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Could the 2018 Budget have far reaching consequences for auto-enrolment?

Could the 2018 Budget have far reaching consequences for auto-enrolment?

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Well, maybe. In last week’s budget, the Chancellor announced the intention to apply IR35 rules to the private sector from 2020. For those of you who have not committed to memory all the Inland Revenue rule codes – and shame on you! – IR35 covers those who are working Off-Payroll for a company by contracting through a private-service company. Essentially this relates to self-employed individuals who use a Limited Company structure, which gives the opportunity to channel some income as dividend payments which are not subject to National Insurance. The Budget change essentially comes down to deciding if someone is genuinely self-employed or not. Crucially, it also determines who is responsible for paying tax charges and fines if they are wrong.

Currently in the private sector, that responsibility rests with the individual. They can self-identify as self-employed and the employer can treat them as such. If it is decided they were not really self-employed then it is the individual who is subject to the fine.

As of April 2020, not only will the employer or agency be responsible for determining the status of the individual, they will also be liable for any fines should that decision be wrong. That’s a big change. It is largely considered to be a tax-raising exercise, designed to close the NI gap between the ‘self-employed’ and the employed – a gap thought to cost the exchequer as much as £1.3bn a year.

So what does this have to do with pensions? The definition of workers for auto-enrolment has always been a little different to the definition for tax and employment purposes. It sometimes feels like policy makers never miss an opportunity to make things complicated. I have always believed that there are a large number of people who are hidden from auto-enrolment within this gap. These are people who are likely to be workers by the auto-enrolment definition but are not by the tax or employment definition. Most auto-enrolment systems are based on payroll. These people are not on payroll. They get missed. It has been easy for employers to ignore these people. It has also been the case that the regulators are looking elsewhere for bigger fish to fry.

IR35 changes all that. If businesses are now on the hook for potential fines they may decide that they need to hire people rather than risk defining them incorrectly. More people on payroll would mean more people being auto-enrolled.

This change will apply to both companies and agencies. The impact could be pretty big. All those well-paid IT contractors and programmers, all those self-employed consultants and service providers, may come under renewed scope for auto-enrolment. Of course, employers may respond differently and things could change between now and April 2020 (let’s face it, lots will change between now and April 2020), but this is definitely one to keep an eye on.

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