How umbrella company returnees on inside IR35 contracts can make Spring Budget's pension changes work for them

As we determined following Spring Budget 2023, contractors who retired early may now have cause to rethink their position thanks to the chancellor’s pensions changes, which more than facilitate coming back to work on inside IR35 contracts via umbrella companies, writes Matt Fryer, managing director of Brookson, a People 2.0 company.

Pension contributions are one of the most common forms of tax planning for permanent employees and contractors -- both those working via a limited and umbrella company. This is because it provides ‘in-year’ tax relief as well as longer-term, tax-efficient saving for retirement.

Spring Budget pensions reform refresher

 Given the ‘Back to Work’ agenda of the Spring Budget, aiming to encourage the over-50s back into work or to defer retirement, it was no surprise to see a number of measures intended to maximise the tax benefits of pension contributions for older workers.

Specifically, three Spring Budget announcements:

  • The abolition of the Pension Lifetime Allowance (LTA);
  • The increased tapered Annual Allowance (a restriction on annual pension contribution for high earners), and;
  • The increased annual pension contribution allowance (hiked from £40,000 to £60,000).

These three all offer high earners who are either still in work, or considering returning to work, additional tax savings because they can pay more into their pension and get tax relief.

While these policies are particularly aimed at higher-earning public sector workers (e.g. doctors), they are of particular benefit to contractors working via inside IR35 contracts.


The government’s changes to IR35 may have resulted in some contractors leaving the sector, due to the increased tax contributions for those now determined to be ‘inside.’ Such contractors might have taken on permanent roles, sought work abroad or even retired early. These exit routes particularly affected the IT and financial services sectors.

Freezing NICs allowances at a time of rising costs also amounts to a tax rise, enhancing the appeal of any arrangement that helps to reduce the amount of tax payable.

So the chancellor’s three pension announcements could be a welcome opportunity for contractors to review their position and be tempted back to the workforce, specifically on high earning contract positions, even where they are inside IR35.

It’s all thanks to the salary-sacrifice model

Crucially, high earners operating inside IR35 and working via an umbrella company which operates a salary-sacrifice scheme, can use the sacrifice arrangement to significantly reduce their tax and national insurance liability.

This is because salary-sacrifice pension contributions by umbrella employees extinguish the income tax AND the employer and employee NIC liabilities, thereby removing the majority of the additional tax burden which is associated with being “inside IR35.”

The extension to the annual allowance effectively frees up an additional £20,000 of salary that can be contributed into a pension scheme and therefore become ‘tax-free.’

Case study

This may be better explained by an example (for illustrative purposes only):

In the current tax year, an umbrella employee with an assignment rate of £50 per hour would take home approximately £61,800 a year. If they maximised their annual pension allowance (assuming no carry forward) of £40,000, their annual take-home pay would be £41,500, with £40,000 in their pension – achieving a total retained income of £81,500.

In the next tax year (that’s the 2023/24 tax year which commences April 6th 2023), if they maximised their pension allowance (again, assuming no carry forward) of £60,000, their annual take-home pay would be £30,170, with £60,000 in their pension – achieving a total retained income of £90,170. So there’s a sizeable increase of £8,670.

Are you a ‘yo-yo’ retiree?

Additionally, turning to the tapered allowance, those who have already accessed benefits of certain pensions were previously limited to further pension contributions of £4,000 a year. This limit has been raised at Spring Budget to £10,000 a year.

This is particularly good news for ‘yo-yo’ retirees, who have to dip into their pension pot for a time, but then want to boost it again before they properly retire.

Further beneficiaries

These changes also benefit contractors who planned to aggressively fund their pension schemes in the run-up to their retirement, or have generational wealth planning in mind. Pension funds fall outside of an individual’s estate with regards to Inheritance Tax. If an individual is under age 75 when they die, the pension fund will pass on completely free from income tax to any nominated beneficiary as a lump sum, drawdown pension or annuity. The abolition of the limit on the size of a pension fund, highlights how they can be used to pass on family wealth, tax-efficiently.

Although this type of tax planning relies on their being no requirement to maximise immediately available funds (as it locks some away in a pension fund), it is an interesting example of how this can be of particular benefit to umbrella employees. It should be emphasised that the umbrella employer should ensure that national minimum wage is not breached, therefore not all of the salary can be sacrificed so there is effectively a ‘cap’ applied to lower paid umbrella employees. This minimum wage ‘cap’ does not apply to contractors working via a PSC, as they are not employees for NMW purposes. So, the tax benefit of increased pension contributions is available to a greater population of limited company contractors (albeit they don’t typically pay NIC so will only benefit from the tax savings).

Lastly, monitor, speak, and act – if money matters

Limited company contractors and umbrella employees wishing to maximise their pension planning -- particularly those looking to use up their annual allowances -- should carefully monitor contribution levels and should speak to a financial advisor as a matter of urgency if money matters.  Many contractor accountants and umbrella companies offer access to such services and in some (but not all) cases will provide access to contractor specialist advice. Good luck making the most of the chancellor’s measures!

Sunday 26th Mar 2023
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Written by Matt Fryer

Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

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