Umbrella Guide: Pension Contributions Explained

13 August 2020

When you are in employment, especially when you are younger, retirement is a faraway concept we tend not to think about. Many however find that they are unable to retire completely supported by only the state pension. This is where auto-enrolment and salary sacrifice contributions step in to help people save for their time past the retirement age. Here is a quick guide to explain what options you have when you join an umbrella company.

Auto Enrolment

Upon joining an umbrella company, like with any employer, you will be asked to join their workplace pension scheme, introduced by the Government to help save for the future. The employer sets up a pension scheme and then pay into it together with the employee through automatic deductions. If you wish to opt out, you can of course.

What are the benefits?

Apparently more than half of UK adults who are planning on retiring, expect that their financial situation will not support their desired lifestyle in retirement. So encouraging people to save is more important than ever.
And there is the fact that it is not only the employee that pays in but the employer and the Government as well. It is essentially free money in your pension pot.

You can easily track how your savings grow by logging into your pension account, or even calculate what it will look like later down the line. Once you are retired or reach the age of 55 you can spend the funds built up in your account.

Who is eligible?

You will automatically be enrolled into a workplace pension if you:
• are at least 22 years old
• are under the State Pension age
• earn more than the £10,000 per annum (equal to £768 per month or £192 per week)
• usually work in the UK

How are your contributions calculated?

If you opt-in, your umbrella employer will calculate your contributions based on your “qualifying earnings”. Your earnings that fall between the minimum qualifying amount of £6,240 and the maximum of £50,000 will form the basis of the calculation. For example, if you earn £25,000 per annum your qualifying earnings will be £18,760 (£25,000 – £6,240).

*2020/21 figures

There are minimum contribution levels set by the government which is 8% of your qualifying earnings. From April 2019 3% must be paid in by the employer, and 4% by the employee, which is then topped up by the government who adds tax relief of 1% essentially doubling what you pay in.
Remember, that the above are minimums as your employer may increase their contribution percentage meaning that you can pay in less.

Is it possible to opt out?

If you qualify, your umbrella employer must enrol you into the scheme, but you don’t have to stay in it. You can opt out within a month and have any deductions refunded; or at a later date where your payment is preserved or refunded. Your options often vary by provider.

Salary Sacrifice

Your umbrella may make a ‘salary sacrifice’ pension contribution scheme available, which is another way of putting money aside but this time through voluntary contributions.

As you may have guessed from its name, this arrangement allows you to give up a part of your salary voluntarily and paid into your pension by your umbrella employer.

Apart from being able to control the amount of contribution and build up your pot quicker, it is also portable, so you can take it with you to your next employer.

As the pension contribution is taken off before tax, using the scheme both the employee and the employer pay less tax and National Insurance. Your workplace may even decide to top up the contributions with this amount if they are nice, but they don’t have to do this.

What are the drawbacks?

First of all, you can’t join if the salary sacrifice reduces your salary below the minimum wage, which is currently set at £8.72 per hour (2020).
Secondly, lowering your earnings will have a knock-on effect when you take out life insurance or want to apply for a mortgage.
And finally, should you decide to opt out, the National Insurance savings made before will have to be paid back through a salary adjustment. This is because savings can only be retained if the money stays in the pot.

What about SmartWork?

Our auto-enrolment provider of choice is The People’s Pension, a non-profit pension provider owned by B&CE that provide support for over 1000 businesses in the UK. Working with them, we made sure that our automatic enrolment process simple and seamless. Also, as part of our personal service pledge, our contractors have a dedicated business manager who is always on hand to answer any questions.

To discuss what SmartWork can do for you, please do not hesitate to get in touch via e-mail at on 0800 434 6446, one of our business managers will be happy to answer any questions.

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