Employer's pension contribution from umbrella company

[Fred_Scuttle]

I contract using an umbrella company and I would like them to make an employer's pension contribution into my SIPP from the gross amount that I earn this month after deducting travel expenses. This would be a one off payment. Therefore this month I would receive no salary.

Can this be done? Is it legal?

The way I see it is that they are my employer and so an employer's pension contribution is perfectly legal. Using this method would save me from paying NI (EE and ER) which I would have to pay if I made a personal contribution.

[malvolio]

No idea. What does your contract say? Or, blindingly original idea, why not askl the umbrella - you're paying for their services to manage your income, there's a fighting chance they'll know the answer.

Or get your own company and make your own decisions (and save 20% a year gross, but who's counting)

[expat]

I contract using an umbrella company and I would like them to make an employer's pension contribution into my SIPP from the gross amount that I earn this month after deducting travel expenses. This would be a one off payment. Therefore this month I would receive no salary.

Can this be done? Is it legal?

The way I see it is that they are my employer and so an employer's pension contribution is perfectly legal. Using this method would save me from paying NI (EE and ER) which I would have to pay if I made a personal contribution.

If they make a one-off payment, they are merely spending your money for you according to your instructions. Therefore it is not an employer's pension contribution, but an employee's pension contribution executed by the employer on the employee's behalf; it attracts income tax relief but does not avoid NICs.

For it to be an employer's pension contribution, it has to involve salary sacrifice. That is, you have to sacrifice the right to that salary. How you do that is not clearly defined (surprise!) and HMRC are unclear about it, because it forms part of employment law, not tax law. But in short, if you have a contract for a certain salary, and then you make a written agreement with the employer to pay a fixed amount per month into a SIPP instead of in salary, this is likely to be accepted. If you get them to make a one-off payment at your discretion, the question is rather, will you get away with it?

[IR35 Avoider]

If they make a one-off payment, they are merely spending your money for you according to your instructions. Therefore it is not an employer's pension contribution, but an employee's pension contribution executed by the employer on the employee's behalf; it attracts income tax relief but does not avoid NICs.

For it to be an employer's pension contribution, it has to involve salary sacrifice. That is, you have to sacrifice the right to that salary. How you do that is not clearly defined (surprise!) and HMRC are unclear about it, because it forms part of employment law, not tax law. But in short, if you have a contract for a certain salary, and then you make a written agreement with the employer to pay a fixed amount per month into a SIPP instead of in salary, this is likely to be accepted. If you get them to make a one-off payment at your discretion, the question is rather, will you get away with it?

If you set up your own company and move your contract to it, you won't have to have a contract of employment so won't have to worry about salary sacrifice issues.

However, whatever issues there may be, the umbrella company is just an employer like any other, and will be able to make employer contributions, if they can be bothered with the admin. I suspect the only option they will offer you is to contribute to a scheme they've set up, if they have one.

[Fred_Scuttle]

In order to answer malvolio’s question, I’ve asked my umbrella company if they can make an employer’s contribution but they don’t know if it’s possible. They’ve asked their accountant to look into it. Seems to be taking a while though.

Expat…. I was interested to read your comments on the topic. My plan was to avoid being paid this month and so the money that would have gone towards my salary would be directed to my SIPP instead. Surely this means I would be sacrificing my salary for that month? From what you say, and I’m not surprised, this is all loosely defined so that HMRC can twist it so that they can squeeze as much money out us.

IR35 avoider …. With my limited knowledge this would have been my understanding in that my umbrella is my employer and so can make employer contributions. I think they’re OK about making the contribution but want to make sure that it’s within the law. Trouble is getting a definitive answer is difficult.

[expat]

My plan was to avoid being paid this month and so the money that would have gone towards my salary would be directed to my SIPP instead. Surely this means I would be sacrificing my salary for that month?

So you would think. But if the individual sum of money is disbursed on your direct instruction, you have not sacrificed the salary, you have spent it. That applies even if you got the employer to do the actual disbursement for you.

