National Insurance for the Self-Employed, Budget 2017

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Chancellor Hammond backtracks on his plan to increase National Insurance

Last updated on Thursday, March 16, 2017

Written by Alex Cadman

The Spring Budget was announced last Wednesday, 8th March. It sparked plenty of backlash around measures to increase tax revenue from the self-employed, particularly the Chancellor's plan to increase to Class 4 National Insurance Contributions (NICs), which has now been cancelled.

Chancellor Hammond previously said that he would increase the main class of NICs for the self-employed, Class 4, from 9% to 10% in April 2018, and again to 11% in April 2019.

Exactly a week later, he backtracked on this plan, stating that there will be no increase in National Insurance rates in this parliament. 

Hammond was criticised for breaking the Conservative’s manifesto to keep income tax, NI and VAT levels the same as in 2015.

In a letter to Conservative MPs, he said: “In the light of what has emerged as a clear view among colleagues and a significant section of the public, I have decided not to proceed with the Class 4 NIC measure set out in the Budget.”

The measure faced widespread opposition almost immediately after its announcement, with many spokespeople saying that it would harm innovation and discourage people from branching out on their own.

Lord Alan Sugar even called the NI increase ‘punitive and demoralising’ for the self-employed.

Speaking on the implications that focusing tax hikes on the self-employed could have, head of tax at the Association of Chartered Certified Accountants (ACCA), Chas Roy-Chowdhury, said: “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.”

National Insurance wasn’t the only topic that sparked heated discussion in the aftermath of the Budget, which we have highlighted here:

Cuts to tax-free dividend allowance

Up on the chopping block this Budget was the tax-free dividend allowance for company directors and shareholders. The tax-free dividend allowance will fall from £5,000 to £2,000 from April 2018, helping to raise £2.63 billion in tax revenue by 2021-2022. Chancellor Hammond admitted that half of those affected will be private company directors and shareholders, but maintains that the main goal is to “address the unfairness” of “an extremely generous tax break for investors with substantial share portfolios.”

Baroness Altmann, the former pensions minister, said that the reduction, alongside the now-cancelled increase in National Insurance, is “another tax on risk-taking.”

Somewhat cushioning the impact are the increases to the personal allowance and Isa allowance. The personal allowance for income in the basic rate tax band is to increase from £11,000 to £11,500 in April 2017, and the higher rate threshold will increase from £43,000 to £45,000. However it is Isas that many could look towards for savings protection, as the Cash Isa Allowance is increasing to £20,000 from 6th April, up from £15,240.

Furthermore, the previously announced Lifetime ISA will be introduced from 6th April 2017, allowing under-40s to have a 25% government bonus each tax year on top of savings, with a maximum tax-free savings allowance of £4,000 per year.

Making Tax Digital implementation to be delayed

The introduction of quarterly tax reporting for small business below the VAT registration threshold is to be delayed a year, now to be implemented in April 2019. However, the Chancellor is being criticised for targeting small firms and traders for forcing quarterly reporting in the first place.

The Sunday Telegraph’s Janet Daley claimed that requiring small businesses and the self-employed to file quarterly income tax returns will “quadruple their accountancy charges at a stroke and require access to online facilities.” Whilst this could be true for some who use high-street accountants, others with specialist contractor accountants may not see such a negative impact.

Philip Hammond’s move to defer quarterly tax reporting was in response to concerns over a lack of time to effectively plan Making Tax Digital and make it as simple as possible for one-man-bands and other small businesses to adjust.

Note: The VAT registration threshold for sole traders and limited companies is rising from £83,000 to £85,000 from 1st April 2017.

Although actions to increase tax bills for contractors and freelancers seem to come about each Budget, the industry has proven resilient over the years – demonstrated by the government’s U-turn in NIC increases.

Freelancers alone contributed £119 billion to the UK economy in 2016, and the contractor industry as a whole now makes up 15% of the whole of the UK workforce.

For information on how to navigate changes announced in Spring Budget 2017, including how you can still legally maximise your take home pay as a contractor or freelancer, contact us today.

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