Over-50s are returning to work; could freelancing be the way to do it?
The latest official data courtesy of the Office of National Statistics shows signs that 50-to 64-year-olds are returning to the workplace following the covid pandemic.
At the same time, the government is incentivising people to get ‘back to work’ in the shape of tax reform (contained back at Spring Budget 2023), and one of the best ways to maximise income, and top up pension pots -- in a nod to the reform, is to become self-employed, writes Jo Elwell, director of financial services at Brookson Financial, a People2.0 Company.
Why return to work?
For those that haven’t yet drawn their pension, returning to work in a flexible environment that self-employment can offer could be a great opportunity to bolster income and wealth in the face of the still ongoing cost-of-living crisis.
For wealthier individuals with an eye on Inheritance Tax, pensions provide a potentially tax-efficient vehicle for intergenerational wealth transfer. This is because your pension does not form part of your estate.
After the recent changes to the Lifetime Allowance (since April 6th 2023 the LA charge has been removed), people can now maximise their pensions without worrying about the previous financial stings which would apply if they were to exceed it. But crucially, you must be earning and part of registered pension scheme to pay into one.
So, returning to work allows individuals to increase their own cash-savings, boost their pension income and, with the right planning, increase their assets which can be placed outside of their estate for inheritance tax mitigation.
The pros and cons of professional freelancing
Two of the biggest motivations for contracting and freelancing are first -- the flexibility that it allows a worker, and second -- the level of earnings that are possible. Both can mean that a job can better fit around the changing lifestyle of someone that is coming out of retirement.
Successful self-employed in this age demographic are usually experienced individuals who provide their expertise on demand, often commanding much higher rates than salaried workers, even before tax benefits are factored in. It’s a model that’s common in industries such as IT, engineering, construction, healthcare and education, but can also work for freelancers in the creative sectors too.
Sole-person business savings
When it comes to tax, one-person businesses can save significant amounts of their incomes. Specifically, by being paid the gross amount by the end-hirer, these individuals can dramatically reduce their exposure to National Insurance Contributions and ultimately take home more in earnings.
However, don’t rush into your freelance career without advice! Being self-employed means you don’t have same employment benefits as others, such as sick pay and holiday pay. For some, this might make independent working less appealing.
But for older individuals who may very well have more financial security, the control and flexibility of self-employment will undoubtedly suit many people who are considering re-entering the workforce.
It should be acknowledged here that the responsibility of managing your business and the finances that are involved can be daunting! But don’t be deterred unnecessarily from setting up on your own -- both can be achieved efficiently through the use of specialist, one-stop shop service providers and technology platforms.
Have you considered an umbrella company?
Due to recent changes to the off-payroll working rules, otherwise known as IR35, not all contract and freelance opportunities will be available to the self-employed operating independently.
An alternative route, worth considering for a more hassle-free working life, is operating through an umbrella company. In this mode of working, the umbrella takes care of payroll and other administration.
The umbrella company route is not as tax-efficient as running your own freelance business, yet it removes the need for an accountant and, by sacrificing salary into a pension, the amount of tax paid on an income can still be significantly reduced.
Press, homework, and accreditation
Be aware, the umbrella market has received some bad press due to a prevalence of tax avoidance schemes and some unscrupulous business operations – both of which often masquerade as genuine, bonafide umbrella companies.
Freelancers must therefore make sure they do their homework before signing-up and committing to an umbrella company. Further be aware that while the umbrella sector is not yet regulated, there are fortunately accreditation bodies, such as the FCSA, which probe umbrellas for their compliance standards
What were the Spring Budget's pension changes?
In the intro, I mentioned the Spring Budget.
Well, seemingly adding to the benefits of freelancing, the government in March came forward with a number of measures to encourage the over-50s back into work and to save more into their pensions.
For those yet to retire, the annual pension allowance has increased from £40,000 a year to £60,000. The effect of this is that self-employed individuals who get paid in full by their end-hirer, can defer the tax of more of their income by putting it into their pension. This deferral, from high to low rates, can reduce income tax from 40% to 20% and massively bolster savings at the same time.
Maxing out the chancellor’s pension perks -- a quick example
The most advantageous situation would be for a higher earning freelance consultant to bring in around£80,000 p/a, sacrificing their salary down to minimum wage and saving the full £60,000 into their pension. As well as income tax, both Employer and Employee National Insurance Contributions would be significantly reduced. However, if you have the means, you could still benefit from saving any amount earned over National Minimum Wage.
Additionally, individuals may be able to contribute more than the annual pension allowance by ‘carrying forward’ unused pension allowance from the last three years.
However, if you have already accessed certain types of pension benefits, ‘carry forward’ cannot be used to make higher contributions and you may be limited to the Money Purchase Annual Allowance (MPAA), which limits pension contributions to £10,000 per annum (increased in the Spring Budget from £4,000 per annum).
Finally, it's horses for courses...
With different routes and options available to people considering reversing the decision to retire, it will be extremely beneficial to consider the various perks of freelancing and whether they are suited to you, your lifestyle and your goals.
Whichever route you chose, if you’re trying to maximise tax allowances and take-home pay you should strongly consider having an adviser in your corner. Look for an established specialist in the market, with a track record of supporting the self-employed, if getting further support around both decision-making and the whole process of returning to work, resonates with you.