Salary sacrifice doesn't mean that you have spent it, it means that you have given up in advance the right to spend it as you please.

IR35Avoider, even if you are on salary from YourCo, you have an impled contract of employment. If you intend to agree with YourCo that they will invest what would otherwise have been some of your salary in a pension, you should get a written agreement with YourCo in advance that this will be done. An exchange of letters is usually sufficient.

I know that this has an element of farce, but it provides a paper trail. Much more convincing than just saying later to Hector, "Oh yeah, but I meant that to be a salary sacrifice".

[ASB]

So you would think. But if the individual sum of money is disbursed on your direct instruction, you have not sacrificed the salary, you have spent it. That applies even if you got the employer to do the actual disbursement for you.

Salary sacrifice doesn't mean that you have spent it, it means that you have given up in advance the right to spend it as you please.

IR35Avoider, even if you are on salary from YourCo, you have an impled contract of employment. If you intend to agree with YourCo that they will invest what would otherwise have been some of your salary in a pension, you should get a written agreement with YourCo in advance that this will be done. An exchange of letters is usually sufficient.

I know that this has an element of farce, but it provides a paper trail. Much more convincing than just saying later to Hector, "Oh yeah, but I meant that to be a salary sacrifice".

Any company can still make one off employer contributions into an authorised pension (if they can be bothered and the pension will allow it). There is no rule that fixes them to any level. Indeed all final salary based schemes normally have highly irregular employer contributions.

Salary sacrifice applies to employee contributions and can help in improving employer NI bills and also can potentially help if large contributions are being made.

[IR35 Avoider]

IR35Avoider, even if you are on salary from YourCo, you have an impled contract of employment. If you intend to agree with YourCo that they will invest what would otherwise have been some of your salary in a pension, you should get a written agreement with YourCo in advance that this will be done. An exchange of letters is usually sufficient.

I'm completely mystified by this statement - are you assuming I'm with an umbrella? I have my own company and pay myself less than the National Minimum Wage, which I believe I'm allowed to if I'm a Director with no contract of employment.

[IR35 Avoider]

Any company can still make one off employer contributions into an authorised pension (if they can be bothered and the pension will allow it). There is no rule that fixes them to any level. Indeed all final salary based schemes normally have highly irregular employer contributions.

Salary sacrifice applies to employee contributions and can help in improving employer NI bills and also can potentially help if large contributions are being made.

I think expat is making a more subtle point than you've appreciated, and he may be right. My wife has used salary sacrifice to reduce her taxable salary and get bigger pension contributions from her employer. Each year in February she has to tell them what percentage of her nominal salary she wants to sacrifice, that then applies to the whole of the subsequent financial year and cannot be changed. Although this could be purely to ease admin, I think it is really because of the sort of legal issues expat is talking about.

Edit: what would be really interesting is whether the agreement could be of the form, pay me up to X in salary over the year, and pay any surplus fee I generate into a pension. This would probably suit contractors working through an umbrella company better than specifying a percentage, and I can't see why it wouldn't be acceptable.

[expat]

I think expat is making a more subtle point than you've appreciated, and he may be right. My wife has used salary sacrifice to reduce her taxable salary and get bigger pension contributions from her employer. Each year in February she has to tell them what percentage of her nominal salary she wants to sacrifice, that then applies to the whole of the subsequent financial year and cannot be changed. Although this could be purely to ease admin, I think it is really because of the sort of legal issues expat is talking about.

Quite so. It is important to sacrifice the salary, i.e. to give up any right to spend it as you choose. Obviously if you own the company it is rather moot, since you could change the arrangement any time you want, but it helps to document the process.

Re your previous post, yes I meant in the case of running you r own Ltd Co. That's what I meant when I said that it had an element of farce (you as director write a letter to you as employee, detailing the company's new pension scheme; you as employee reply accepting the salary deduction in writing...). I thought it was amusing whan I did that, but my accountant took it with a straight face. In your case you have little salary to sacrifice, but I guess no NICs on most of your money anyway so the salary sacrifice question doesn't apply to you (it's only important for the NIC aspect).