Tony Hazell  

Self-employed savings deficit needs resolving

Tony Hazell

Tony Hazell

A couple of years ago Chancellor Philip Hammond gleefully attempted to increase national insurance for the self-employed.

Obviously the self-employed were a bunch of idle tax-dodgers who were wallowing in their ill-gotten gains, while he and his Treasury mandarins slogged selflessly for their tax-payer subsidised pensions.

I hope he has had time to glance at the Office of Tax Simplification’s (OTS) Savings Income report. The Federation of Small Businesses highlighted shocking figures in the report saying that just 17 per cent of the self-employed have a private pension, compared with 78 per cent of employees.

There are 4.8m self-employed, representing 15 per cent of the workforce. If the situation does not change we could have almost 4m self-employed eventually solely on the state pension.

Fair enough, this is a tad dramatic because some people move in and out of self-employment. But something is wrong and legislators have not given enough thought and urgency to the savings deficit among the self-employed.

One obvious area is how difficult it can be for a self-employed person to commit to a regime of regular saving.

Monthly and annual income can vary enormously. Paying today’s bills takes priority over saving for tomorrow’s pension.

Self-employed people may only begin to enjoy financial stability later in life, yet the ironically named Lifetime Isa shuts the door on savers at age 40.

Providers also carry a share of responsibility with some savings products punishing those who cannot commit to monthly amounts throughout the year or who need their money in a hurry. 

Given a choice between meeting the twice-yearly tax bill and adding to a savings account, the tax bill must take priority.

You might argue that the self-employed should prepare for these things – but the employed have it all done for them, including automatic pension contributions and an employer top-up.

When the self-employed fail to save into a pension, they not only miss out on the opportunity to grow their own money they also miss the tax relief – a perk now enjoyed by most employed people thanks to auto-enrolment.

So while the self-employed enjoy some perks, it is arguable that the employed get more out of the tax system.

Ultimately, the self-employed savings deficit is a problem for each and every one of us as smaller pensions equate to a greater reliance on benefits. 

It is a problem the savings industry and government should be making far greater efforts to resolve.

 

Keep checking your tax

The OTS report also highlights how a lack of financial literacy is combining with complexity to leave many bamboozled about tax on their savings.

The report says that 95 per cent of people should have to pay no tax on their savings. But savers are often unaware of the savings and dividends allowances, and many do not know that money put into Isas does not get taxed. This can lead to what the OTS describes as “sub-optimal decisions”.