange, your workplace pension contributions are classed as employer’s contributions. They’re deducted from your gross pay – BEFORE tax and NI are calculated. You’ll get tax relief at your highest marginal rate and you do not need to reclaim it via your tax return.
If you pay the basic rate of tax, the cost of your contributions will result in reduced savings of 20% in tax, 12% in personal NI, and 13.8% in employer’s NI. So, your total tax and NI savings could add up to almost 46% of your total contribution.
As a higher-rate tax-payer, reduced tax savings of 40-45% – combined with reduced personal and employer’s NI payments – means you could save almost 60%, depending on your circumstances.
What’s more, your contributions will grow in a more tax-efficient way than they would, say, in your current account or certain savings accounts. If you use salary exchange, your remaining income must not fall below the National Minimum Wage.
12. Can I opt-out of my Workplace Pension Scheme?
Yes. Once you’re enrolled in a workplace pension, you’re entitled to opt-out any time within the first month. If you choose to leave within the first month of enrolment, you’ll get back the money you’ve contributed up to that point. It’s as if you never enrolled in the scheme in the first place.
Furthermore, if you do opt-out and then change your mind, you can choose to re-join the scheme at any time.
13. Can I leave my Workplace Pension Scheme after one month?
Yes. After one month, you can no longer ‘opt-out’ of a workplace pension scheme. Instead, you can ‘cease active membership’ any time after the first month. If you cease membership, your contributions up to that point will remain in the scheme until you draw your retirement benefits.
To leave your workplace pension scheme, contact your provider. Your umbrella company must inform you of how to do this. You can find out more about leaving your scheme – and how to opt back in – here.
14. Do I have to enrol onto a Workplace Pension as an Umbrella Company Contractor?
If enrolment is compulsory, you must enrol. And, since 2018, it’s been a legal requirement for all UK employers – including umbrella companies – to offer automatic enrolment onto a workplace pension scheme. Enrolment is not automatic if your earnings amount to less than £10,000 per annum.
Once enrolled, as above, you can opt-out/cease active membership. Your umbrella company must let you leave the workplace pension scheme you’re enrolled in if you request to do so, and refund you any money you’ve paid in if you opt-out within the first month.
15. Will I still get a State Pension if I have a Workplace Pension?
Yes. The majority of people in the UK receive a State Pension when they reach the State Pension age. This is currently 66 years old but will start increasing from May 2026. The full State Pension from April 2024 – will be £221.20 per week. The actual amount you receive depends on your National Insurance record. For instance, you need 35 years of National Insurance credits to receive a full State Pension. State Pension forecasts are available here.
Nowadays, many people rely on a private pension scheme – on top of their State Pension – to save some extra pennies for their retirement.
16. What other Private Pension Schemes are available for Umbrella Company Contractors?
Of course, there are other types of private pension schemes available for umbrella contractors. You’re free to pay into any private scheme of your choice, either instead of or as well as your workplace pension. Here are some of the options available to you:
- With a Self-Invested Personal Pension (SIPP), you’ll enter into an individual contract with your pension provider. While your employer – if you have one – can contribute to your SIPP if they wish, it’s not a legal obligation. SIPPs are flexible, and tend to offer ‘wider investment options than other pension types.’
- You may instead consider a simpler Personal Pension or Stakeholder Pension. These come un1der the same legislation as SIPPs but tend to offer less investment choice.
Private pension schemes, as with all investments, carry risks. We’re not experts in other types of private pension schemes, and we’re not here to tell you to take out a private pension either. Nor are we attempting to provide detailed information on any private pension options other than the workplace pension. The above is simply to show that other schemes are available for umbrella company contractors. So, for more information on private pension schemes, and retirement planning more generally, it’s always best to seek expert advice.
17. The Danbro Group SIPP Scheme
The Danbro Group SIPP Scheme provides a tax-efficient way for contractors like you to save for your retirement, giving you control over your plan. The scheme’s flexibility, low charges, and additional features, not to mention potential tax savings, often provide much better value for money than other private pension plans. With a wide choice of investment funds, it’s set up in such a way that you’ll receive a tax-free lump sum, as well as pension income during your retirement.
18. How does The Danbro Group SIPP work?
As a Danbro umbrella employee, you’re automatically enrolled as a member of The Danbro Group SIPP after being with the company for 10 weeks. After this time, your minimum contributions get collected and paid into the scheme providing the following applies:
- You’re aged between 22 and the current State Pension age
- You earn at least £192 per week / £10,000 per annum
You’re also free to join the scheme at any time within the first 10 weeks. Contact email@example.com for further details.
If you die with funds remaining in your SIPP pension pot (either untouched or in drawdown), the full value of the fund at that time will be available to your beneficiaries. In the unfortunate event of your passing, any remaining funds will get paid out under a ‘flexible trust’. This means that they go straight to your nominated beneficiaries without being liable to any form of taxation, if you die before the age of 75.
If you die after age 75, your beneficiaries will pay Income Tax on anything they take out of the remaining fund as income. Make sure you complete a death benefit nomination form.
19. Umbrella Company Benefits
We’re committed to ensuring we do right by our clients, supporting your career as much as we can. That’s why we offer a whole host of exclusive benefits, to make your introduction to umbrella as comfortable and stress-free as possible. This includes continuity of employment, outstanding HR support, free take-home pay calculations, and help finding new contracts.
As well as enrolment onto The Danbro Group SIPP Scheme detailed above, you’re also entitled to:
- BUPA Cash Plan (Ts & Cs Apply)
- Exclusive rewards
- Weekly / monthly payments
- Statutory employment rights
- Exclusive online timesheet portal
- No set-up or exit costs
- Dedicated customer care team
- Business insurance (Ts & Cs Apply)
What’s more, IR35 does not apply to umbrella company contractors.