'Salary-Sacrifice' pensions and umbrella companies
For contractors who take on different roles at different times, incomes can vary which means that saving for retirement and contributing to a pension can sometimes seem challenging.
But, by working through an umbrella company and becoming an employee of that umbrella company a contractor has some clear advantages when it comes to saving for a pension, writes Crawford Temple, CEO of Professional Passport, the UK’s largest independent assessor of payment intermediary compliance.
An influx of high earners, top contributors
Following the introduction of the off-payroll working rules in the private sector there has been a significant increase in the numbers of contractors moving across to umbrella companies, and many of them have historically operated through their own limited companies.
It means that umbrella companies are now regularly dealing with contractors who are earning much higher rates than previously. Those contractors operating at these higher rates who until recently have been operating through their own limited companies were often making high pension contributions on their contracted income. Now, many of these are looking to continue these arrangements when they move across to umbrella working.
Pension entitlement when using an umbrella company
As an employee of an umbrella company, a contractor is legally entitled to access a workplace pension scheme and generally, after a three-month deferred period, the umbrella company will auto-enrol you into its chosen scheme (although you can request to join earlier if you wish). The levels of contributions into these arrangements are relatively low, with a set percentage being paid by both the umbrella and the worker.
For those with spare disposable income, sacrificing some of this to fund pension arrangements through an umbrella company can prove to be very tax advantageous. Typically, the contributions would be treated as employer contributions and therefore be paid from the gross funds received by the umbrella. Where an umbrella pays from its gross funds received, this money is not assessed for PAYE tax and therefore additional savings in Employer’s National Insurance is made. This saving of 13.8%, together with any savings in PAYE tax makes this the route of choice for those seeking to make additional pension contributions when engaged through an umbrella company.
Relief, assurance and indemnities
If the contributions were made from the net pay received, the worker could claim the due tax relief but would still have suffered all the employment costs that are built into the rate received by the umbrella company, and these would not be recoverable.
Be aware though, there are limits on the level of contributions that can be made into pensions and so expect your umbrella to seek an assurance that these are not being breached, as they might not be aware of all your personal arrangements. The umbrella is also likely to confirm that if contribution limits are breached and some contributions disallowed, you will indemnify them against any tax liabilities that may arise.
Final advice for contractors
Not all umbrella providers operate such arrangements and some, where they do, will charge additional fees for processing these payments. My advice to contractors is to consider your options carefully before choosing an umbrella firm as not all umbrellas offer a salary-sacrifice pension scheme. Ensure you are fully aware of any additional charges that will apply and, in all cases, speak to your financial adviser so you can better understand all options available to you.