Tax on the Self-Employed and Business Owners from Old Mutual Wealth

The Chancellor has today announced an increase to the national insurance contributions payable by the self-employed, while also taking away tax advantages for business owners.

Currently the self-employed pay only a small weekly contribution through ‘class 2’ national insurance and then 9% on income between £8,060 and £43,000. This is lower than standard 12% rate for employees, and the government also miss out on employer national insurance payments as well. Meanwhile, company owner-managers can currently get even lower tax rates because they can take income from their company through lightly taxed dividends.

It is estimated that a £5bn subsidy arises from this gap in national insurance rates and that the self-employed account for over two thirds of the £7bn underpaid tax through self-assessment.

Old Mutual Wealth pensions expert Jon Greer says:

“The news could have been worse for the self-employed. A small increase to 10% and then 11% will still see the self-employed paying a lower rate of national insurance than their employed peers. But the dividend allowance cut was a surprise and will be really unwelcome for business owners and investors, effectively reducing the amount you can take free of tax from their business by 60%. The measure will also undoubtedly prove controversial and attract criticism from those that believe it breaches the government’s pledge not to boost personal taxes

“The number of self-employed people in the UK has risen steadily over the last two decades, and has accelerated significantly since the economic downturn in 2008. The most recent ONS figures show well over 4.5 million people are registered as self-employed and the growth in self-employment has made a substantial difference to employment figures and economic recovery since the financial crisis. But it is estimated an NICs cross-subsidy of around £5bn exists the self-employed and employed. These concerns will have been exacerbated by the rise of the so-called ‘gig’ economy, with online platforms creating an increasingly flexible workforce with more opportunities to work for themselves.

“By updating the national insurance system, Hammond has guarded the government’s coffers against the risk of a growing tax gap, but stopped short of completely equalising national insurance for the self-employed.

“Reducing the tax-free dividend allowance from £5,000 to £2,000 for 2018 will impact people who have direct holdings over £50,000. This mean people will be  With the ISA allowance increase to £20,000, people would be wise to maximise ISA contributions if they aren’t already doing so.

“Despite this double-whammy tax change, pitched as a measure to ensure ‘fairness’ for the employed, it should not be forgotten that while the self-employed currently enjoy a reduced rate of national insurance, they also miss out on sick pay, holiday entitlement and other perks enjoyed by those in employment. However, the Government will consult on changes to Parental benefits in the summer. Also, later this year the government will review the pension reforms, known as auto-enrolment, which ensure all employees save by default for their retirement. They benefit from tax-relief and pension contributions from their employer in the process. But the self-employed are currently excluded from the private pension system unless they make their own arrangements. Today’s news strengthens the case for the government to address this imbalance and ensure the self-employed enjoyed a comparable opportunity to save for their retirement.”