Guide to Umbrella Company Pensions

Like it or not, everyone feels unwell at some stage in their lives, and sometimes to the extent that they can’t work. And taking time off work due to sickness is something that COVID-19 brought into sharp focus for millions of people working for themselves in the UK.

So, cutting to the chase, are umbrella company pensions a thing? And if so, how do umbrella company pension schemes work? In this jargon-free guide, we’ll explain everything you need to know about this important aspect of umbrella working.

Do umbrella companies pay pension contributions?

Absolutely. Umbrella workers operate under a contract of employment, which means the umbrella company is legally obliged to auto-enrol workers into a workplace pension after 12 weeks at the latest. This is no different to any other employer. To qualify, the worker must:

Earn above £10,000 annually
Be aged between 22 and your State Pension Age
Usually work in the UK
Hold ‘worker’ status

What is a workplace pension scheme?

A workplace pension - commonly called ‘automatic enrolment’ - is when an employer contributes a percentage of your earnings into a pension scheme. Businesses are legally required to contribute at least 3%, but many choose to pay in much more. The idea is that the employer’s contributions top up the employee’s, helping them to save more for retirement.

Can workers opt out?

Of course. By law, your umbrella company has to enrol you after 12 weeks, but if you’d rather make your own arrangements for retirement, you can always opt out. However, it’s worth bearing in mind that you can’t opt out of a workplace pension until you’ve made the first contribution - for which you will of course receive a refund. Umbrella companies can’t opt out on your behalf either, meaning you’ll need to contact the pension provider to do this.

How do umbrella company auto-enrollment pensions work?

An auto-enrollment pension is also called a workplace pension, this works in the same way as with any employer:

You’ll be presented with information regarding pensions and auto-enrolment upon joining an umbrella company.
Your umbrella company will automatically enrol you into a pension scheme with a provider (some do this immediately, others at 12 weeks).
A contribution (no less than 3%) of your earnings will be paid into this by the umbrella company. You can then top this up.
All pension contributions will be shown clearly on the payslip issued to you by the umbrella company.

Do workers have a choice over pension provider?

You cannot choose your auto-enrollment pension provider, however Parasol is set up to give you more freedom. If you already have a private pension in place, we can contribute to this existing scheme as your employer, providing it can accept employer contributions. This is voluntary and separate to your auto enrollment pension and works in the same way as salary sacrifice.

Voluntary employer private pension contributions

It’s an option sometimes made available to employees, which sees the employee reduce their taxable earnings by the amount of their pension contribution. The employer will pay the full pension contribution amount.

In addition to the tax savings, as a result of the lower salary, National Insurance (NI) payments owed to HMRC by the employer and the employee are reduced. This helps both parties operate with greater tax efficiency and ensure the worker still receives their full pension contributions.

However, Parasol will even pass on the employer’s NI savings to you, the worker. This is not always the case.