Self-employed should be ‘auto-enrolled’ into pensions

Marina Gerner
13 July 2017

A new review, commissioned by the government, says self-employed workers should be ‘auto-enrolled’ into pensions and their Class 4 National Insurance Contributions (NICs) hiked.

The ‘Taylor Report’ was led by Matthew Taylor, chief executive of the Royal Society of the Arts, and commissioned by the prime minister back in 2016, to figure out how employment practices should evolve.

It says that Class 4 NICs for the self-employed, which are currently 9 per cent, should be brought in line with the 12 per cent contributions paid by employees.

But this recommendation is likely to meet resistance from the Labour party, and it is also a policy that the government has previously U-turned on.

The recommendation to enrol the self-employed into a pension through self-assessment tax returns could be more fruitful. The self-employed population has been steadily growing to around five million people in the UK.

Self-employed people, it is thought, are less likely to save for retirement and this savings gap needs to be addressed. A 2015 report by the Resolution Foundation found that just 27 per cent of self-employed workers put money into a pension, compared to more than 50 per cent of employees.

Malcolm McLean, senior consultant at Barnett Waddingham, comments: ‘It has been the view of the pensions industry for some time that the growing army of self-employed workers without a pension should be brought into auto-enrolment. Surely the question now is not if this should happen, but how and when it can be best achieved.’

He says there is merit in the idea of using self-employed workers’ tax returns and diverting a percentage of their profits and gains into a pension scheme, adding that the system should mirror auto-enrolment for employees as far as possible.

He adds: ‘There should be a specified 4 per cent contribution rate plus 1 per cent tax relief. A further cash top-up from the government in lieu, as it were, of a separate employer contribution - the self-employed, of course, are their own employer - is also worthy of consideration.’

However, McClean also points out that the self-employed are a diverse group, including not only sole traders, but many large business owners for whom such top-ups from public funds could well attract criticism.

Tom Selby, senior analyst at AJ Bell, says: ‘While reforms to the state pension introduced last year boost self-employed workers by giving them exactly the same entitlements as employed workers, the Taylor Review acknowledges that most should not be relying solely on the state to support them in retirement.’

He argues that bringing the level of Class 4 NICs paid by the self-employed into line with those paid by employed people may make sense given their increased state pension entitlement, but it won’t be easy.

‘The government has already been forced into one embarrassing U-turn on raising Class 4 NICs and, given Labour’s commitment not to increase personal National Insurance contributions and Theresa May’s flimsy majority, a second attempt could hit a Parliamentary brick wall,’ adds Selby.

Couple of catches to consider

Jon Greer, retirement policy expert at Old Mutual Wealth, says there are a few catches to consider too. First and foremost, only around two million of the five million self-employed workers would qualify for auto-enrolment based on the earnings trigger, which currently enrols eligible workers who earn at least £10,000.

He says: ‘Implementing a savings policy for the self-employed is essential, but the current terms of auto-enrolment would still mean millions are not contributing to a pension.’

While some self-employed worked may feel aggrieved at being compelled to save, especially if they felt they couldn’t afford the contribution they would make themselves, Mr Greer says that the tax relief and employer contributions provide a big reason to stick with pension saving despite the short-term sacrifice.

Tim Roache, general secretary of trade union GMB, says: ‘Given the epidemic of precarious work in the UK, this report simply does not go far enough in fixing a broken system, which gives employers the choice of whether to treat their workers fairly or not.’

This article was written for our sister magazine Money Observer.

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