Self-employed hit by national insurance hike in budget – The Guardian

Self-employed people such as plumbers will face higher national insurance contributions thanks to measures in the budget. Photograph: Alamy Stock Photo

The tax advantages enjoyed by the UKs 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 are no longer justified by increasing the national insurance contributions (NICs) for self-employed people earning more than 16,250 a year.

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 in NICs between those in employment and the self-employed reflected differences in state pensions and contributory welfare benefits, he said.

But with the introduction of the new state pension, these differences have been very substantially reduced.

Hammond told MPs the changes would raise 145m a year after taking into account George Osbornes abolition of a separate class of self-employed national insurance contributions, class 2.

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 NI 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 chancellors new initiatives.

The changes to the taxation of dividends was criticised for leaving the door open to massive tax avoidance by 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 weve seen in recent years, which in turn is undermining the taxmans 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, its 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.

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, dont you think that the chancellor needs to explain why hes 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.

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 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 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 OBRs 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?

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Self-employed hit by national insurance hike in budget - The Guardian