The Salary Calculator

Navigating pension pots in times of financial crisis

by Madaline Dunn

Saving into a pension can help safeguard your future; the state pension is just £203.85 per week, and the cost of living is only increasing. However, the cost of living is also making it more difficult than ever to save into a pension, and increasingly the research shows that people are unable to afford to do so and are cutting back on contributions in order to afford the basics.

At The Salary Calculator, we’ll walk you through,

• What the data shows about people not being able to afford pensions
• The percentage of self-employed people that don’t pay into a pension
• How much is it recommended that you save into a pension?
• What the consequences of not saving into a pension are
• Where to go for advice and guidance

More and more people can’t afford to pay into a pension

According to a survey commissioned by insurer Aviva Life and Pensions Ireland, the cost of living crisis, and energy crisis are negatively impacting people’s ability to take sustainable action in their personal lives, despite a desire to do so. For example, the research found that four in ten people aged between 55 and 65 would like to hold some investments, this includes pensions.

However, while nearly 90% are eligible (over 22 and earning over £10,000 per annum) for the automatic pension enrolment scheme, more people are either stopping or reducing their workplace and personal pension contributions.

The number of people doing so reportedly increased by almost a third between March and July 2022.

Some proposed solutions to help counteract this have included increasing the amount that employers pay in under the scheme from 3% to 6%, allowing workers to supplement their disposable income. Others have suggested that employers opt to continue contributions while workers take a “temporary contribution holiday.”

What percentage of self-employed people don’t pay into a pension

While there’s an increasing number of people reducing or stopping their pension contributions when it comes to the self-employed population, which makes up 4.39 million workers, only 16% save into a private pension.

Further to this, as the number of self-employed people has risen, the number contributing to a private pension has fallen. It makes sense then, that a recent report from the Office for National Statistics (ONS) found that there’s a significant difference in the average pension wealth between employed and self-employed, with the latter, more likely to report not being able to afford to pay into a pension.

Further, the Institute for Fiscal Studies found that, for those self-employed workers that do pay into a pension, most rarely increase their contributions, even as their income rises. Indeed, nearly half kept their contribution at the same level for two years, and for those who had saved into a pension for nine years, one in five never increased their contributions. The average contribution is just £600 per year.

How much is it recommended that you save?

When it comes to saving into your pension, there are a lot of numbers thrown around, some advisors suggest that you contribute as much as ten times your average working-life salary by the time you retire. Others suggest that you aim for the ’50-70′ rule, which means you end up with an annual income that is between 50 and 70 per cent of your working income.

Elsewhere, it’s recommended that if you’re 30 years old, 15% of your salary should be pension contributions; further some advise that by your mid-thirties, you need to have twice your annual salary saved into your pension pot.

Of course, for many, this isn’t a feasible option, and many people have more immediate priorities to think about. Speaking about this to The Independent, Rebecca Aldridge, managing director of Balance: Wealth Planning, said that focusing solely on building up a pension pot “ignores the reality of life” for most people under the age of 35.

Indeed, it overlooks high levels of debt, and the expenses associated with raising children and childcare, for those who have them.

“Most worryingly in my view, most have little in accessible savings, making them incredibly vulnerable if they are made redundant, can’t work due to illness, want to take longer parental leave or so on. A healthy pension fund won’t help with any of those,” she said.

Instead, Aldridge recommends building a strong foundation by saving a little each month, enough to work toward paying off debt, and building up a savings fund of six months. After this, she explains, it makes sense to put money into “a mixture of other savings pots.”

What are the consequences of stopping paying into a pension?

More and more people are feeling less confident in their ability to afford retirement, according to research from Hargreaves Lansdown. In fact, 39 per cent feel this way, up from one-third a year prior. And the cost of living crisis is compounding the issue.

Speaking about this, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrisey, said that the real shift has come from people who were “unsure if they had enough to retire” who now seem to know they “definitely don’t” as their costs rise and their investments “took a pounding.” Further, she said that while the younger you are, the better your chances of boosting your pension contribution, for those coming up to retirement age, “the prospects look bleak.” This, she said, is why more and more people who have retired are returning to work.

“Many believed they had enough set aside to see them through retirement, but the enormous hike in the costs of essentials such as fuel and food is making many revisit their plans. Though we expect inflation to start falling this year, it is likely to remain a squeeze on peoples’ plans for the foreseeable future.”

However, many finance experts advise that while it might feel tempting to pause your pension contributions, so you can divert that money elsewhere, it could come back to bite you in the long run. Not only will you miss out on your employer matching your contribution, you’ll also no longer benefit from the tax relief the government pays on those contributions. Even pausing for a period of two years could see tens of thousands of pounds wiped from your pension pot, depending on salary and contribution.

Where should I go if I’m seeking advice?

Considering the long-term consequences of cutting back on contributions, it’s a good idea to speak with a financial adviser who can give you a deeper understanding of how it might affect you later on, alternatives and ways in which you can mitigate the effects of reducing your contributions.

Some sources which can help and point you in the right direction include:

• Unbiased 
• Money Helper
• Citizens Advice 

Tags: investments, pension, private pension, self employed

Self Assessment rules refresh

by Madaline Dunn

As the cost of living crisis drags on, nearly 200,000 low-earners have been hit with HMRC penalties for failing to file their tax returns. This high figure is a reminder of the scale of confusion that surrounds Self Assessment.

