Apart from the security of State pensions, individuals all across the UK tend to invest in personal pensions - an additional support system for their post-retirement life. Personal pensions are an interesting phenomenon in their own right. With continuous reforms in legislation, they have been known and understood in different formats historically. Currently speaking, they are instrumental in their dual function of saving for retirement and generous tax relief.
So, can one make personal pension contributions through an umbrella company? The answer is a staggering yes.
What we cover in this article:
- Are you eligible for personal pension?
- How can one contribute to their personal pension?
- What are the upsides of personal pension?
Accessing Workplace pension
Contractors working through an Umbrella company are classed as employees, which makes them automatically enrolled in the Workplace pension scheme, if they fulfill the following conditions -
- You’re between the age of 22 and State pension age
- You’re classed as an employee
- You’re classed as an ordinarily UK resident for work purposes
- You’re earning more than £10,000 a year
Since an umbrella companies are legitimate employers, they are required to have a pension scheme in place for all their employees, which is to say that all employees are automatically enrolled in pension plans as soon as they join the company. These pension schemes can be of varied nature depending on the company's choice- funds, shares, etc. The contribution is made by both the company and the employee, which is automatically done at fixed intervals.
This auto-enrollment is mandatory at the time of employment as per the government guidelines, but if one chooses to opt out at a later stage, they can easily do so.
Also See: How To Choose An Umbrella Company?
How can one contribute to their personal pension?
In addition to the workplace pension scheme, you can also ask an Umbrella company to pay into your personal pension pot. When you make contributions through Umbrella, you have enough support in the form of allowances and earnings. You can consider these four relevant allowances when contributing to a pension -
- Annual Allowance - An employee can fix an amount- up to 100% of their pre-taxed income or the annual allowance, which is £40,000 currently- that go straight to their pension pot each year. The payment can be made either by the employee or directly by the employer. If you exceed the current allowance limit of £40,000, you won’t receive tax relief on the paid contributions over and above the allowance limit, and you will be liable to pay an annual allowance charge. For people who are low or non-earners, the contribution is allowed up to £3,600 per year.
- Tapered annual allowance for high earners - You will be subject to a ‘tapered’ or lower annual allowance during the ongoing tax year if both these conditions apply -
- The threshold income is more than £200,000 and
- The adjusted income is more than £240,000
It is important to take into account that the threshold income and adjusted income limits are different for previous tax years.
- Carry forward allowance – By using carry forward allowance, you can make use of unused allowances from the previous 3 tax years to make pension contributions in excess of your annual allowance.In order to get eligible for using carry forward allowance, one must be a member of a registered pension scheme during the carry forward period, and you will not be entitled to receive tax relief on contributions in excess of your earnings in that tax year in which the contribution is paid.
- The lifetime allowance - The amount of pension saving that you can accumulate does not have a limit. However, the lifetime allowance indicates that there is a limit on the amount of pension benefits that can be withdrawn, whether as a lump sum or as income from your pension without the payment of a tax charge. For the period 2020-2021, the lifetime allowance is set at £1,073,100.
Also See: A Guide To Sick Pay For Umbrella Employees
What are the benefits of using an Umbrella Company to make pension contributions?
- Tax relief: The contributions are made on the pre-taxed income, which means that the contributed amount is deposited in the pension pot without paying National Insurance contributions and income tax. This way, personal pensions save more than any other investment options.
- Transferability: The contributions are portable among employers, which is to say, if one changes jobs, their pension pot is easily transferred to the new employer without losing prior investment.
- Tax-free withdrawal: The first 25% can be generally accessed tax-free from the pension pot from the age of 55 (as of 2020/21).
Conclusion
Saving and investment are crucial to a comfortable retirement and life afterwards. Numerous governmental reforms in the pension management is an indicator of the fact that financial security holds more value in an individual's life than anything else. In today’s time, where the economy takes precedence over every other aspect, finance is very tightly linked to the overall wellbeing of an individual.
Personal pensions in this regard are extremely helpful as they add on to the workplace pension and provide a much needed hike to the collected amount. With the current regulations, DNS umbrella companies are able to facilitate this process tremendously; they not only contribute to the pension pots of their employees but also take up the outsourced complicated work of managing the pensions efficiently.
Also See: Expense Claim Through Umbrella