Your Pension Your Choice

Most contractors that move between multiple agencies and multiple umbrellas find that they end up with multiple pensions.

Unfortunately due to the legal obligations of auto-enrolling new employees into these schemes, it is largely unavoidable.

When auto-enrolled you can opt-out and if done so within the first month, you will be refunded the deductions that have been made. When working with an umbrella this means that both the employers and employees contribution will be refunded to you.

You can mitigate the issue of multiple pensions when moving between employers by engaging with your own private pension. By doing this your employer pays into YOUR pension and that pension travels with you not matter who your employer is.

When you do pay into a pension, no matter what one, you will receive tax relief based on the amount you contribute.

What Is Pension Tax Relief?

When you save into a pension, it is usual that the government gives you a top up as a way of encouraging you to save for your future. This top-up comes in the form of tax relief rather than actual money.

Tax relief is available on your pension contributions at the highest rate of income tax that you pay. So, for non-Scottish taxpayers, this means:

  • Non-taxpayers (i.e. people who earn under the personal allowance) get no pension tax relief – unless they are in a ‘relief at source’ scheme
  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers get 40% pension tax relief
  • Additional-rate taxpayers get 45% pension tax relief

To illustrate: 

You are a higher rate of tax payer, and thus pay 40% PAYE income tax.

You earn £100, which you can take as salary via us as your Umbrella Payroll company, or you can pay into your pension as salary sacrifice.

By taking the £100 as salary via us, your umbrella company, the below deductions would be taken:

  • £14.00 will be deducted for employers and employees NI, which leaves a balance of £86.00.
  • A further £35.00 will be deducted as higher rate PAYE income tax.
  • This means your take home will be £51.00.

If you choose to pay the £100.00 into your pension, then the whole £100.00 would go into your pension fund.

Please Note:
If you wish to receive a refund once you have opted-out of the auto-enrollment pension, you will need to do so within 30 days of your enrolment. You will need to login into your pension account or contact The People’s Pension to do this. This is not something we can help you with, and you will need to speak with The People’s Pension, who will be able to assist. Click here for more information on opting-out.

What Is Salary Sacrifice?

Salary sacrifice basically involves you paying a portion of your earnings each month or week in return for a non-cash benefit from your employer. In this instance we will be talking about pension contributions

The arrangement is set up and agreed between the employer and the employee. An agreed amount of the workers pay is deducted prior to the worker receiving their wage, and the corresponding sum is paid into the pension scheme.

This deduction reduces the workers salary and, because the income is lower, the amount of tax and national insurance that is paid.

Many umbrella’s now allow workers to pay into their own private pension but this does not bypass enrolment into the company pension scheme. The worker will still need to opt-out of the auto-enrolment scheme if they only wish to use their own scheme.

Using Salary Sacrifice, the worker has the freedom to choose their own pension scheme so as to have more control over the options offered by the provider.

Annual Allowance

For tax year 2022 to 2023, an employee can contribute up to £40,000.00 to ensure that they receive tax relief on their annual earnings. The amount contributed is also dependant on National Minimum Wage (NMW) limits which will ensure that the workers annual wage does not fall below NMW.

Your annual allowance applies to all of your private pensions, if you have more than one. This includes the total amount paid in to a defined contribution scheme in a tax year by you or anyone else (for example, your employer)

If you use all of your annual allowance for the current tax year you might be able to carry over any annual allowance you did not use from the previous 3 tax years.

How to use Salary Sacrifice with Payments Pro

If you have your own private pension and would like to pay a portion of your wage into it then you will need to contact your provider and let them know that your employer will be facilitating payments from your wage. The should then provide you with the details that will enable us to set-up the deduction. This should consist of an account number, sort code and a reference number that will ensure the contribution is associated with your account.

Once set up we will make the agreed contribution into your pension each time that you are paid. Please note that we charge a £1 processing fee each time we make the contribution.