The reforms to off-payroll rules in the private sector are due to come into force in April next year and some limited company contractors may find they need to look at alternative working options, such as Umbrella.
Here, we look at what would happen to your pension if you transferred to an Umbrella company.
A compliant Umbrella company like JSA will employ you, and must therefore provide you with a pension scheme.
If you meet certain criteria set out by the pension legislation you will be automatically enrolled into one, or have the right to join and you also have the right to opt out if you so wish.
The Umbrella company, as your employer, will contribute 3% of qualifying earnings and you as the employee will pay 5% of qualifying earnings into the pension bringing overall tax-efficient contributions to your pension scheme of 8%. If you are a high rate tax payer, you can receive tax relief on contributions up to a value of £40,000 each year under the current annual allowance rules (2019/20).
If you are a limited company contractor who makes contributions to a private pension scheme, you will need to decide if you are going to:
- Opt into the Umbrella pension scheme and maintain your personal pension.
- Opt out of the Umbrella pension scheme and maintain your personal pension.
- Opt into the Umbrella scheme and discontinue contributions to your personal pension.
- Opt into the Umbrella scheme and transfer your current pension to the Umbrella scheme.
Contributions to the Umbrella’s pension scheme will need to be made from the income you receive from the Umbrella company and would need to be taken via PAYE, not made as a lump sum contribution at year-end.
If you wish to continue to make contributions to a private pension or SIPP whilst working as an Umbrella employee, you would need to take advice on the most tax-efficient approach. However, this is likely to involve additional administration and a transfer fee.
The importance of specialist advice
It’s important to take advice from our team of specialists before making any decisions about your pension arrangements. The right approach will depend upon your personal circumstances.
Our team has been supporting contractors to work compliantly and tax-efficiently as PSCs and Umbrella employees for three decades. Please get in touch to discuss your pension or any other aspect of contractor accounting.