The UK workforce has over 896,000 employees working as contract workers, according to a report published in 2019 by Stastisa. However, saving enough money for retirement can be a tough task for many contractors due to the varying income means alongside juggling their day to day job requirements. But umbrella companies in the UK have been serving as a safe haven for contractors since long, offering a compliant PAYE (pay-as-you-earn) structure for contractors. Umbrella companies can offer contractors many ways to help them in saving for retirement by contributing to their pension.
So let’s jump straight into the discussion and learn how contract workers can benefit while working under an umbrella:
Umbrella Contribution Towards Pension:
An umbrella company like any other business, employs contractors under an employment contract and hence has to offer mandatory auto enrolment pension schemes to contract workers. Every umbrella company is legally entitled to offer contractors a workplace pension scheme, requiring contractors to opt-in or out within 3 week of their registration. All such contractors will be enrolled automatically provided they fulfill the below criteria:
- Contractors should be classed as an employee.
- Contractors should fall in the age bracket of 22 years and state pension age.
- Contractor’s earnings are in excess of £10,000 for the tax year.
- Contractors are classed as ordinarily resident in the UK for work purposes.
However, pensions under an umbrella work differently and contractors should make contributions from the income they receive from the Umbrella via PAYE and not at the year-end as lump sum amount. The umbrella will be collecting a percentage of contractor’s income and itself place it into the workforce pension scheme. Everything will be done by the umbrella.
Moreover, since the new reforms, an umbrella will also contribute to the pension. As of now, the minimum contribution is rated at 8%, wherein the umbrella would contribute 3% and the employee will contribute 5% to the pension. Also, contractors can even invest their 100% income up to a maximum limit of £40,000 through salary sacrifice. Based on your earnings and preferences, pension contributions can be flexible.
If the contribution is made directly by the Umbrella contractor, the UK government will also be contributing an extra 25% in the form of top up to the pension pot and the contractor will further receive tax relief based on their marginal rate of tax, with maximum tax relief up to £40,000.
Contractors working under an umbrella company can also opt for a salary sacrifice pension scheme, where the Umbrella company can make direct contributions to their SIPP account or a group pension scheme setup by the Umbrella. This is one of the most tax-efficient way, since it reduces tax liabilities mainly for National Insurance contributions and Income Tax. However, the minimum earnings clause still needs to be adhered to.
Contractors falling under the IR35 can also operate under an umbrella company for pension contributions.
Benefits Of Investing In A Pension Scheme:
Investing a part of your monthly salary into the Pension scheme has a number of benefits. Here are some of the benefits of investing into a pension scheme at the earliest:
- It is a long term saving plan for your future.
- You can claim for a tax relief if you are contributing towards your pension.
- You’ll be getting at least a quarter(25%) of your pension amount as tax free when you finally retire.
- Since the contribution is flexible, you can contribute according to your financial status.
- You can earn a handsome amount as compound interest on your initial amount.
- No need to depend on anyone else when you retire.
Working under an umbrella company as contractors is a wise choice since they work as regular employees and have an option to goi for pension contributions and make their future safe. Also, the contributions are flexible and aren’t a compulsion. Moreover, contractors also receive contributions from the umbrella company which they won’t get otherwise.