The Work and Pensions Committee has called for employee and self-employed national insurance contributions to be equalised, arguing that following the introduction of the new state pension, the self-employed contribute far less.
The lack of pension entitlements of those working in the so-called gig economy has received much attention in the industry as it focuses on how auto-enrolment can be extended to the self-employed and those on zero-hour or short-term contracts.
What they’ve uncovered, to some extent, is a can of worms. It’s not the black and white world that HMRC likes to imagine
Ian Neale, Aries Insight
In December last year, the Work and Pensions Committee launched an inquiry into the gig economy, as companies such as food delivery app Deliveroo or taxi app Uber have come under increased scrutiny over workers’ conditions.
Equalising contributions
The select committee, chaired by Frank Field, published a report on Monday claiming gig economy companies are “free-riding on the welfare state”. It notes that self-employed people have historically received much less support from the welfare state than employees, particularly in state pension.
However, the new state pension, which was rolled out from April 2016, applies equally to the self-employed and employees.
But the report highlights that “while formerly contracted-out employees must now pay the full rate of NICs in return for this entitlement, the self-employed are seeing their entitlement increase with no such increase in their NICs rate”.
In a bid to increase fairness, the report states that “the incoming government should set out a roadmap for equalising the national insurance contributions made by employees and the self-employed”.
It also discusses auto-enrolment and the “stark differences” between the pension arrangements of self-employed people and employees.
“While auto-enrolment for employees has been a great success, current structures are not encouraging sufficient pension saving by the self-employed,” the report stated.
It added that “the idea of using an opt-out system on tax returns to encourage greater contribution to pensions is an interesting one that merits further consideration”.
A spokesperson for Uber said: “The vast majority of drivers who use Uber tell us they want to remain their own boss as that’s the main reason why they signed up to us in the first place. But we know drivers want more security too, which is why we are investing in a heavily discounted illness and injury cover offer for drivers with [self-employed and freelancer association] Ipse.”
Extending the success of AE to the self-employed
Sarah Luheshi, deputy director of the Pensions Policy Institute, said the self-employed have benefited from recent changes to the national insurance system with the abolition of class 2 contributions. She explained that this impacts lower earners more, removing some from paying any NICs at all.
"All self-employed individuals have benefited from the introduction of the new state pension in 2016, which removed one of the main state benefit differences between employed and self-employed”, she added.
Luheshi argued that “the most successful recent policy to increase levels of private pension saving overall has been automatic enrolment”.
She noted that “the fact that the scope for the 2017 AE review explicitly mentions coverage of the self-employed indicates that saving for their retirement is rising up the policy agenda”.
Given that the size and nature of the self-employed labour market has increased, “it would appear suitable to consider how the self-employed can be enabled to more effectively plan and save for their retirement, across both state and private pensions, whilst balancing the tension between individual affordability and the cost to the exchequer”, Luheshi added.
Grey areas
Balancing contribution and entitlement between the self-employed and employees is fair, and the introduction of the new state pension has been “hugely beneficial” for the “majority of the self-employed”, said Ian Neale, director at policy specialists Aries Insight.
However, “as the report shows, what they’ve uncovered, to some extent, is a can of worms. It’s not the black and white world that HMRC likes to imagine,” Neale noted.
Neale also noted that “there are clear disparities between the support available to employed individuals, or formerly employed individuals – individuals seeking employment if you like – and self-employed people”.
Make it as painless as possible
Regarding the idea of using an opt-out system on tax returns to promote greater contribution to pensions, Neale said the problem is that “if you’re self-employed… any pension saving that you make amounts to putting your hand in your pocket and actually setting aside money”.
Diverting part of the class 4 national insurance contributions towards a qualifying pension arrangement – as suggested by former pensions minister Sir Steve Webb, now director of policy at Royal London – might be a solution, said Neale.
“There does definitely need to be either an incentive to save, or a relatively painless way of doing that” by avoiding the individual having to make a deliberate sacrifice of part of their earnings, Neale said.
