Umbrella Company Pensions & Salary Sacrifice Explained
Every UK employee is legally required to enroll their employees onto a workplace pension scheme. This means that employees can save for their retirement.
The schemes work by taking a percentage of an employee’s pay and putting it into a pension pot.
All employers must automatically enroll their staff onto a workplace pension scheme if they meet the following criteria:
- They are between 22 and state pension age
- They are classed as a worker. Find out what classifies as a worker in this government guide.
- They earn £10,000 or more each year
- They usually work in the UK
Therefore, as an umbrella company contractor, if the above applies to you then you will qualify for a workplace pension. You are an employee of the employer company.
How Does An Umbrella Company Pension Work?
When you start working with the umbrella company, they will auto-enroll you onto a pension scheme.
Once you have been enrolled, you will be sent relevant information relating to the pension scheme such as who the pension is with and other key information.
The umbrella company payslip you will receive will also outline how much you pay in pension contributions so you always know how much you are paying in.
Typically, umbrella company employees pay a contribution of 5% of their salary and the umbrella company will pay the employer’s contribution of 3%. In reality of course the total 8% contribution comes from the contractors assignment value. Importantly you should be given the option of opting out of the pension scheme should you wish to retain more of your contracts value directly.
Salary Sacrifice Explained
Some umbrella companies allow salary sacrifice pension contributions which is a way for contractors to contribute more to their pension in a tax-efficient way. Annually you are allowed to contribute up to a maximum of around £40000 or the total of your salary, whichever is higher. By deferring your earnings in to a pension scheme the tax savings can be significant although of course you need to make sure to keep a salary that supports your lifestyle before you can claim your pension.