Review supports increasing Class 4 National Insurance Contributions for the self-employed – but proposal could face fierce opposition from Labour
Self-employed workers could be ‘auto-enrolled’ into a pension through self-assessment tax returns
Challenge to Government and industry to better explain the benefits of retirement saving
Tom Selby, senior analyst at AJ Bell, comments:
“The UK’s five million strong army of self-employed workers are woefully undersaving for retirement, with one survey suggesting just 27% are putting money into a personal pension. 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.
“Bringing the level of Class 4 National Insurance Contributions (NICs) paid by the self-employed into line with those paid by employed people may be logical 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.
“Beyond the state pension, the Review advocates extending the principles of automatic enrolment to the self-employed. Using the annual self-assessment tax return to automatically divert 4% of income into a pension, unless the individual opts-out, is a pragmatic approach.
“The Government-sponsored National Employment Savings Trust (NEST) would be the obvious default provider for these contributions, although serious consideration should be given to how self-employed workers will be engaged in the process and whether embedding choice into the process would be practical and beneficial.
“For example, people could be given the option to choose provider or to have their contribution paid into a Lifetime ISA, which offers extra flexibility (albeit with an early-access Government penalty).
“Policymakers will also need to consider whether to ‘match’ this contribution in the same way as auto-enrolment – potentially through the tax system - and the fiscal implications of doing so, which are likely to be significant.
“The gauntlet has now been laid down to Government and the industry to better communicate the benefits of retirement saving to everyone, including the self-employed. The bonus on offer through tax relief is incredibly generous – a 25% uplift for basic rate taxpayers and a 66% boost for higher rate taxpayers – while the pension freedoms have vastly improved the flexibility of retirement saving. We all need to do more to explain these positives in a clear, engaging way.”