I thought that I’d let the dust settle on Chancellor Philip Hammond’s Spring 2017 Budget before commenting and boy oh boy am I pleased with that decision after his ignominious climbdown on the National Insurance tax increase for the self-employed.
Who would have lost out?
In an interview the morning after last week’s Budget, the chancellor said that 60% of self-employed workers would pay less NI as a result of the abolition of Class 2 contributions in April 2018, combined with the increase in Class 4 contributions.
He said: “Of the 15% of people who are self-employed, 60% will see a reduction in their National Insurance charge. Anyone earning less than £16,250 a year will see a reduction in the National Insurance contributions they pay.”
That was clearly not the case – those earning less than £5,965 a year would not have paid any National Insurance either before or after the changes; with the ONS estimating that 40% would have paid less NI, while 20% would see no change.
How does NI work in practice?
Workers – whether they are employees or self-employed – pay National Insurance to qualify for certain benefits, such as the state pension.
As the self-employed do not have access to some benefits they pay less in National Insurance. This discount also reflects the greater risks the self-employed take; for example, they do not get statutory sick pay if they cannot work owing to illness.
Technically, there are four different classes of National Insurance. Class 1 is paid by employees. Class 2 and Class 4 are paid by the self-employed, and Class 3 is for voluntary top-ups.
- Class 1 contributions are a proportion of pay that are paid by employees and are automatically deducted by their employer (currently 12% once your salary exceeds £8,060 a year)
- Class 2 contributions are a flat rate paid by self-employed workers on profits of more than £5,965 a year (currently £145.60 a year)
- Class 4 contributions are a proportion of profits, currently paid at a rate of 9% when making a Net Profit of more than £8,060 a year
That is the $64,000 question. What we know for certain is that Class 2 NI will still be abolished in April 2018, however, apart from an assurance that Class 4 NI will not rise this Parliament, we don’t know and I suspect that the chancellor hasn’t made his mind up either.
The government announced its intention to reform self-employed NICs in the March 2016 Budget, with Class 2 being abolished in 2018, followed by a reform of Class 4 NICs to introduce a new contributory benefit test.
Setting to one side the political ramifications of Philip Hammond’s U-turn on Class 2 tax rise, the chancellor now has a new problem; how does he plug the likely £2bn hole in tax income as a result?
Its reversal, with no prospect of any replacement direct tax increases this Parliament, makes the government pledge to “balance the books” even more difficult to honour, especially as the NI rise was to pay for spending commitments on social care and business rate support.
Income tax, National Insurance contributions and VAT raise 65% of the government’s tax income. If you pledge not to raise any of them, your room for manoeuvre is severely limited. So over to you Mr Hammond!
Other 2017 budget measures affecting business included
- Dividend allowance reduction: the tax-free allowance of £5,000, despite being in effect for less than a year, will be cut to £2,000 in April 2018 – a measure due to raise a whopping £2.6bn over five years
- Business rates: A relief package of £435m to cushion the business rates blow, will be brought in from April this year
- VAT: The VAT registration threshold is to increase to £85,000 from 1st April 2017
- Making Tax Digital: There will be a 12-month delay in the original Making Tax Digital (MTD) timeline for unincorporated businesses with a turnover below the VAT threshold, until April 2019 at the earliest, with the possibility that it may become permanent
- Capital Gains Tax: The CGT Annual exemption is to increase from £11,100 to £11,300 on 6th April 2017
- Pubs: Philip Hammond also offered some small beer to the pub industry, with a £1,000 discount in business rate bills in 2017 for all pubs with a rateable value of less than £100,000
Well that’s it folks until the next budget due in six months’ time when there is no doubt that we will see some major changes in the tax system, preparing the way for the upcoming General Election and I suspect it will be a lot like the proverbial curate’s egg.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.
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