Pension tax relief: everything you need to know as a contractor

Depending on the umbrella company you are working with, you should be automatically enrolled into a pension scheme. Tax relief is one of the major benefits of paying into a pension and can help contractors save for the future. Carry on reading to find out what it all means and if you’re eligible. 

What is pension tax relief? 

When you make payments towards your pension, the tax that would usually be deducted also funds your pension. This is a scheme set up by the government to encourage more people to invest in their future. 

Am I eligible? 

Individuals who meet any of the following could be eligible for tax relief on their pension contributions: 

• You are a UK resident
• You are under 75 years of age
• You make a gross contribution of up to the higher of 1) your relevant UK earnings or 2) A £3,600 gross contribution which equates to £2,800 as a net figure to your pension pot

What’s the difference between net arrange payments and relief at the source? 

There are two different ways in which you can get tax relief on your pension: 

1. Net arrange payments 

As your employer, the umbrella company you are with will automatically deduct your pension contributions before tax is worked out. That means you only owe tax on whatever remains – thus, tax relief is instantaneous regardless of your tax band. In other words, the figure that appears on your payslip includes your pension contribution as well as the tax relief. 

2. Relief at source 

This is when the company you work for takes your tax and National Insurance Contributions (NICs) from your pay cheque before it takes your pension into account. You are then owed money from your pension provider who will claim back the tax relief from HMRC and add it to your total pension. In this scenario, the amount you see on your payslip does not include the tax relief. 

Here at Mint, all of our candidates are eligible to enrol into (and out of) a pension scheme at any point. Get in touch with our team via [email protected] to find out more about the scheme and what this means for pension tax relief. 

Remember, if you switch umbrella companies on multiple occasions then you could end up with multiple pension pots. That’s why we recommend finding one compliant and reliable umbrella to stick with.