Auto enrolment for the self-employed and gig economy?
08 March 2017
As part of the automatic enrolment review, the Work and Pensions Select Committee has received proposals to help the self-employed save for retirement.
One of the questions the automatic enrolment review asks is how can self-employed people best be encouraged and supported to save for retirement.
One of the difficulties with the self-employed/gig workers is that many may not be paid well enough to qualify for automatic enrolment under the current rules. Previous evidence heard by the Committee was from Deliveroo where 85% of the delivery drivers work for other organisations as well. Automatic enrolment has not dealt with this issue so far and people with multiple jobs is another area that the Review is looking at.
A key question to come from the evidence submitted to the Committee is in order to have a financial product for these individuals, does there have to be a new kind of employment definition for them? As we know there have been, and continue to be, various court cases about the precise definitions of workers/employees/self-employed – Uber and Deliveroo being prime examples.
Some providers, including NEST, will accept people who are self-employed without being referred through an employer. However the whole structure of auto enrolment is the contribution from the employee, the employer and the government, so who will be the employer in this category? In the absence of an employer, would it fall to the individual to make up the shortfall or would the government pay in more? There is also the fact that auto enrolment is designed to work through the workplace through an employer - it is an employer who chooses the scheme, it is an employer who operates the scheme and it is an employer who makes contributions alongside the employee, and it works with the PAYE system to get tax relief. So would the whole model of auto enrolment need to be amended to fit for the self-employed?
Class 4 National Insurance contributions (NICs)
One of the proposals put to the Committee is to use Class 4 NICs as a vehicle for the self-employed to divert money into a pension fund. The suggestion is that there would be a profit threshold of around £8,000 and those with profits over this amount would see an increase of 3% to their Class 4 NICs. And as long as the individual pays 4% into a pension they would then get 1% tax relief, bringing it to an 8% model akin to auto enrolment.
Personal Tax Account (PTA)
Could the PTA be utilised? One potential avenue suggested in the evidence is interaction with HMRC through tax returns. Could there be a way in which a default could be set up, so there is an automatic contribution to a pension scheme made at the time of the tax return that people could opt out of - something that allows the system to assume that people will make a pension contribution rather than assuming that they will not. This would be in line with more frequent returns and possibly in real time which is where digital is moving to in many aspects. However the individual would still have to select a pension scheme or have a scheme allocated to them - NEST potentially?
There are many issues and options discussed in the evidence submitted to the Committee. It is a lengthy read, but a very interesting one if time permits.