Budget 2017: self-employed targeted with NIC increases
Chancellor Philip Hammond has identified the rising number of self-employed workers as benefiting unfairly from differences in tax treatment.
He has therefore announced measures including an increase in national insurance contributions (NICs) in Wednesday's (8 March) Budget.
At present, says the chancellor, an employee earning £32,000 will pay NICs of £6,170 including those from their employer, while a self-employed person pays only £2,300.
The discrepancy was previously a reflection of differences in state pension benefits, but with the introduction of the new universal state pension in April 2016 that differential has been removed and everyone has access to the same state pension rights.
The government has previously announced the abolition in April 2018 of the flat-rate Class 2 NICs paid by self-employed people (based on the number of weeks of self-employment in the year).
To counter that tax break for self employed, this Budget sees the announcement of an increase in Class 4 NICs (based on self-employed profits), from 9 to 10 per cent in April 2018 and 10 to 11 per cent the following year.
The chancellor says the combined impact of the changes means only individuals with profits above £16,250 will pay more NICs.
Steven Cameron, pensions director of Aegon UK, comments that the rise, though unpopular with the self-employed, is not surprising.
'NI contributions notionally pay for state pensions and with the self-employed being key beneficiaries by now receiving the same single state pension as employees, it's not unreasonable to reflect that in NI rates.
'However, this justification would have been easier to use had the changes to NI happened at the same time as changes to state pension entitlements,' he says.
However, self-employed people do not receive other employment benefits such as holiday pay, maternity or paternity leave and sick pay; nor do they benefit from employer contributions into their pensions.
As Tim Walford-Fitzgerald, private client principal at accountant HW Fisher, points out: 'The regular wage slip is a world apart from the increased risks and uncertainty involved in running your own business. These tax changes do not reflect the practical distinctions between employment and self-employment.'
But the Resolution Foundation (RF) says that the move is a fair one, though it should be part of a wider package of reforms designed to provide greater support for the self-employed.
Its analysis concludes that more than half of self-employed workers will be better off in 2019-20, 'because they save more from the abolition of Class 2 NICs (a flat rate tax of £150) than they lose from the increase in Class 4 NICs from 9 per cent to 11 per cent'.
'This is due to a heavy concentration of low pay among the self-employed, with around half earning less than £13,000 a year.'
'BOLD AND WELCOME' CHANGES
It will be higher-earning self-employed individuals who lose out from the rises in Class 4 NICs.
Resolution Foundation analysis shows that:
- a self-employed hairdresser (with average earnings of £12,700) will be £70 better off in 2019-20 as a result of the combined reforms
- a self-employed taxi driver (with average earnings of £17,300) will be £20 worse off
- a self-employed management consultant (with average earnings of £51,100) will be £620 worse off
Torsten Bell, director of the Resolution Foundation, described the NIC changes as 'bold and welcome'.
'By abolishing Class 2 NICs and staggering the increase in Class 4 NICs, most self-employed workers will actually be better off next year, with higher paid accountants and management consultants taking the biggest hit.
'These tax rises should be part of wider reforms that address remaining incentives to become self-employed, while offering greater support with the likes of maternity pay and pension savings that are particularly needed for the millions of workers at the precarious end of self-employment.'
Those who have set up their own companies will also be hit with a cut to the value of dividends that can be received tax-free, from £5,000 to £2,000.
Director shareholders have historically been able to benefit from corporate rather than income tax rates by paying themselves dividends from the company instead of a salary.
That benefit was further enhanced at the lower-paid end of the scale by the introduction of the £5,000 dividend allowance in April 2016.
Following the Budget, Sean McCann, chartered financial planner at NFU Mutual, said: 'The National Insurance announcement could make pension contributions even more attractive to entrepreneurs who wish to take money out of their company in a tax efficient way.
'Company pension contributions via salary sacrifice are not only tax efficient, they also don't attract National Insurance and can be accessed from age 55.'