With the continued bulk of contracts falling inside of IR35, many contractors are being hit with a double-whammy.

Workers are seeing an increase in the amount of HMRC contributions that they are liable for compared to working through their Limited Company. They are also seeing an increase in tax due as they are breaching the higher limit threshold of £50,271.00 meaning they will pay 40% of their earnings.

Obviously those workers that earn around this amount will need an umbrella payroll service to calculate the correct amount earned after company deductions. Once the deductions have been made a true reflection of their annual income will become transparent.

If the worker still breaches the threshold then there are a number of ways that they can mitigate the amount of tax they pay through the umbrella:

Auto-Enrolment (AE) Pension Contributions

When starting a new job, an employer is legally required to enrol you into a company pension scheme. By default the scheme contribution is set at 3% employers, and 5% employees.

When working through an umbrella, all employer contributions, also known as company deductions, including Employers National Insurance, Apprenticeship Levy and Employers Pension contribution are paid by the worker. This is due to the amount deductible exceeding the fee or margin charged by the umbrella service.

It is worth noting that a pension deduction of 8% will reduce the amount of HMRC contributions paid for every employee that continues to pay into the scheme and not just the high earners.

As all of the pension contribution is paid by the umbrella worker, both employee’s and employers, the worker has the option to increase the amount contributed, further reducing the amount of tax paid but also reducing the amount of earning paid into the bank.

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.

Please note: the worker will still be auto-enrolled into the workplace scheme even if they wish to use their own personal pension. The worker would need to opt-out directly with the workplace pension provider if they do not wish to contribute into both pensions.

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 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. This is something you would need to discuss directly with HMRC.

Payments Pro offer the facilitation of payments into a private pension. As long as your pension provider can provide us with the required details, we will be able to make payments into the pension  on your behalf.