Empowering the Freelance Economy

Pension Woes: what umbrella company contractors must look out for

Tony Clark, Senior Proposition Manager, St James’s Place (www.sjp.co.uk)
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By Tony Clark, Senior Proposition Manager, St James’s Place (www.sjp.co.uk)

What’s covered in this article:

  • What can freelancers do to avoid having many small pension pots?
  • What are the different types of SIPPs or pension funds that a freelancer can invest in?
  • Can a freelancer invest in this pension fund if they take overseas contracts or retire outside the UK?

Many freelancers will be familiar with working through an umbrella company – an intermediary between them and any labour suppliers, such as recruitment agencies. Whilst umbrella companies can help to shield IR35-related risks by taking on the responsibility to tax the worker at source, they come with their own challenges.

Sometimes joining an umbrella company is unavoidable, especially if you want to work for certain end clients through recruitment agencies. Unfortunately, this can often mean that they have to pay for the privilege to work in the form of umbrella company admin fees, employees NI, employer’s NI and apprentice levy, plus the usual costs to operate as a freelancer.

The umbrella company will also be required to automatically enrol employees into a pension scheme if they work with them for more than the maximum postponement period. What tends to happen all too often in the industry is that the umbrella company is acquired by another umbrella company or payroll service company. It is then difficult for freelancers to transfer their pension to another umbrella company or another pension fund. 

What this can mean for the contractor is a large number of very small pensions pots that could be very easy to lose track of. In this article, Tony Clark, Senior Propositions Manager at St James’s Place answers some of the most common questions around pension investments when working through an umbrella company.

What can freelancers do to avoid having many small pension pots?

It is possible for a freelancer or contractor to transfer the smaller pots over to another pension themselves, but it involves time and effort.

The small pots rules do allow someone over the normal minimum pension age (currently 55) to cash in up to three pots of up to £10,000, which can provide another solution in retirement.   

The solution to this is that most umbrella companies appear to allow contributions via salary sacrifice to the individual’s own choice of pension instead of a default workplace scheme. A standard personal pension will suit most people’s needs, it doesn’t need to be a Self-Invested Personal Pension (SIPP). 

What are the different types of SIPPs or pension funds that a freelancer can invest in?

A freelancer or contractor can stay in the employer scheme as outlined above, or if they choose to, can remain paying into their own personal pensions or SIPP.  All personal pensions are very similar in terms of the product offering.  A SIPP offers a wider investment choice and can be used in certain circumstances for commercial property investment.  

However, there is no need to have a special product for freelancers.  An important point is that the pension needs to be willing to accept the contributions and method of payment that the umbrella will use.  

Can a freelancer invest in this pension fund if they take overseas contracts or retire outside the UK?

Non-UK residents can only pay and receive tax relief on pension contributions to an individual’s existing UK scheme and are limited to up to £3,600 a year for up to five tax years following departure.  It may also be more beneficial to make contributions in their country of residence. It would be beneficial to take specialist advice on this.


It’s possible to take benefits from a UK pension as a non-UK resident. The double taxation agreements with most countries will ensure that pension income is only taxed in the country of residence at the time it is taken.  Note though that UK pension providers always have to pay pension income out under PAYE.  They can only make payments gross when they are supplied with an NT tax code.   A non-resident individual may be able to apply to HMRC in advance of receiving any pension income to obtain the NT code.

UK pensions can also be transferred out to an overseas pension, but this must be a Qualifying Recognised Overseas Pension Scheme (QROPs).

A summary of the key points

  • Use salary sacrifice where available under an umbrella company. 
  • If working under a limited company, pensions are a very tax efficient way of extracting funds from the company. 
  • The increase in the dividend rates of 1.25% and National Insurance Contribution (NIC) rates have made pensions more attractive.  

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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