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Govt pension plans for self-employed face tax setback

All but the highest earning self-employed workers are turning their backs on pensions according to new figures published today by HM Revenue and Customs.

The figures contained in HMRC’s latest personal pension statistics bulletin flags up the challenge the government faces to boost pension saving among the self-employed.

In December 2017, the government published its review into auto-enrolment saying it planned to conduct targeted interventions to work out the best method to increase saving among the self-employed.

It followed this up a year later with a report setting out plans for carrying out these trials.

But the HMRC figures published today hint at the scale of the task, as they show both contributions to pensions and the cost of making them.

Hargreaves Lansdown has compared the two to give the effective rate of tax relief granted for contributions into self-employed pensions.

Among the self-employed, it points out the effective tax relief granted in 2016/17 was 40 per cent, suggesting there are few basic rate tax payers taking advantage of saving for retirement.

Furthermore, the self-employed contribution figure for 2017/18 is absent from the latest release.

Hargreaves Lansdown senior analyst Nathan Long says: “Delve deeper and there are clues that all but the highest earning self-employed workers are turning their backs on pensions.

“It’s a reminder that a lot rests on the government’s work where they’re testing nudges to boost saving among the self-employed. If this proves ineffective a more radical shake up to the incentives will be required.

“The amount the self-employed contributed in 2017/18 is unusually absent from the latest numbers.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. The question is answered in the text. 40% taxpayers contribute because they can immediately see the further tax relief. If one was to revert to the old system (Not CRAP – Contributions Relief At payment), but immediate tax relief to be knocked off the liability. EG £1,000 contribution with £200 knocked off the tax bill.

    Yes I know that the current system means a net contribution of £800 which is grossed up. But it is the psychology. Everyone hates paying tax and if it can be seen to be reduced it is an incentive. I wonder how basic rate self employed contributions looked 20 years ago?

  2. Paul Johnston 1st May 2019 at 8:06 am

    Harry brings up one problem. The other is that many self-employed dont know how well the business has performed and thus how much to set aside. It would make sense to allow a contribution to be made in this tax year and carried back to the last tax year thus reducing the tax bill for that year.

    Sad as it seems autoenrolement needs to be forced on the self-employed otherwise they will have an impoverised retirement, perhaps working until nearly 80 years of age

  3. Mark Champion 1st May 2019 at 8:20 am

    Is it also that self employed individuals take a more diversified look at retirement savings such as property, paying contributions for employed family members to reduce business taxation and even the eventual sale value of their own business? Employed individuals are shoehorned into pension plans often without understanding them or whether they are actually adequate for their retirement aspirations. Perhaps employed civil servants with their gold plated tax payer subsidised retirement provisions have not quite grasped this.

  4. Much of this will come down to education and understanding that you can’t just rely on the state pension.

    Most people like a discount so telling them that if they make a cont. they automatically get a 20% discount is another way of selling the idea to them and for many s/e people who don’t earn much or are already tax efficient via other means RAS means they get the benefit of tax relief regardless.

    Also helping those with companies understand ER cont’s will help.

    Many years ago I believe when HMRC sent s/e people info about other things they did also make them aware of pensions.

    I don’t know if they have done the same more recently but perhaps they could do the same again and include a flyer or something in future perhaps pointing them to MAPS/tPAS’ website,(although their current mid-life reviews miss a large section of the s/e as many are over 50), or speak to their accountant or adviser.

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