TECHTALK. The self-employed aren t required to automatically enrol themselves. SANDRA HOGG

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1 TECHTALK This article originally appeared in NOV 17 edition of techtalk. Please visit for the latest issue. PENSIONS FOR THE SELF-EMPLOYED Insufficient participation in pension planning by the self-employed, exacerbated by confusion around differing working practices, requires an integrated approach by Government. This article examines the issues and looks at suggested solutions. SANDRA HOGG Sandra is a Chartered Tax Adviser with over 35 years experience as a financial planning expert in the insurance industry and as an accountant advising owner managed businesses and high net worth clients. The Taylor Review delivered a set of stark statistics about how few self-employed people are saving for their retirement highlighting that only 13.1% of self-employed people were participating in a pension in 2014/2015, dropping to only 4.2% amongst year olds. By way of confirmation, Taylor also quoted statistics of 27% saving into a pension from a 2015 report by the Resolution Foundation and 23% intending to rely on pension savings in retirement from the Wealth and Assets Survey. At 4.81 million, self-employed people represent more than 15.0% of all people in work in the UK according to the Office for National Statistics (ONS) report for June This is an increase of 23,000 compared with the same time last year. It seems clear from these statistics that a large and growing proportion of the working population isn t saving for retirement. By contrast, automatic enrolment has reportedly been a great success so far, with almost seven million employees having been enrolled in a pension scheme by nearly 300,000 employers. Furthermore, the Government expects automatic enrolment to lead to around ten million people newly saving or saving more by 2018, generating around 17 billion a year more in workplace pension savings by 2019/2020. Employers have played a huge part in this success, contributing almost 60% of the 82 billion saved into workplace pensions in The estimated average amount of contributions for workers of medium or large firms has increased to 8% of employee earnings, four times higher than the current minimum contribution rate. The self-employed aren t required to automatically enrol themselves.

2 Date Employer's staging date to 05/04/ /04/ /04/ /04/2019 onwards Employer minimum contribution 1% 2% 2% 5% 3% 8% Total minimum contribution (including 1% (including 3% (including 5% Of course, the self-employed aren t required to automatically enrol themselves and they can t benefit from the advantages of employer contributions. The Government has acknowledged that something needs to be done to resolve this and reduce the potential that the taxpayer has to pick up additional costs associated with ill health or inadequate retirement saving. It also acknowledges a growing population of people working in what is known as the gig economy, often classed as something between self-employed and employed and working in multiple jobs, who may not qualify for automatic enrolment.

3 THE GIG ECONOMY Innovations in digital technology like apps and adware have enabled new business models where marketing promotion can reach a much bigger and more targeted audience than a small business could ever have managed before. They have also changed the way sellers and buyers interact, often resulting in a quicker and more convenient buying experience. This has broadened the range of people who can make money from selling products or from using their particular skills to provide a service. The gig economy is where, instead of a salary, workers get paid for the gigs they do, such as deliveries or taxi journeys. Well known examples include Uber and Deliveroo. The Chartered Institute of Personnel and Development estimates that approximately 1.3 million people (4% of all in employment) are working in the gig economy in the UK. Only a quarter of gig economy workers responding to their survey said that it s their main job, suggesting most use gig economy work to boost their overall income rather than depend on it. And their research shows that income earned from gig work is typically low, with median reported income ranging from 6 to 7.70 per hour. Somewhat disappointingly, but perhaps not surprisingly, the Government has said it doesn t expect to make policy decisions on these areas during Nevertheless, changes to National Insurance contributions for the self-employed, the current method for providing them with state funded ill health and retirement benefits, are likely to be imminent. NATIONAL INSURANCE CONTRIBUTIONS FOR THE SELF-EMPLOYED The self-employed currently pay two classes of National Insurance Class 2 and Class 4. The Government has already announced plans to abolish Class 2 National Insurance contributions from 6 April 2018 and to reform Class 4 from the same date. This is important, because Class 2 National Insurance contributions build up entitlement to the state pension, maternity allowance (at the standard rate), bereavement support allowance and contributory employment and support allowance for the self-employed. Conversely, Class 4 National Insurance contributions don t qualify the selfemployed for any benefit entitlements. The Class 2 National Insurance rate is a weekly rate set at 2.85 per week for the tax year ended 5th April It s payable if profits from the self-employment exceed the small profits threshold currently set at 6,025. However, even where profits are below this level, the self-employed person has the option to pay Class 2 contributions voluntarily. This provides great value as it s considerably cheaper than voluntary Class 3 contributions, which currently cost per week. Class 4 National Insurance is currently payable at the main rate of 9% on profits between the lower profits limit of 8,164 and the upper profits limit of 45,000, and at the additional rate of 2% on profits above the upper profits limit. Class 4 National Insurance contributions are due to be reformed from 6th April 2018, so that they will become the means by which the self-employed get an entitlement to the above state benefits. The Government published a response to its consultation paper in December 2016: The gig economy is where, instead of a salary, workers get paid for the gigs they do. 2-national-insurance-contributions/abolition-of-class-2- national-insurance-contributions Further information is expected this Autumn. It remains to be seen if the Class 4 National Insurance increase to 10% in 2018, and 11% in 2019, that was announced by Philip Hammond in his March 2017 Budget, and then swiftly withdrawn, will re-materialize.

