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Self-employed hit by national insurance hike in budget Self-employed hit by national insurance hike in budget
(about 4 hours later)
The tax advantages enjoyed by the UK’s millions of self-employed people will be dramatically reduced following a series of major changes in the budget.The tax advantages enjoyed by the UK’s millions of self-employed people will be dramatically reduced following a series of major changes in the budget.
Appearing to reverse a Conservative party manifesto pledge from 2015, Philip Hammond risked irking his backbenchers and party supporters by announcing he is to close tax benefits that can “no longer be justified”. Appearing to reverse a Conservative party manifesto pledge from 2015, Philip Hammond risked irking his backbenchers and party supporters by announcing he is to close tax benefits that are “no longer justified” by increasing the national insurance contributions (NICs) for self-employed people earning more than £16,250 a year.
The chancellor said an employee earning £32,000 a year faces a national insurance bill of £6,170 along with their employer, while the bill for a self-employed person earning the same salary would come to £2,300. Announcing his changes, the chancellor said an employee earning £32,000 a year currently faces an NI bill of £6,170 along with their employer, while the bill for a self-employed person earning the same salary would be £2,300.
“Historically the differences reflected different entitlements to the state pension, but with the introduction of the new state pension the difference has been substantially reduced,” he said. “Historically, the differences in NICs between those in employment and the self-employed reflected differences in state pensions and contributory welfare benefits,” he said.
Hammond told MPs the changes would raise £145m a year after taking into account George Osborne’s abolition of class 2 national insurance contributions which will come into effect next year. “But with the introduction of the new state pension, these differences have been very substantially reduced.”
He said class 4 national insurance contributions for the self-employed would rise from 9% to 10% in April 2018 – and then to 11% in April 2019 – on income up to the higher rate threshold of £45,000. The rate is still lower than for employees who pay national insurance at 12% on the same income, while both groups will continue to pay at 2% on income above the higher rate threshold. Hammond told MPs the changes would raise £145m a year after taking into account George Osborne’s abolition of a separate class of self-employed national insurance contributions – class 2 – which will be eradicated next year.
The policy was welcomed by the Resolution Foundation, which said: “These tax differences are actually driving the big increase in self-employment we’ve seen in recent years, which in turn is undermining the taxman’s ability to get revenues in. He said class 4 NICs for the self-employed would rise from 9% to 10% in April 2018 – and then to 11% in April 2019 – on income up to the higher rate threshold of £45,000. The new rates are still lower than for employees who pay national insurance at 12% on the same income levels, while both groups will continue to pay at 2% on income above the higher rate threshold.
However, some self-employed people appeared to have been insulated from another of the chancellor’s new initiatives.
The changes to the taxation of dividends was criticised for “leaving the door open to massive tax avoidance” by the wealthy people working for their own companies. New data published by the Office for Budget Responsibility showed that a previous increase in dividend taxes resulted in much of the benefit falling to “just 100 individuals who were able to withdraw dividends averaging £30m each from their companies before the higher tax rate took effect”.
The new NI policy was welcomed by the Resolution Foundation, a living standards thinktank, which said: “These tax differences are actually driving the big increase in self-employment we’ve seen in recent years, which in turn is undermining the taxman’s ability to get revenues in.
“To put that in context: 45% of the employment growth since 2008 has been driven by rising self-employment (and no, it’s got very little to do with headlines about the gig economy), with the lower tax take that implies.”“To put that in context: 45% of the employment growth since 2008 has been driven by rising self-employment (and no, it’s got very little to do with headlines about the gig economy), with the lower tax take that implies.”
However, the increase has triggered criticisms that the Conservatives are reneging on a 2015 manifesto pledge that committed the government “to no increases in VAT, income tax or national insurance” – while the reception from the business community was less than positive.However, the increase has triggered criticisms that the Conservatives are reneging on a 2015 manifesto pledge that committed the government “to no increases in VAT, income tax or national insurance” – while the reception from the business community was less than positive.
