More than a million self-employed people have been targeted in the 2017 Spring Budget as chancellor Phillip Hammond outlined plans to increase the rate of National Insurance they will pay.
In his Budget announcement on 8th March, the Chancellor proposed changes to the Class 2 and Class 4 NI contributions that relate directly to people who are self-employed. Should the controversial plan go ahead, the self-employed can expect to pay more as of April 2018, with another rise set to take effect in April 2019.
What this means
National Insurance contributions are a prerequisite for everyone, whether you are an employee or self-employed. These are what make you eligible for certain benefits such as free NHS healthcare and the state pension.
Self-employed people have conventionally contributed less NI as setting up your own business carries a greater risk, and the self-employed do no get statutory sick pay if ill health prevents them from working.
Of the four different classes of NI contributions, self-employed people are primarily concerned with Class 2 and Class 4.
Class 2 concerns base contributions paid by self-employed people who are making a profit in excess of £5,965 a year.
Class 4 contributions constitute a percentage of profits on a profit in excess of £8,060 a year.
What will change?
The first difference will be the abolition of Class 2 contributions in April 2018. This was determined in March 2016 by then chancellor, George Osborne.
It will result in a tax cut of £146 per year for self-employed people making over £5,965 a year.
However, in Phillip Hammond’s latest proposal, the self-employed will pay more in Class 4 contributions as of April 2018. The sum will rise from a rate of 9% to 10% on profits over £8,060 with a further 11% rise set for the following year.
The result? Self-employed people with profits of more than £8.060 will have a tax rise that averages as £240 a year.
How will this affect you?
Well, it might not.
Of the 4.8 million self-employed people in the UK, the Treasury estimates that only 2.5 million of these will make enough profit to be affected when you apply just Mr Hammond’s April 2018 changes to Class 4.
However, if you factor in the abolition of Class 2, this figure reduces to just 1.6 million people who are likely to end up paying an increased rate.
Any upsides?
Yes – according to Mr Hammond, at least. He has argued that the gap in benefit entitlement between employees and the self-employed is growing slimmer.
In addition, the new state pension (that came into effect last year) means that the self-employed are increasingly eligible for more than the absolute minimum amount.
Analysis
We have seen a major outcry over a proposal that, in reality, affects a relatively small amount of people. Why?
It is important to understand the context in which these changes are being brought about. The way we work in the UK is undergoing a shift.
More of us are self-employed. 3.23 million were working for ourselves at the end of 2000; today, the figure is closer to 4.8 million.
This isn’t such good news for HMRC. Reports indicate that the average wage for self-employed people has dropped, which means the Treasury is missing out on tax as a result.
These plans are not just an attack on anyone who is currently self-employed, but on anyone who dreams of one day doing the same.
Arguably, it represents the Tory ideal of ‘pulling yourself up by your bootstraps’, which is why so many Conservative backbenchers have been quick to register their consternation.
The figures already show a dramatic rise in self-employment over the last decade and, despite the perils and continual highs and lows of working for oneself, it is still perceived by many as the final expression of freedom and control over your own life.
Why tax the self-employed, rather than the businesses that take advantage of their services and offer no benefit or security in return?
If the proposal takes effect, self-employed people will be faced with a choice: expand their businesses and take a bigger hit on their increasing profit, or sacrifice growth in the face of an ever changing, ever more uncertain, market.
In addition, it appears that in announcing his plans, the chancellor has broken a major Conservative manifesto pledge.
“We will not raise VAT, National Insurance contributions, or income tax,” said the Conservative party manifesto in 2015.
The plans have been compared to the Liberal Democrats rolling back on their promise to cap tuition fees, a decision which heavily contributed to a loss of trust in the party.
Failure to commit to basic manifesto pledges can make a party seem duplicitous; the perception is that they said whatever it took to get into government with no intention of following through. It instantly undermines trust and causes unrest amongst the electorate.
The battle lines have been drawn, 19 Conservative MPs have already publicly opposed the policy. With a working majority of just 17, this represents a problem to the government, although both the prime minister and chancellor have defended the policy.
Behind closed doors though, all does not seem quite so friendly. Downing Street and the Treasury appear to be briefing against each other, with BBC Newsnight carrying a message from Treasury sources that Number 10 “just wants to spend money”. Meanwhile, a source tells The Times that the Treasury “forgot the manifesto”.
Theresa May has pressed pause on the plans, delaying the National Insurance part of the legislation until the Autumn.
Is a U-turn coming that might save you money? Watch this space.
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