Royal London: Do tax changes pave the way to self-employed pension saving?

Tait, Fiona_700x450

Despite the Conservative manifesto commitment to “no increases in VAT, National Insurance Contributions or income tax”, Chancellor Philip Hammond announced in his Budget this week that the rate of Class 4 NICs for the self-employed would increase from 9 to 10 per cent in April 2018 and by a further 1 per cent a year later.

I cannot fault his rationale. The higher rate paid by employed workers (currently 12 per cent) has historically been justified by the higher state pension and welfare benefits they received.

But since the introduction of the new state pension, both groups will be accruing state pension benefits at the same rate.

As such, it seems more than reasonable they should pay the same contributions towards it.

In Hammond’s words, the “dramatically different treatment” of two people earning essentially the same amount and accruing the same benefits cannot be fair.

The most surprising thing is that the Government waited until now to level it up.

Self-employed individuals will rightly point out there are still inequalities of benefits – in sick pay and redundancy, for example. Presumably, the Chancellor sees the 1 per cent difference in NIC that will remain between the employed and self-employed in 2019 as a reasonable discount.

The self-employed could also argue their job security is not equal to that of most employees. However, I would like to point out one other key difference: they are saving less and less towards their own retirement than the general employed worker.

I wonder, then, whether this might be the start of a move to encourage them to save more for it? Royal London director of policy Steve Webb has previously suggested using increased NICs to deliver a form of automatic-enrolment for the self-employed.

Auto-enrolment works because of inertia. The number of new savers as a result of it has been higher than forecast so far, mainly because of the unexpectedly low opt-out rates. If we are to persuade more self-employed workers to save we must utilise the inertia of this group too.

Webb suggests an additional levy of 3 per cent Class 4 NICs could be used to automatically fund a pension. Unless the individual chooses to opt out of the system, the additional 3 per cent would form the equivalent of an employer’s minimum contribution and the individual would be required to match it with a personal contribution of 5 per cent (including tax relief).

Obviously, there would be issues of affordability and, of course, some people would opt out. But given the experience with auto-enrolment so far, it may be they are fewer in number than expected.

Even if it is just the minority that continue to save, it would still reverse the current trend of falling numbers contributing to a pension. What is more, unlike the change proposed on Wednesday, it would not be breaking the manifesto pledge. I propose we suggest this to the nation.

Fiona Tait is pensions specialist at Royal London