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Private Pension/SIPP Scheme Contributions Explained

What Is a SIPP?

A SIPP is a type of personal pension that allows you to control your retirement savings. Unlike traditional pensions, SIPPs provide a range of investment options, including stocks, funds, and property. They are particularly attractive to high earners due to the generous tax relief they offer.

More details on how to set up an ii SIPP through SmartWork are provided in our Knowledge Base.

What are private pension contributions?

This is an arrangement where an employee agrees to reduce their Assignment Rate in exchange for increased pension contributions from their employer. This results in a lower salary for the employee, but the sacrificed amount is paid directly into their pension, leading to potential tax and National Insurance savings for both the employee and the employer.

The primary advantage of this type of private pension contribution is the potential for higher take-home pay, resulting from lower National Insurance contributions, as well as the increased tax efficiency of pension savings.

Now let’s go through how the tax benefits a SIPP can provide:

Tax Relief on Contributions

Because you exchange a portion of your Assignment Rate for pension contributions, you are more tax efficient because the pension is paid over to your chosen provider as a Gross Employer contribution, so no tax is deducted from this amount.

In terms of overall savings, here is what you can expect:

  • Employment costs: This includes 13.8% Employer NI and 0.5% Apprentice Levy.
  • Employee PAYE Tax: 20% for income within the basic rate tax band and 40% for higher rate earners.
  • Employee NI: 12% for income within the relevant banding and 2% for income beyond that.

Will I Receive the Employer’s NI Saving from Salary Sacrifice?

When setting assignment rates, agencies and end clients typically take into account all employment costs associated with engaging a worker through an umbrella company. These costs include Employer’s National Insurance (NI), Apprenticeship Levy, holiday pay, pension costs. As a result, the assignment rate is generally intended to cover both your pay and these associated employment costs.

Because the umbrella company is the legal employer, it is required to calculate and pay Employer’s NI and other statutory employment costs to HMRC. These costs must therefore be deducted from the assignment income before your gross taxable pay can be calculated. Our illustration confirms that the assignment rate includes these employment costs.

When you make a salary sacrifice pension contribution, the amount of salary subject to Employer’s NI is reduced. This lowers the Employer’s NI cost that the umbrella company must pay to HMRC.

As Employer’s NI is funded from the assignment income rather than from a separate budget provided by the umbrella company, any reduction in Employer’s NI costs benefits the overall payroll calculation. In other words, less of the assignment income is required to cover statutory employment costs, which improves the efficiency of the salary sacrifice arrangement.

For this reason, workers generally benefit from the Employer’s NI saving through the payroll calculation itself, rather than through a separate payment. Unless an umbrella company specifically advertises that it shares Employer’s NI savings as an additional pension contribution, the saving is typically reflected within the overall salary sacrifice calculation.

Keeping Your Personal Allowance

The personal allowance (currently £12,570) starts to reduce by £1 for every £2 you earn over £100,000. This means the effective tax rate on your income between £100,000 and £125,000 is a whopping 60%!

So, to retain your personal allowance, you need to reduce your taxable income to below £100,000. Paying any pre-tax income over the £100K threshold into a SIPP is a perfect way to do that, as it offers multiple benefits.

Example:

If you earn £125,140 and contribute £25,140 to your SIPP:

  • Your taxable income reduces to £100,000.
  • You retain your full personal allowance of £12,570.
  • You avoid the 60% tax trap on the income between £100,000 and £125,140.

Additional Benefits of a SIPP

SIPPs don’t just offer tax relief—they also come with other advantages:

  • Tax-Free Growth: Investments within a SIPP grow free from UK income tax and capital gains tax, ensuring your retirement savings grow efficiently.
  • Tax-Free Lump Sum: At retirement (from age 55, rising to 57 in 2028), you can take 25% of your SIPP savings as a tax-free lump sum.
  • Inheritance Tax Planning: SIPPs are often exempt from inheritance tax, making them an effective tool for passing on wealth.

If you are interested in setting up private pension contributions, please visit our other knowledge base articles to learn how to do so.

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