Change National Insurance to boost contractor saving

Wednesday 31 July 2013

The government should consider changing the rules regarding National Insurance contributions to encourage self-employed earners to save for the future, according to a pensions expert.

Writing for Money Marketing, head of pensions market development at Scottish Widows Ian Naismith says that individuals who choose to work for themselves are at a disadvantage in the current pensions system. Although one in every seven workers is self-employed in the UK, they enjoy only one thirty-fifth of the tax relief on pensions available to the nation’s workforce. In fact, Mr Naismith says, the average employee enjoys around six times as much tax relief on the retirement funds as the typical self-employed worker.

At the moment, the self-employed are also losing out on support from the state during their retirement, because they are not eligible for the state second pension. Once the single-tier pension is introduced in 2016 this will cease to be the case. But as Mr Naismith points out, transitional arrangements have been brought in to protect higher pensions built up by employees through other means, so it will actually be several years before self-employed people enjoy genuine pension equality with their employee counterparts.

Scottish Widows’ own Pensions Report for this year found that just one in three self-employed workers are preparing well enough for their retirement, compared to 41 per cent of private sector workers, half of staff in charitable organisations and nearly six out of ten public sector employees. However, one in five expect their primary source of income to come from a defined benefit scheme - one percentage point higher than among private sector staff.

Since the latest Labour Market figures from the Office for National Statistics shows that there are more than four million self-employed workers in the UK, Mr Naismith writes, the UK could potentially find that a sizeable number of retirees are struggling to support themselves in the future.

The expert adds that although there seems to be a popular belief that the self-employed can make up some of the pension shortfall by selling their business, if they work as a sole trader or through their own limited company. But this is a common misconception, Mr Naismith explains, since only eight per cent said they expected this to be among their top three sources of retirement income. Instead, those who choose to work for themselves are more likely to be doing so well past retirement age. An eighth of workers who go it alone say that they expect to work beyond the age of 75.

To balance out some of these discrepancies, Mr Naismith is calling on the government to bring in relatively small changes to the tax system which would encourage self-employed workers to plan more effectively for the future by introducing a National Insurance exemption.

This argument is far removed from the that of CentreForum, which last month published a report calling for self-employed National Insurance contributions to be increased.

Employees are liable for a National Insurance deduction of 12 per cent from their salary, the think tank said, on top of 13.8 per cent in employer contributions. However, self-employed professionals are currently paying around nine per cent, which the report says amounts to a “self-employment tax break” worth up to £1.6 billion. Once the single-tier pension comes in, Centreforum added, that figure could reach £2.3 billion.

By Victoria McDonnell

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