Autumn Budget and the self-employed: tax and income gaps

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Pension and tax rules can change, and benefits depend on personal circumstances. Investments can fall as well as rise in value, so you could get back less than you invest.

Full podcast episode transcript

[0:11] Sarah Coles: Hello and welcome to the Switch Your Money On podcast from Hargreaves Lansdown. My name’s Sarah Coles – I’m Head of Personal Finance.

[0:16] Helen Morrissey: And I’m Helen Morrissey – Head of Retirement Analysis.

[0:19] Sarah Coles: So, Helen, self-employment has been on the agenda again because of more Budget rumours around Income Tax, which, specifically, could affect self-employed people.

So, this week, we are actually asking, ‘Do you really want to work for yourself?’

So, personally, I have experience of working, myself – I did it for a decade and, I have to say, I hated every second of it because I just spent the entire time thinking that tomorrow would be my last day of work, and then it would dry up, and it would all be awful. So, I wasn’t suited to it, but I know some people do love it.

[0:46] Helen Morrissey: And, to be honest, I’ve never done it, so it’s all new to me. But, I mean, if we do drill down into some of these rumours that we’re hearing doing the rounds – and I think that the main one is from the Resolution Foundation – and what they’re proposing is to take 2 pence off National Insurance and add it to Income Tax – which is quite an interesting proposition.

Now, they’re saying that it could raise £6bn, without affecting people who receive income from employment who are under State Pension age – and this means that they, theoretically, avoid hitting working people, as they say. However, it would hit several types of income that are subject to Income Tax and not National Insurance. So, I mention there pensioners, for instance, but it also could include the profits of self-employed people.

[1:39] Sarah Coles: Yes, of course – because, although self-employed people do pay National Insurance, it’s a different class – it’s a different rate – and so, therefore, it would affect them differently. It is a bit of a worry, I think, for self-employed people if this comes along.

So, the reason why this thinktank put this forward is because, in their view, self-employed people are under-taxed. So, if you take a median employee, all the taxes relating to their employment – so that includes their taxes as well as the taxes their employer pays – so they’re, actually now, 55% higher than those for an equivalent self-employed worker – and that is actually a record.

Now, self-employed people could also be hit if they run their own company and they pay themselves, at least partly, in dividends – because another suggestion from the Resolution Foundation is that there is a change to the dividend rate or allowance.

[2:20] Helen Morrissey: That sounds pretty interesting. So, as you say, the tax situation could get worse, but am I right in saying it’s still only a small part of the overall challenges that self-employed people face?

[2:31] Sarah Coles: Yes. Speaking personally, I remember that challenge of waking up in the morning and thinking, ‘Oh, my goodness, no-one’s holding me to account – I don’t have to do any work.’ But there are other issues facing self-employed people.

So, overall, self-employed people actually earn less. So, the Barometer shows average net household income is lower in households that are headed by a self-employed person – so budgets are more stretched. So, households headed by this self-employed person have an average of £89 left at the end of the month – and that’s compared to an employed household that has £244 – so, clearly, a lot more money left over at the end of the month. And, of course, that income can be really lumpy – so you will have months when there’s nothing left by the end of the month.

[3:07] Helen Morrissey: And that lumpiness is gonna make it a lot harder to save for the future, isn’t it?

[3:11] Sarah Coles: Yes, absolutely.

So, self-employed people save an average of just over 2% – so 2.3% of their income. That’s compared to employees who save 5.6% – so that is a lot more. But one of the biggest gaps is in those areas where employee benefits actually support employees, and it can be something that people really overlook when they’re thinking about working for themselves.

So, 70% of employees would get a pay-off if they were laid off. If you look at self-employed people, only 12% of people would.

Again, 92% of employees would be paid if they were too sick to work, and only 27% of employed people would – ‘cause, obviously, they don’t get things like sick pay.

[3:46] Helen Morrissey: So, what should self-employed people be thinking about then, Sarah?

[3:49] Sarah Coles: So, it’s really important to think about your financial resilience as soon as possible.

55% of people already have enough emergency savings – which is really good news – but it is worth looking at whether you’re in that 55% and, if not, really building it

as soon as possible.