4 A person is self-employed if they run their business for themselves and take responsibility for its success or failure. CLARITY NEEDED There s a huge diversity in working practices, often with different tax treatments and employment rights. HMRC has attempted to provide some basic definitions, which I ve summarised below: Worker Has a contract or arrangement to do work or services personally for a reward. Although, bearing in mind that today it s only 8,297 a year ( a week), like anyone else, the self-employed probably wouldn t want to be relying solely on the State Pension for their retirement. WHAT MIGHT HELP TO INCREASE SELF- EMPLOYED PENSION FUNDING? A number of ideas have been put forward to Government, including: When a self-employed person delivers their self-assessment return to HMRC, as well as paying their income tax and National Insurance liability, they could also be required to pay a percentage of income towards a pension unless they are already paying in a sufficient amount or they choose to opt out. Provide an incentive for self-employed people to pay into a pension, similar to the employer contribution, which acts as an incentive for the employee not to opt-out of the pension scheme. This might be achieved by providing self-employed people with a National Insurance saving even more of an incentive if the rate of Class 4 National Insurance increases. Introduce digital payment software that automatically transfers money directly into a pension so that it becomes as much of a norm as when an employed person has their employee contributions deducted at source. Ensure self-employment is considered alongside employment in Government policy decisions. A solution that goes some way to reduce confusion over the status of employment and self-employment and the rights and benefits available could be the key to encouraging further pension saving. Employee Self-employed Director of a Limited Company Only has a limited right to send someone else to do the work. Has to turn up for work even if they don t want to. Their employer has to have work for them to do. Isn t doing the work as part of their own limited company in an arrangement where the employer is actually a customer or client. An employee is someone who works under an employment contract. All employees are workers, but an employee has extra employment rights and responsibilities that don t apply if workers aren t employees. A person is self-employed if they run their business for themselves and take responsibility for its success or failure. Self-employed workers aren t paid through PAYE, and they don t have the employment rights and responsibilities of employees. Company directors run limited companies on behalf of shareholders. Directors have different rights and responsibilities from employees, and are classed as office holders for tax and National Insurance contribution purposes. An office holder is a person who s been appointed to a position by a company or organisation but doesn t have a contract or receive regular payment. A director of a small or medium business is unlikely to have an employment contract, however if they work for the company and receive payment they will effectively also be classed as an employee. If you require more information, please see:

5 Innovations in technology have often been the driver for diverse working practices consider the massive growth in IT contractors in the 1980s. Legislation has invariably struggled to keep up and has often been developed to tackle differing issues without being as joined up as it perhaps could be. Much of the legislation around automatic enrolment has developed from the same legislation that covers the National Minimum / Living Wage and Working Time Regulations, including the definition of worker. THE UBER CASE The 2016 Employment Tribunal ruling that Uber drivers are workers for the purpose of the Employment Rights Act 1996, the National Minimum Wage Act 1998 and the Working Time Regulations 1998, means they are entitled to the minimum wage and paid leave. Taylor suggests that Government should retain the current three-tier approach to employment status [employee, worker and selfemployed] as it remains relevant in the modern labour market, but rename as dependent contractors the category of people who are eligible for worker rights but who are not employees. Currently, self-employed people and so called dependent contractors are responsible for their own pension provision. It appears that there are likely to be a large number of employees who perhaps should be being offered a pension under automatic enrolment, but aren t, as their status falls somewhere between employed and self-employed. Additionally, it shouldn t be forgotten that there s a large and growing band of contractors and small businesses that are operating as one person limited companies. The directors are effectively classed as employees, however as they are highly unlikely to have given themselves an employment contract, they cannot be a worker and are therefore always exempt from automatic enrolment. Any Government review needs to consider these people alongside the self-employed. Ultimately, an integrated approach to pension saving is vital if this situation is to ever be resolved. Despite Uber s contention that Uber is simply a technology platform that puts drivers in touch with passengers, the Tribunal held that the reality is that Uber is in the business of providing taxi services and engaged the drivers as workers for this purpose. It remains to be seen if Uber will need to automatically enrol its drivers into a qualifying pension scheme. Uber was granted leave to appeal, with the hearing set for 27 September so the outcome is unknown at the time of writing. Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number