The Matthew Taylor Review of Modern Working Practices highlights ways in which self-employed people could be helped to save for retirement, but questions remain.
About 20-30 per cent of the working-age population in the US and EU-15 countries engage in some form of independent work, according to research carried out by the McKinsey Global Institute.
Self-assessment tax returns are the obvious vehicle to auto-enrol self-employed workers
Tom Selby, AJ Bell
The Taylor review, published on Tuesday, urged the government to explore ways to improve pension provision among the self-employed.
It welcomed changes made to the state pension provision last year, boosting the level of state pension that self-employed people could accrue, but stressed that self-employed individuals should not be solely reliant on the state pension.
Auto-enrol the self-employed
The report suggested auto-enrolling self-employed people into a pension and administering this through self-assessment tax returns.
“When the individual provided [HM Revenue & Customs] with their self-assessment, as well as providing funds to cover income tax and [national insurance contributions] liability, they could also be expected to provide 4 per cent of income towards a pension unless they choose to opt out,” the report proposed.
Malcolm McLean, senior consultant at Barnett Waddingham, agreed that self-earners needed nudging into pensions.
“I don’t see at all why self-employed people should not be engaged at all with auto-enrolment, they are workers, they need to save for their pensions and they clearly need some sort of nudge to enable them to do it,” he said.
He welcomed the fact that the Taylor report acknowledges this issue, but noted that it does not give any precise details on how it should work.
On the idea of using self-employed people’s tax return and transferring a percentage of their profits and gains into a pension scheme, McLean said: “The issue around that seems to be, which scheme are they going to be enrolled into?”
The Taylor report said that the level of NICs paid by employees and self-employed people need to be brought in line in due course.
“To some extent, the government has messed this up, quite frankly,” McLean said, noting that it should have recognised the need to increase NICs at the time the new state pension was introduced.
Similarly, Tom Selby, senior analyst at platform provider AJ Bell, argued that “the Conservatives have already been forced into one humiliating U-turn on raising self-employed national insurance”.
He noted that, given Labour’s opposition to such a move and the Tories’ small majority in the House of Commons, any move in this area “could potentially run aground again”. He added: “I doubt very much it’s a battle the government wants to wage right now.”
Selby said that self-assessment tax returns are the obvious vehicle to auto-enrol self-employed workers, but "there remain significant questions to be answered on where their money will be invested, how they will be engaged in saving for retirement [and] whether the state should offer the equivalent of a matched contribution”.
He added: “It is open to serious question whether taxpayers should be asked to subsidise the pensions of people who choose to be self-employed.”
Redefine self-employed workers
The report also called on the government to update legislation to help people understand what employment status applies and what rights they are entitled to.
Currently, “all employees are workers, but not all workers are employees”, highlighted the report. It said that the government should rename those who are eligible for worker rights but who are not employees, as "dependant contractors".
Select committee hears evidence on how to get the self-employed saving
Proposals including an expansion of auto-enrolment and raising class 4 national insurance contributions, aimed at boosting pensions coverage in the UK, have been put before the Work and Pensions Committee as part of its inquiry into self-employed workers.
The report states that the status of such dependant contractors should also have a clear definition, “capturing those more casual employment relationships that are on the increase today – an individual who is not an employee, but neither are they genuinely self-employed”.
Tim Gosling, the Pensions and Lifetime Saving Association’s defined contribution policy lead, said expanding the scope of what a worker is would also require changing the definition of a worker in the Pension Schemes Act 2008, so that it broadly matches the new definition of a dependent contractor.
He said that there are two sides to the issue of improving retirement saving for the self-employed; one is reclassifying gig economy workers as dependant contractors, which would mean “they should be subject to vanilla automatic enrolment”.
The other relates to those who are 'genuinely' self-employed and must therefore be caught by another retirement saving mechanism, which is yet to be designed, but should be designed as part of the government’s 2017 auto-enrolment review, Gosling noted.
“If we ever get both of those things right, then I think we can greatly expand pension coverage in the UK,” he said.