You also need to think about protecting your family – so that’s Life Cover, Critical Illness, and Income Protection.

But, of course, it’s not just the short-term where self-employed people fall short – it’s the long-term too, isn’t it?

[4:13] Helen Morrissey: Absolutely. So, the self-employed also lag when it comes to pension savings.

So, according to the latest HL Savings and Resilience Barometer data, only 36% of self-employed households are on track for an adequate retirement income. Now, this compares to 46% of employed households, so there’s a big gap there.

There’s lots of reasons for this – one part is auto-enrolment. You know, self-employed people... they don’t get auto-enrolled into a workplace pension, so it means that they have to sort that pension out themselves, which can bring admin and time hurdles. If you’re not part of a workplace pension scheme as well, you don’t get that employer contribution, which really works towards boosting how much goes into your pension too.

Now, also, on top of all of that, is that many self-employed people may actually find pensions to be quite inflexible. Because of that lumpy income that we discussed a little bit earlier, they might not feel able to make regular contributions, for instance, and that can have an impact. The money is also tied up in a pension until at least the age of 55 as well – and, given that lumpy income, self-employed people might think, ‘Well, what if I need to access that earlier?’ – and that could put them off using a pension.

[5:34] Sarah Coles: So, obviously, there’s the big pensions gap, but that’s not the whole picture, is it?

[5:38] Helen Morrissey: No, it’s not – and this is really good because self-employed people... they do still save – they just tend to save in other vehicles – so, for instance, Stocks and Shares as well as Cash ISAs.

So, if we use the Barometer data again – and take into account all these extra assets that you can save and invest into – we actually see 47% of self-employed households on track for an adequate retirement income. So, that’s a big improvement from if you just look at pensions on their own – however, they do still remain a good way behind employed households, who would see 54% on track for their adequate retirement income if they looked across all of their assets.

[6:22] Sarah Coles: It does help to close some of the gap – definitely – but there are other options when you’re looking at retirement income when you’re self-employed, aren’t there?

[6:28] Helen Morrissey: Yes, absolutely.

So, we believe that the Lifetime ISA, potentially, has a huge role to play in helping groups like the self-employed to prepare for retirement.

So, first things first, the 25% government bonus on contributions up to £4,000 acts like basic-rate tax relief that you would get on a pension – then, when you turn 60, you can take the Capital or the Income Tax free, which is really good.

You can also access the money early if you need it – however, it’s worth saying that this is subject to a 25% exit penalty – and this penalty... it does, unfortunately, have the effect of taking a chunk of your hard-earned savings as well as removing the effect of that government bonus that you’ve built up. We are actually calling on the Government to revisit this and look at reducing the penalty to 20% to prevent this from happening.

[7:24] Sarah Coles: I think that, psychologically, would make a really big difference. It’s funny, really – as human beings, we do tend to focus on the downsides of things, so it’s quite easy to forget the fact that you do get a government bonus and worry about what might happen if you needed to access the money earlier.

[7:39] Helen Morrissey: Yeah, absolutely – I agree. And we are also calling on the Government to make other changes to Lifetime ISA to make it even more useful to groups like the self-employed.

So, we would like to see people able to open and contribute to a Lifetime ISA up until the age of 55. So, at the moment, the age limit to opening a LISA... it stops at the age of 40.

Now, the Barometer research that we’ve done onto self-employment and their retirement prospects suggests that, if we could make these changes, 1.2 million self-employed households could be helped to build a better retirement. However, it is worth saying that, if you are a higher-rate tax payer, you are still very much likely to be better off in a pension due to the higher rate of tax relief that’s on offer. Though it’s worth saying that you have to reclaim the extra tax relief through your tax return – but, when you work for yourself, quite frankly, you’ll be used to the extra admin, by the sounds of it.

[8:38] Sarah Coles: [Laughs] Yeah – I mean, is an absolute headache. I do remember working for myself... the whole task of invoicing. I just didn’t give myself permission to do it during the day ‘cause I wasn’t getting paid for it, so I’d be up, slaving away in the middle of the night in order to do it.

