The Chancellor’s budget makes provision for a £360m cost for the abolition of Class 2 National Insurance Contributions (NICs) from 2018; with the self-employed moving to the same single tier state pension as employed individuals.
Although the phasing out of Basic and Second State Pensions is a total con for most people in the UK, the self-employed are one beneficiary of the change – despite paying a lower rate of national insurance, and therefore having no entitlement to the Second (Earnings Related) State Pension, they will receive the same flat rate pension as everyone else with the same NIC record.
This leaves a glaring disconnect: self-employed individuals pay only 9% (on earnings from £8,060 to £43,000) NI and employed individuals pay 12% personally with 13.8% cost for the employer on the same ‘band’ earnings. Although NI doesn’t truly fund the state pension why do employees pay more for the same?
A policy paper from Royal London today makes the proposal to increase Class 4 National Insurance for self-employed individuals, from 9% to 12%; diverting the 3% increase to a pension (or lifetime ISA).
Be careful what you wish for! The true rate of employee national insurance maybe as high as 25%, it would be easy for the government to increase self-employed national insurance and offer nothing in return.
Limited company structures may still avoid national insurance through the payment of dividends, but there has been a clamp down over the last few budgets: members’ voluntary liquidations are harder, there can be a 7.5% surcharge on dividends, and with a £400m estimated cost of ‘personal service companies’ the ability to disguise employment and reduce national insurance is more limited than ever before.
Steve Webb is right to highlight the issue, and the reduction in retirement savings amongst the self-employed is stark. There is always an element of ‘my business is my pension’ but those reliant on their own resources for long-term financial security should take more involvement in long-term planning not less.