At The Salary Calculator, we’ll walk you through the key information, to help safeguard you against being hit with tax-related fines. Below, we’ll explore and explain:

• How many penalties were issued and why,
• The rules around Self Assessment,
• HMRC’s response and upcoming changes

HMRC issues hundreds of thousands of penalties to low earners

Recent figures have revealed that between 2018 and 2022, HMRC handed out 660,000 fines to earners who didn’t owe any tax. Eleven million people are required to submit a Self Assessment income tax return to document their other sources of income or past income. Missing the submission deadline on 31 January, means people are automatically hit with a £100 penalty.

For the 2020-21 financial year, 184,000 people were fined for failing to complete a Self Assessment tax form by this deadline. These 184,000 taxpayers were paid less than £12,500 a year, meaning they were not subject to income tax. A total of 58000 of the 184,000 low earners who were fined were successful in their appeal, bringing down the total to 126,000.

Thinktank Tax Policy Associates (TPA) obtained the data following a FOI request, and found that 92,000 people among the lowest-paid 10% of the population were fined by HMRC in 2020-2021, while just 39,000 of the highest-paid 10% received fines.

Speaking about this, Dan Neidle, a tax campaigner and founder of TPA, said: “We believe the law and HMRC practice should change. Nobody filing late should be required to pay a penalty that exceeds the tax they owe.”

“People are falling into debt and, in one case we’re aware of, becoming homeless as a result of HMRC penalties. Advisers working with low-income taxpayers see this kind of situation all the time, and filing appeals for late-payment penalties often makes up a significant amount of their work.”

What are the rules and penalty charges?

So, what are the rules around Self Assessment that you need to adhere to in order to avoid being hit with penalties?

If, in the last tax year, any of the following applied, you must file a tax return:

• You were self-employed as a ‘sole trader’ and earned over £1,000 (prior to deducting anything you can claim tax relief on)
• You are a partner in a partnership business;
• You are a minister of religion;
• You are a trustee or the executor of an estate.

There are some other circumstances where you might also need to file a Self Assessment Tax Return. You can find out more about that here.

It is important that you register with HMRC for Self Assessment by 5 October, following the end of the tax year in which the income or gains first arose. If you fail to do this, you may be subject to penalties. This deadline is extended to 31 October for paper returns.

Other key dates include 31 January, which is the deadline for both submitting your online tax return and paying the tax that you owe.

The second payment on account is due 31 July 2023, and by January, if you still owe HMRC tax following your payment on account, you’ll need to pay a balancing payment.

If you miss the submission deadline, you will be hit with an automatic £100 automatic late-filing penalty.

If you fail to pay this for three months, the penalty can begin to increase by £10 each day, up to a maximum of £900 for 90 days.

At six months, a flat £300 additional penalty can be applied, or 5% of the tax due, whichever is higher, and if after 12 months you’ve not paid, you can incur another £300 penalty.

What was HMRC’s response and are there incoming changes?

Following a wave of criticism, an HMRC spokesperson released the following statement: “The government has recognised that taxpayers who occasionally miss the filing deadline should not face financial penalties, and has already announced reform of the system.”

So what reforms are set to be introduced? From 2026 onwards, the current standard £100 fine for late filing of Self Assessment tax returns will change to a points-based system.

According to HMRC, this will mean that those who make an occasional mistake won’t be hit with big fines straight away. Instead, those who miss the filing deadlines will be given a point, and a financial penalty will only be charged to them when a set number of points is reached.

The Government policy paper outlines that taxpayers will receive a point every time they miss a submission deadline, and HMRC will notify them when they receive a point.

When they reach a particular threshold of points, determined by how often they’re required to submit, a financial penalty of £200 will be charged, and they will be notified.

These thresholds are as follows:

• Annual – 2 points
• Quarterly (including MTD for ITSA) – 4 points
• Monthly – 5 points

As per these new rules, another £200 penalty will be issued for every subsequent late submission, but the taxpayer’s points total will not increase.

However, despite calls to reform the system further, the spokesperson said deadlines for returns are “necessary for the efficient functioning of the tax system,” adding: “We strongly encourage anyone who does not need to file a return to tell HMRC.”

“Our aim is to support all taxpayers, regardless of income, to get their tax right, and details of what to do if a person no longer needs to file a return are included in reminder letters every year.”

There are also further upcoming changes to Self Assessment, too. From April 2026, those who file Self Assessment reports each year and are self-employed, with annual gross income of over £50,000, will have to comply with the government’s new Making Tax Digital (MTD) for Income Tax rules. As per these rules, these taxpayers will have to keep records in a digital format, using specific accounting software packages or apps or maintain spreadsheets for recording business transactions.

Further, instead of a yearly report, people will be required to submit quarterly updates to HMRC. The deadlines for this will be as follows:

• 6 April to 5 July
• 6 July to 5 October
• 6 October to 5 January
• 6 January to 5 April

In addition to the quarterly returns, this will conclude with submitting an ‘end-of-period statement’ to confirm the final taxable profit for the accounting period.

From April 2027, those who file a Self Assessment tax return and are self employed, with an annual gross income of between £30,000 and £50,000 will be required to do the same.

Tags: HMRC, income tax, making tax digital, Self Assessment