Umbrella contractors: how pension funding really works (and where NI savings can help)

How pay works under an umbrella

An umbrella company is your employer and must meet automatic enrolment duties. The flow works as follows:

• The agency pays the umbrella an assignment rate.
• The umbrella deducts employer costs (NIC, pension, holiday pay, Apprenticeship Levy, margin).
• What remains is your gross taxable pay.
• From that, Income Tax, employee and employer NI, and any employee pension
contributions are deducted.

Ways to contribute

1. Standard workplace contributions (net pay or relief at source)

Save Income Tax but not NI (NI is calculated before deductions).

2. Salary sacrifice (salary exchange)

You reduce cash pay; the umbrella pays the same into the pension as an employer contribution.
Reduces Income Tax, employee NI, and employer NI.
Cash pay must stay above National Minimum Wage, so umbrellas may cap sacrifice.

3. Personal/SIPP top-ups

Paid from take-home pay. The provider adds 20% (basic rate relief).
Higher and additional rate relief reclaimed via Self-Assessment.

Why salary sacrifice helps (2025/26 NI)

Employee NI: 8% (£12,570–£50,270), 2% above.
Employer NI: 15% above £417 per month.

Sacrificing £X can save up to 8% employee NI and approximately 15% employer NI.

Case study (illustrative, 2025/26 rules)

Scenario A: £40,000 umbrella pay, £10,000 into pension

1. Standard contribution

Tax saved: £2,000
NI saved: £0
Net cost: £8,000

2. Salary sacrifice £10,000

Tax saved: £2,000
Employee NI saved: £800
Employer NI saved: ~£1,500
Net cost: £5,700 (an improvement of £2,300 compared with standard contribution)

Key allowance rules

Annual Allowance: £60,000 (carry forward 3 years; taper applies above £260k income, minimum £10k).
MPAA: £10,000 once flexible access of DC benefits is taken.
Lifetime Allowance: abolished (April 2024). Lump sums tested against LSA (£268,275) and LSDBA.

Important: This is general information, not personal advice. Pension and tax rules can change, and their effects depend on your circumstances. Investments (including pensions) can fall as well as rise in value, so you may get back less than you invest. Consider regulated financial advice before taking action.