An Umbrella Guide to Pensions (Including NEST)
by on January 23, 2023
The maximum State Pension in the UK at the moment is £9,628 per year. It’s well known that the UK ‘devotes a smaller percentage of its GDP to state pensions and pensioner benefits than most other advanced economies’ and, therefore, it’s important to have an occupational pension in place for when you retire. However, if you’re a contractor working through an umbrella company you might not be aware that not all umbrella companies allow you to put money aside for your old age (or early retirement). Here we look at how Payme can help you save for this important time of your life.
Why save for a pension?
£185.15 a week, or what the state pension provides at the moment, simply isn’t enough for most of us to live on when we retire. The current cost of living crisis has exacerbated the situation and millions of elderly people who rely on the state pension are struggling to make ends meet. If you’re lucky enough to be able to save for your own old age, and if you haven’t started with your pension yet, now is the time to do it.
Pensions offer people a source of income when they retire, ideally enough to maintain a healthy, active, enjoyable life after work. They can also provide a reassuring sum of money, either as a continued pension or as a lump sum, for our dependents when we die so they don’t suffer financially– this usually applies to home-makers who haven’t worked for any number of reasons and who rely on their partner’s income.
If you’re a contractor who works through an umbrella company you will be automatically enrolled into that company’s workplace pension scheme. Auto enrolment was introduced by the government in 2012 to combat the dearth of people saving for their retirements through pension schemes, and umbrella companies, like every other UK company, must contribute towards your pension – the minimum amount they can contribute is 3% and the maximum is 5%, on earnings between £6,240 and £50,270.
Because you’ll become automatically enrolled – usually in a timeframe of up to 12 weeks – it’s vital that the umbrella company you choose to work through is compliant. This is to ensure that the umbrella is meeting its obligations towards your future and not leaving you with financial uncertainty.
While some umbrella companies will have their own preferred pension providers, most will auto-enrol you to NEST (National Employment Savings Trust). This is an independent, trust-based workplace pension scheme, accountable directly to the Department for Work and Pensions, which was set up by the government in 2010 in order to make auto enrolment simple, and it’s now the largest in the country.
NEST, like many workplace pensions, offers eligible contractors the benefits of tax relief – meaning that for every 80p you contribute NEST will claim 20p back for you from the government. This tax relief is set at 20% – the basic rate of tax paid on earnings – which means that the more you contribute the more NEST claims back for you.
Many contractors choose to use salary sacrifice for their pension contributions. This means that they’ll sacrifice part of their salary as part of their contractual agreement – usually this money goes towards a pension. There is no ‘fixed’ amount that contractors can sacrifice – it can be either a percentage of their monthly income or a fixed amount each month. The benefits of salary sacrifice include a reduction of tax and NIC on their monthly income, as well as the benefits of tax-free pension contributions.
At Payme we give the worker the ability to take advantage of salary sacrifice for pension contributions. It could be an excellent and tax efficient way to save for retirement. Typically, the contributions are treated as employer contributions which means the funds are not assessed for PAYE tax and therefore additional savings in tax and National insurance contributions.
As an employee of Payme you can pay a fixed percentage into a private pension as long as it doesn’t reduce your gross pay below national minimum wage. You are currently able to pay up to £40,000 a year with the possibility to even back-date any unused allowances from the previous three years.
Not all umbrella companies allow workers to take advantage of salary sacrifice which is just one more reason why Payme is the umbrella of choice for contractors.