John Overs, partner at international law firm Berwin Leighton Paisner, said: “The chancellor equates the position of the employed and self-employed including those working for their own companies, doing similar jobs and earning similar amounts but fails to appreciate the self-employed normally have much more financial risk and much less security than the employed. Trying to equalise tax treatment fails to recognise these differences. Labour said it would oppose the policy, with the shadow chancellor, John McDonnell, saying: “Labour will oppose the £2bn Tory tax on self-employed lower-middle earners.”
Chris Leslie, former Labour shadow chancellor, said during the Commons debate on the budget: “On the point about the increase in national insurance contributions for the self-employed, don’t you think that the chancellor needs to explain why he’s breaking a manifesto promise made in the 2015 general election manifesto on that?”
Hammond suggested the tax rise was justified because the self-employed could now access the state pension more easily. He planned to consult on extending parental rights to the self-employed, after a review by former Tony Blair adviser Matthew Taylor on the changing nature of the labour market reports later this year.
Rachel Reeves, a Labour MP on the treasury select committee, said: “While it is right for the chancellor to say that we should look at access to maternity and paternity benefits for the self-employed, what about the other benefits that people take for granted if they are direct employees, such as sickness benefits, out-of-work benefits and access to universal credit?”
John Overs, partner at international law firm Berwin Leighton Paisner, said: “The chancellor equates the position of the employed and self-employed, including those working for their own companies, doing similar jobs and earning similar amounts, but fails to appreciate the self-employed normally have much more financial risk and much less security than the employed. Trying to equalise tax treatment fails to recognise these differences.
“A rethink may be in order if we do not want to turn away entrepreneurs and wealth creators from this country.”“A rethink may be in order if we do not want to turn away entrepreneurs and wealth creators from this country.”
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, added: “Before this tax is raised, the government needs to think carefully about ways to align the level of benefits.Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, added: “Before this tax is raised, the government needs to think carefully about ways to align the level of benefits.
“In a time when we are trying to encourage innovation and create a Britain that is ‘open for business’, we should not be creating barriers to entrepreneurship and self-employment.”“In a time when we are trying to encourage innovation and create a Britain that is ‘open for business’, we should not be creating barriers to entrepreneurship and self-employment.”
In addition the chancellor also announced that he was addressing similar benefits enjoyed by people who are directors and shareholders, by cutting the tax- free allowance on the dividends they take out of their companies. In his speech, the chancellor said: “Since 2016 self-employed workers now build up the same entitlement to the state pension as employees, a big pension boost to the self-employed.
“The dividend allowance cut from £5,000 to £2,000 will cost basic rate taxpayers £225, higher rate taxpayers £975 and additional rate tax payer £1,143,” said Paul Haywood-Schiefer, assistant manager of accountants Blick Rothenberg. “The most significant remaining area of difference is in relation to parental benefits, and I can announce today that we will consult in the summer on options to address the disparities in this area as the FSB [Federation of Small Businesses] and others have proposed”.
Hammond also announced that he was addressing similar benefits enjoyed by people who are directors and shareholders, by cutting the tax-free allowance on the dividends they take out of their companies from £5,000 to £2,000 from April next year.
However, the moves may not prove to be as costly to people drawing dividends as assumed, as the announcement of the lower allowance presents taxpayers with the opportunity of lowering their bills by drawing dividends in advance.
In the July 2015 budget, the basic, higher and additional rates of taxation on individual dividend income rose by 7.5 percentage points, with the changes coming into effect in April 2016.
In the OBR’s economic and fiscal outlook, which is published alongside the budget, the watchdog estimated that such action cost the exchequer £800m.
The report added: “HMRC analysis suggests that around one pound in seven of that saving benefited just 100 individuals who were able to withdraw dividends averaging £30m each from their companies before the higher tax rate took effect.”
Jolyon Maugham QC, a tax barrister at Devereux Chambers and a director of the Good Law Project, said: “Every now and then the government does something so awful with the tax system as almost to be venal. Why would you deliberately – because the government knew this would happen – leave the door open to massive tax avoidance?”