Many employers are ill-prepared for the pensions fallout of a complex new tax fairness rule that comes into force in just six weeks’ time, experts have warned.
From April 6, companies will have to determine the tax status of their contractors. Known as IR35, this new potential tax quagmire from HM Revenue & Customs could also impact on wider areas such as pension provision.
As fines are payable for non-compliance with auto-enrolment at a daily rate, it is better to be safe and take that legal advice, rather than just hoping for the best
Penny Cogher, Irwin Mitchell
Its aim is to achieve fairness by ensuring that 230,000 individuals who work like employees but through their own limited company pay broadly the same income tax and national insurance contributions as those who are employed directly.
“If the new rules apply, then broadly it is the responsibility of the ‘employer’ to ensure PAYE and national insurance contributions are deducted before the net payment is made to the ‘deemed employee’,” explains Chris Smith, personal tax director at chartered accountants BKL.
The reform is not retrospective and applies only for services to medium or large company hirers with a turnover of more than £10.2m, a balance sheet total of more than £5.1m or more than 50 employees.
What can be a headache for hirers is that an individual’s status is not automatically the same for IR35 purposes as it is for employment and pension purposes.
While guidance from HMRC stresses that the rule change is intended to change tax status, rather than employment status, if individuals successfully argue that they are workers, the client or hirer will have to apply auto-enrolment duties.
With the change in the rules almost imminent, companies should act promptly to “check numbers of off-payroll workers, determine their employment status and issue an employment status determination to the individual”, urges Sue Waites, partner and senior defined contribution consultant at Hymans Robertson.
In general, businesses engaging workers through the worker’s own limited company should be safe from this trap.
HMRC has developed a checking service to help organisations determine whether the off-payroll working rules apply, but it accepts it is only about 85 per cent accurate. Determining factors in recent court cases include the degree of autonomy, mutuality of obligation and the existence of a right to substitute.
If in doubt about whether a contractor should be auto-enrolled, the best option is to seek professional guidance.
Penny Cogher, partner, Irwin Mitchell, counsels: “As fines are payable for non-compliance with auto-enrolment at a daily rate, it is better to be safe and take that legal advice, rather than just hoping for the best.”
However, she adds that the changes “should not affect the pension position of genuine self-employed contractors”.
Yawning gulf
IR35 is also a burden on the 5m self-employed in the UK, whose numbers have shot up by more than 50 per cent since the turn of the century. At the same time, “pension saving among the self-employed has fallen to a record low over the same period – from a high of 1.2m savers in 2002 to just over 400,000 today”, points out Alistair McQueen, head of savings and retirement at Aviva.
Yet “without a strong nudge, self-employed people are likely to arrive at retirement with little or no private retirement savings,” stresses Gregg McClymont, director of policy at B&CE. Some 62 per cent of self-employed now have no pension savings at all
One answer to the yawing gulf between employed and the self-employed, says Barnett Waddingham senior consultant Malcolm McLean, is to use “the annual tax return to nudge them into pension saving, perhaps going as far as requiring HMRC to withhold a percentage (say 4 per cent) of any profits and gains and with the person’s consent pass it on direct to a nominated pension provider”.
But policy experts are increasingly recognising that the pension may not be the ideal vehicle for self-employed long-term saving. “Self-employed people may experience irregular earnings and may also need to invest in their business,” notes Mr McClymont. “An Isa or Lisa may provide greater liquidity.”
Nest, which has a modest 12,400 self-employed members, is exploring whether elements of workplace saving can be replicated.
Will Sandbrook, executive director of Nest Insight, points to the ‘set and forget’ dimension of payroll deduction. Here, “workers paid through platforms could be given the option to pre-commit a percentage of each fare or fee to a savings product, and a similar method could be offered to those who invoice electronically.”
Work is also being done at government level. Steve Cameron, pensions director at Aegon, points to current Department for Work and Pensions trials testing “what communication message and product solutions might prompt more self-employed to consider paying into pensions.”
