Cash-free business transacting combined with HMRC's 'Making Tax Digital 'initiative could solve the self-employed pension savings gap, asserts Adrian Boulding.
Auto-enrolment (AE) has been a great success for the almost two-thirds (63%) of the UK labour market that enjoy full-time employment. The number newly saving for retirement as a result of being auto-enrolled by their employer has now topped eight million. And opt-out rates remain encouragingly low at around 10%.
However … the Pensions Regulator (TPR) statistics, derived from the compliance reports it is sent by employers as they pass through staging, reveal another seven million employees who were not enrolled by their employer because they were too young, too old or did not earn enough. That number is still rising as AE completes its roll-out, with about another 300,000 small employers still to pass through the system.
There are a lot of part-time workers in here - the Office for National Statistics tells us that, in total, the UK has just under seven million part-time employees. A lot will fail to meet the £10,000 per year earnings threshold required to make AE a statutory requirement.
And for the UK's 1.1m ‘portfolio workers' with several employment contracts, the threshold is particularly tough as it is not total earnings - only the earnings at each separate employer - that count towards achieving the important threshold that triggers AE and those valuable employer pension contributions.
By far the most glaring omission is the total failure to include the 4.8m self-employed workers into AE. That is 15% of the labour market - a proportion that is rising year on year. The number of self-employed workers has risen by very nearly one million in the last eight years.
Included in this figure is around 1.3m who The Chartered Institute of Personnel and Development (CIPD) calculate make up the so called ‘gig economy - people using apps to sell their labour, such as Uber and Deliveroo - who are currently classed as self-employed and outside AE. Interestingly, CIPD estimates between 50% and 60% of those working in the gig economy also have another job. But again, that £10,000 annual earnings threshold will keep many of those second jobs outside of AE.
The key facts we need to know about self-employed people are:
The Department for Work & Pensions' 2017 Review of AE was therefore right to flag up the self-employed as the key ‘vulnerable' group that is missing out on the benefits of the initiative. The Review may feel duty bound to come up with the beginnings of a solution when its report is published in December.
If so, officials in Caxton House would do well to scour July's 116-page report led by Matthew Taylor, the head of Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) and titled ‘Good Work: The Taylor Review of Modern Working Practices'.
The report has some interesting recommendations for mitigating some of the least desirable by-products of the more flexible ways of working that are now gaining ground.
These include a ground-breaking definition of ‘dependent contractors' to combat the way in which work platform providers ‘style' workers as self-employed, and in so doing avoid provision of statutory employment rights that employees enjoy, including statutory sick pay, holiday entitlement and even the national minimum wage - while simultaneously depressing NI receipts.
If Taylor has his way, dependent contractors could receive ‘rolled up' holiday pay - effectively increasing their wages by more than 12%. If not being guaranteed a specific number of hours of work, they should also be compensated by receiving pay levels higher than the national minimum wage. They may also be entitled to Statutory Sick Pay and - wait for it - employer AE pension contributions!
Meanwhile, workers on zero hours contracts could have the right to fixed hour contracts after 12-months of an employment relationship - eliminating never-ending agency contracts that many large firms having been routinely using. If many of these recommendations are adopted by the government there will be a significant shift in the balance of fringe benefits back in favour of the worker.
On the point of encouraging self-employed workers to start paying into a pension, however, the report looks to a combination of the HMRC's 'Making Tax Digital' (MTD) push and mobile-based electronic payment solutions as one tech-led answer. MTD will see mandatory electronic filing of tax returns and digital VAT record keeping coming in for all businesses turning over £85,000 or more from April 2018.
While many of the self-employed turn over far less than this £85,000 threshold, they would still welcome help getting their tax right. The Taylor Review surveyed gig economy workers and found 72% would welcome an online tool that calculated their tax correctly for them. This combines very powerfully with cashless transaction tools as a cashless payment automatically generates a digital footprint that can drive all the downstream calculations.
So, we will soon arrive at the point when only those intending to will be operating in the cash-in-hand/informal/black economy - thereby shifting the default positions for many hundreds of thousands of window cleaners, builders, casual labourers, gardeners and cleaners away from cash.
Digital payment solutions from the likes of PayPal and WorldPay are already working well. Much of this technology is now being moved onto mobile devices so that payments for jobs, while out and about, can be collected via a few touches of a mobile phone screen in real-time.
It is not too much of a stretch from there to see a portion - say 8% - of all work payments taken for an AE pension pot or LISA; and another, slightly larger income tax payment going through to HMRC in real-time. That is the digital technology-driven vision Taylor laid out this summer and it might just be the win-win that we are looking for to bring the self-employed into AE.
Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas
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