Contractor guide: umbrella company pensions

Working as an umbrella employee means you - the contractor - gets automatically enrolled into a workplace pension scheme. This is in line with the government's auto-enrolment pension initiative, which was first introduced back in 2012,  writes Joanne Harris, head of technical, compliance and payroll at Parasol

At that time, the main objective was to help more people save for their retirement as the government had some big concerns about the amount of money workers across lots of different industries were putting away for life after work.

Under the rules, every UK company must now include all of their eligible workers into a pension scheme, and this includes umbrella companies.

It's really important to use a compliant umbrella company to ensure you are automatically enrolled onto a pension scheme. A compliant umbrella company will be your employer, and as such they’re required to operate a workplace pension scheme and ensure all eligible employees are automatically enrolled.

As an umbrella contractor, how much will get paid into my pension?

With the auto-enrolment scheme, both the employer and employee must make a contribution with each payroll run. Employers can choose the basis for auto-enrolment and there are minimum contributions that must be made.

Employers calculate contributions based on pensionable earnings. These pensionable earnings can be calculated using the ‘qualifying earnings’ method or the ‘certification’ method.

How do the qualifying and certification methods work?

If the umbrella employer uses the qualifying earnings method, the contribution into your pension will be calculated as a percentage of qualifying earnings. For 2021/22, this is all earnings between £6,240 and £50,270. The minimum employer contribution will be 3% and minimum employee contribution is 5%. 

Alternatively, the certification method uses one of the three tiers described in the legislation. Each of the three certification tiers has a different basis for calculating pensionable earnings and minimum contribution rates as detailed below:

Tier Basis Minimum employer contrib. Minimum employee contrib.
Tier 1 Basic pay 4% 5%
Tier 2 85% of total earnings 3% 5%
Tier 3 100% of total earnings 3% 4%

As with all costs of employment, the employer contribution to the AE (Automatic Enrolment)  pension scheme is included within the ‘assignment rate’ agreed with the agency or end-hirer. All employees are free to opt-out of the auto-enrolment pension scheme if they wish, however they must do this themselves voluntarily and an employer cannot encourage you to do so.

As an umbrella company employee, do I need to take action on pensions myself?

No. Not unless you wish to opt-out. Working with a compliant umbrella employer should ensure that everything is taken care of for you. This means the process will not be at all complex, with very minimal paperwork and admin required on the part of you, the contractor.

Is everyone eligible for an auto-enrolment pension?

If you’re employed by an umbrella company, the business is required to have an appropriate pension scheme in place that you can access. You should automatically be enrolled onto it as long as you meet the following criteria:

  • You are at least 22 years of age and below the state pension age (currently 66)
  • Earn more than £10,000 a year
  • Primarily work in the UK

A contractor can individually choose to opt-out of the auto-enrolment if they’d prefer to make their own arrangements for retirement.

Can I have more than one pension pot with an umbrella company?

It is possible to have multiple pension pots if you've worked with different umbrella companies!

Often this happens when contractors switch to another umbrella company, and will likely be the case for each employment you hold.

This means that contractors that switch lots of times can end up with several pension pots! However, it's important to remember that typically, it takes three months to get a new pension scheme set up, so there could be gaps between each one if lots of switches take place.

Those contractors who have an existing pension that they would like to pay into either instead of, or as well as, a company workplace pension, can ask the umbrella company to make employers’ contributions into their pension scheme.

Obligation, temptation and finally, getting further help

Be aware -- umbrella employers are not obligated to facilitate this, but many will and contributing into a private pension this way can be advantageous, as you will benefit from national insurance savings in addition to tax relief.

Finally, consider that while it is tempting to maximise your contributions, particularly if you are on a short-term assignment inside IR35, you must still receive at least national minimum wage for the hours worked, plus holiday pay. Your pension contribution cannot take you below this.

Very finally, please factor-in that there are lots of different options available when it comes to retirement planning and it's always wise to seek advice from a financial expert if you do decide to open another pension scheme. For everything else pensions-related with your umbrella, they as your employer, should be able to help and so should be your first port of call.

Monday 9th Aug 2021
Profile picture for user Joanne Harris

Written by Joanne Harris

Joanne joined the Optionis Group in 2009 as an account manager, working closely with our agency partners. After developing an interest in the technical aspects of the role, she took the opportunity to train as a chartered accountant. She is now fully qualified, and a member of the Association of Chartered Certified Accountants (ACCA).
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