Pension contributions — and IR35.
IR35 determines whether a contractor is taxed as an employee or as self-employed. The distinction affects how pension contributions work, what tax relief is available, and whether employer contributions from a personal service company are viable.
- ▸Inside IR35: the deemed employment rules mean income is treated as salary for tax purposes. The contractor pays income tax and NI as if employed, but receives no employer pension contributions unless the fee-payer or umbrella provides them.
- ▸Inside IR35 via an umbrella company: pension contributions can often be made via salary sacrifice from the umbrella, preserving NI savings.
- ▸Outside IR35: the contractor operates as self-employed or through a PSC. Standard self-employed or director pension rules apply — employer contributions from the PSC are the most tax-efficient route.
- ▸The annual allowance (£60,000) applies regardless of IR35 status.
Inside IR35: what you can and can't do
When a contract is determined to be inside IR35, the contractor's income from that engagement is treated as deemed employment income. The end client (or the fee-payer in the supply chain) must deduct income tax and National Insurance at source, as if the contractor were an employee.
For pension purposes, being inside IR35 creates a problem: the contractor is taxed like an employee but does not receive the benefits of employment. There is no obligation for the end client or agency to make employer pension contributions, provide auto-enrolment, or offer salary sacrifice arrangements. The contractor bears the tax burden of employment without the pension infrastructure.
Personal pension contributions remain available. The contractor can make contributions to a SIPP or personal pension scheme, with tax relief based on their relevant UK earnings (which now includes the deemed employment income). The contribution limit is 100% of relevant earnings or £60,000, whichever is lower.
However, because income tax and NI have already been deducted at source, the net cash available for pension contributions is lower than it would be outside IR35. The tax relief on pension contributions partially offsets this — a 40% taxpayer contributing £10,000 effectively pays £6,000 after relief — but the overall cash position is tighter.
Employer contributions through umbrella or PSC
Many contractors inside IR35 work through an umbrella company rather than their own limited company. The umbrella employs the contractor and handles payroll, tax, and NI.
Some umbrella companies offer workplace pension schemes with salary sacrifice. If available, this allows the contractor to redirect pre-tax, pre-NI income into a pension — recovering some of the NI cost that IR35 imposes. The mechanics are identical to salary sacrifice for a regular employee: the contractor agrees to a lower salary, and the difference is paid as an employer pension contribution.
Not all umbrella companies offer this, and the terms vary. The pension scheme may be a basic auto-enrolment scheme (often NEST) with limited investment options, or it may allow contributions to an external SIPP. Checking the umbrella's pension arrangements before signing up is worthwhile.
For contractors inside IR35 who continue to operate through their own PSC (personal service company), the position is more constrained. The deemed employment rules mean the PSC must account for PAYE and NI on the contract income. After these deductions, remaining company profits can still be used for employer pension contributions — but the available cash is significantly reduced. The deemed payment calculation already taxes the bulk of income as employment earnings.
Outside IR35: the self-employed route
Outside IR35, the contractor's PSC is treated as a genuine business. Income flows to the company as revenue, and the director can extract profits via the standard combination of salary, dividends, and employer pension contributions.
Employer pension contributions from a PSC operating outside IR35 follow the same rules as for any limited company director:
- Deductible against corporation tax
- No employer or employee NI
- Not limited by the director's salary
- Subject to the annual allowance (£60,000) and the wholly-and-exclusively test
This is the most tax-efficient way for an outside-IR35 contractor to build pension savings. A PSC with £100,000 of annual revenue, after paying a £12,570 salary and covering business expenses, might direct £30,000–£40,000 into the director's pension as an employer contribution.
The director pension calculator models the tax savings from employer contributions versus salary extraction. The self-employed pension calculator covers sole trader scenarios.
The annual allowance still applies
Regardless of IR35 status, the pension annual allowance applies to all contributions in a tax year: personal contributions, employer contributions, and contributions to any other pension scheme (including any workplace pension from a separate employment).
The standard annual allowance for 2025/26 is £60,000. Carry forward of unused allowance from the previous three tax years may increase the effective limit, provided the individual was a member of a registered pension scheme in those years.
For contractors who switch between inside and outside IR35 engagements (or between employment and contracting), tracking total pension contributions across all sources is essential to avoid an annual allowance charge.
The tapered annual allowance applies to individuals with adjusted income above £260,000 — reducing the allowance by £1 for every £2 above that threshold, to a minimum of £10,000. This is unlikely to affect most contractors but can apply to highly paid IT or management consultants.
- ▸IR35 (off-payroll working rules) determines whether a contractor is taxed as an employee or as self-employed. Since April 2021, the end client (for medium and large businesses) determines IR35 status. [HMRC]
- ▸Inside IR35, the fee-payer must deduct income tax and NICs from payments to the contractor's PSC or intermediary. [HMRC]
- ▸The pension annual allowance for 2025/26 is £60,000 regardless of employment status or IR35 determination. [HMRC]
- •IR35 status is determined per engagement, not per contractor. A contractor may be inside IR35 on one contract and outside on another simultaneously.
- •Umbrella company pension arrangements vary significantly. Check salary sacrifice availability, fund options, and fees before committing.
- •Making employer pension contributions from a PSC on an inside-IR35 contract is technically possible but the available cash after deemed payment calculations is often limited.
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.