But I think... there was a recent survey, actually, that showed that there are about

17 hours a month of admin for self-employed people – which, if they put into doing their actual jobs rather than doing the admin, they could make an extra £3,000 a year. So, yeah – the admin is a big deal.

So, a big part of the admin is the tax returns that people have to do by the end of January. There is also another bit, which comes in the middle of the year – so you might need to make a payment on account by the end of July. So, this will happen if your tax bill was more than £1,000 last year and less than 80% of your income is taxed using PAYE.

Now, of course, obviously, another issue is that lumpy payments – that we keep talking about – can cause cashflow problems – and, of course, when you’re looking at being self-employed, it’s not just the work that’s lumpy – sometimes, the payments can be lumpy. I can remember waiting months and months for some of the money to come in.

So, you can actually split up the tax bill and spread it over a year through something known as a ‘Time to Pay’ plan. So, that will then spread it over the following 12 months, which will ease any potential cashflow issues.

From April next year, things are going to get even more admin-heavy – because sole traders earning more than £50,000 in qualifying income are going to switch to a digital-only tax return, providing quarterly updates – and there’s even more dates in the diary. They’ll also need to pay for software that works with the system.

Now, that system’s actually gonna be introduced gradually for people who are earning less too. My freelance friends are absolutely dreading it – and they’re, overwhelmingly, saying they’re gonna end up just using an accountant because it’s just too complicated – which, of course, takes away your admin, but then adds to your cost.

[10:18] Helen Morrissey: Absolutely. So, are there any ways that can make this easier?

[10:22] Sarah Coles: Well, I think the rising tide of admin is something that is gonna be affecting a lot of people – and, unless you’re willing to employ people to do it for you, you can’t get rid of all the admin. But one of the things you can do is to streamline your finances elsewhere – to take away some of that admin.

So, one of the things, for example, is you can use a Stocks and Shares ISA or a Cash ISA.

Now, this doesn’t just mean that your income and gains are tax-free – it also means you don’t have to put them on your tax return, which takes that off your plate. So, there are a variety of different things that you can do – but, yes, I’m not gonna sugar-coat it. I’m afraid, whatever you do, there will be a heck of a lot of admin when you work for yourself. However, it’s not all bad – there are some benefits in working for yourself.

So, we did a poll, a couple of years ago, asking people the biggest attractions of working for themselves – and the most popular answers varied, depending on when you were asking men or women.

So, one group said the biggest attraction was being their own boss – and one said it was the flexibility of the hours – but which d’you think was chosen by men and which by women?

[11:20] Helen Morrissey: Okay – so, I mean, I’m looking at that – and, obviously, they’re both great perks, but I, personally, think it would be the flexibility of the hours chosen by women.

[11:32] Sarah Coles: You are right. So, yes, there are some ways in which we are absolutely, stereotypically, interested in certain things – but, yes, flexibility was top-of-the-list for women.

Interestingly, actually, 12% of people said that one of the top-three attractions was not having to go to meetings! [Laughs]

[11:47] Helen Morrissey: It’s fair enough, isn’t it? – fair enough! [Laughs]

[11:50] Sarah Coles: Maybe the admin’s worth it if you wipe out having to sit in boardroom for hours, listening to other people talk.

[11:54] Helen Morrissey: [Laughs] Yes!

[11:56] Sarah Coles: So, that’s all from us this time – but, before we go, we should say this was recorded on 11th November 2025, and all information was correct at the time of recording.

[12:03] Helen Morrissey: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you.

[12:09] Sarah Coles: Tax rules can change and benefits depend on circumstances. Pension money can’t normally be accessed until 55, which is rising to 57 from 2028.

[12:16] Helen Morrissey: Money taken from a Lifetime ISA before the age of 60 – that’s not to buy an eligible first home – is subject to a 25% penalty.

[12:24] Sarah Coles: All investments fall as well as rise in value, so you could get back less than you invest.

[12:28] Helen Morrissey: So, all that’s left is for us to thank our Producer, Elizabeth Hotson.

[12:32] Sarah Coles: And, of course, to thank you, so very much, for listening – we’ll be back again soon. Goodbye!

[12:36] Helen Morrissey: Goodbye!