Auto-enrolment pensions: A contractor's friend or foe?
Yes; you’ve guessed it, the government feels everyone should be saving more for their retirement and the brutal reality is, in the vast majority of cases, they have a point.
What is auto-enrolment?
After decades of under investment in state, private and employer pension provision, what has been termed ‘Auto-enrolment’ will see virtually all employees automatically become members of an employer pension scheme. There will be the option of an opt-out if required by the employee, but the default assumption will be that employees will become members of a scheme.
Who’s covered by auto-enrolment?
Interestingly, when referring to employees the actual definition will be ‘Eligible Jobholder’. This term covers a multitude of job roles, ranging from the traditional employee, temporary and part-time workers and, potentially, contractors too.
Anyone between the ages of 22 and State Pension Age who earns over £8,105 per year will qualify for auto enrollment, however other age and earnings groups can still have the option to join if they want to, although these will not be through an automatic process.
The contribution will be based on banded earnings between the Lower and Upper Earnings Limit, which currently stands at £5,564 to £42,475. The minimum contribution is 2%, with 1% being made up from the employer and 1% coming from the individual. This minimum level could stand until October 2017 at which point it will rise to 5%, then moving to 8% by October 2018.
What does auto-enrolment mean for contractors?
For one-person companies the impact is potentially very minimal. That’s because as things currently stand, a company with only one employee (controlling director) does not fall into the auto-enrolment criteria. Contractors shouldn’t qualify via the site that they are contracted to work at either, as their contract for services is through their company, rather than as an individual.
However, limited companies which have additional employees (this could include a spouse employed as a company secretary) may well fall within the auto enrolment framework. This is therefore something for some limited company contractors to be mindful of for the future.
For freelancers working via umbrella companies things become a little more involved. Most contractors will be auto-enrolled through the umbrella when their service provider reaches a ‘staging date’ over the next few years. This trigger date will be based on the number of employees on the payroll so most contractors will be auto-enrolled between Spring 2013 and Spring 2014. As the umbrella is essentially just a payroll provider, they will not have the means to pay in the employer’s portion of the contribution, so the onus will fall on the contractor to make both payments.
While there is no mandatory requirement for you to make pension investment (yet), our work with umbrella company clients over the years shows a high level of interest among contractors to use pensions as a very effective tax planning tool.
So-called ‘salary exchange’ represents a very effective way of getting money from contract into personal hands without the taxman receiving a penny. That’s why we have clients who literally save tens of thousands of pounds in tax each year using umbrella company-sponsored pension provision.
Contractors’ views of being ‘all in’
Of course, some may feel auto-enrollment further impacts on the flexibility of being a contractor, but with the ability to opt-out at any time the adverse impact could be very minimal. There is, however, a massive retirement savings gap between what the country should be investing for the future and what we actually are earmarking for our old ages. Maybe, just maybe, this is the prompt many of us need to address this age-old but important issue.
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