It is a legal requirement for umbrella companies to provide and enrol their employees in a workplace pension scheme as an employer. Continue reading as we give an overview of how pensions work when contracting through an umbrella company and how to opt-out if you do not want to continue with the pension contributions.
What is a workplace pension scheme?
In the UK, whether you work full-time or part-time, it is a legal requirement for your employer to enrol you in a workplace pension scheme if you meet the following criteria:
- You are aged between 22 and State Pension age
- You are classed as a ‘worker’ in the UK
- You earn more than £10,000 a year for the 2021/22 tax year
As long as you meet these auto-enrolment conditions, you’ll also be covered if:
- You’re working on a short-term contract
- An agency or umbrella company pays your wages
- You’re away on maternity/paternity, adoption or carer’s leave
Employers can delay the date they must enrol their employees into a pension scheme by up to 3 months. Due to the short-term nature of contract work, most umbrella companies will enrol their employees after 12 weeks. This minimises the administration for both the umbrella company and the contractor, particularly for contractors working on short-term assignments which may not require an umbrella company once the assignment has been completed. If you would like to start making contributions into a workplace pension scheme before the 12-week mark, please speak to your umbrella company about early enrolment.
What are the benefits of paying into a workplace pension scheme?
There are many benefits of saving for retirement with a workplace pension scheme; these include but are not limited to:
- Saving into a workplace pension means you qualify for tax relief. This may happen via a ‘net-pay’ arrangement (when your pension payments are deducted from your gross, pre-tax income) or via a ‘relief at source’ arrangement (when a pension provider claims tax relief back from the government). The annual allowance you can save across all your pension schemes without paying tax is the lower of either £40,000 per annum or 100% of earned income.
- You do not need to have retired to draw from your workplace pension fund. You can start to draw funds from 55 – rising to 58 from 2028. Once you reach 55, you have the option to take up to 25% of your workplace pension fund as a tax-free lump sum payment.
- Unlike if you manage your own savings and investments, your employer (your umbrella company) and pension provider will arrange your contributions. For example, rather than you being responsible for allocating a proportion of your income to save in a personal pension, your umbrella company will automatically take it from your salary before you receive it.
How much will I pay into the workplace pension scheme?
How much you pay into your workplace pension scheme will depend on how much you earn. This is because you contribute a percentage of your qualifying earnings – the more you earn, the more you pay in. The minimum total auto-enrolment contribution rose to 8% in April 2019 – 3% employer’s contribution and 5% employee’s contribution.
How to opt-out of a workplace pension scheme
Whilst it is a legal requirement for umbrella companies to opt you into a workplace pension scheme, it is entirely your decision to remain enrolled and continue with the pension contributions. If you would like to opt-out, you will need to contact the umbrella company’s chosen pension provider and notify them of your decision.
Please be aware you cannot opt-out of a workplace pension scheme until you have been enrolled and made your first contribution. Please speak to your umbrella company about early enrolment if you want to opt-out before the 12-week point.
You will have 30 days from the date you are enrolled to opt-out and request a full refund for any contributions made. If you opt-out after this point, you cannot request a refund, but it will stop any future pension contributions from being made to your pay.
Have you considered salary sacrifice?
If you’re keen to save for retirement and would like to increase the amount you contribute to your personal pension each time you are paid, it’s worth considering salary sacrifice. One of the benefits of salary sacrifice is that you are free to decide how much of your salary you would like to send to your pension each time you are paid. This can either be a fixed amount or a percentage of your income.
Salary sacrifice is particularly beneficial as the pension contributions are made before your tax and National Insurance Contributions (NICs) are deducted. As contributions are taken from your pre-tax salary, you will also pay a reduced income tax and NICs on your remaining earnings. If you are interested in salary sacrifice, always check with an umbrella company before registering that they can process these payments as not all umbrella companies offer this service.
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