What happens to your pension if you switch from working as a limited company contractor (PSC) and join an Umbrella company?

With reforms to off-payroll rules in the private sector on the cards for April 2020, this is a very good question.

A compliant Umbrella company has to operate like any other employer and provide a pension scheme for employees. You do not have to join the Umbrella pension scheme, but the Umbrella has to offer a scheme to you, and you have to opt in or out within 12 weeks of registration.

From 6th April 2019, employers contribute 3% of qualifying earnings and employees pay 5% of qualifying earnings bringing overall tax-efficient contributions to your pension scheme of 8%. You can receive tax relief on contributions up to a value of £40,000 each year under the current annual allowance rules.

If you are a limited company contractor who makes contributions to a private pension scheme and you’re thinking of switching to Umbrella, you will need to decide if you are going to:

  • Maintain your personal pension whilst opting into or out of the Umbrella pension.
  • Opt into the Umbrella scheme and discontinue contributions to your personal pension or opt into the Umbrella scheme and transfer your current pension.

It’s important to remember that pension contributions under Umbrella would work differently – you would need to make contributions from the income you receive from the Umbrella company via PAYE, not 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. It’s likely you would need to either:

  • Contribute to your pension from your taxed income and claim any higher rate tax credit in your self-assessment tax return. You would need to consider the fact that you would still have to pay employers’ National Insurance Contributions as part of the employment cost.
  • Contribute a larger amount to the Umbrella’s provider and then transfer these contributions out to your own pension. This, however, is is likely to involve additional administration and a transfer fee.

Take specialist advice

It’s important to take advice from your K&B accountant before making any decisions about changing your pension arrangements. The right approach will depend upon your personal circumstances.

Our team has been supporting contractors to work compliantly and tax-efficiently for many years – please get in touch to discuss your pension or any other aspect of contractor accountancy.