The government has announced that the proposed increase in National Insurance paid by the self-employed will be shelved until at least 2020.
In the Spring Budget the Chancellor had announced that Class 4 National Insurance Contributions (NICs) paid by the self-employed were to increase by 1% in April 2018 and a further 1% in April 2019. This would have taken the rate up to 11%, compared to the 12% Class 1 rate paid by employees.
Whilst the planned scrapping of Class 2 National Insurance Contributions (NICs) paid by the self-employed will still go ahead, the 2% increase in their Class 4 contributions will be shelved in this Parliament, with the gap left to be covered by new measures to be announced in the Autumn Budget.
Such measures could include, for example, a new tax on pensions, a reduction in pension contribution tax relief, or maybe an increase in Insurance Premium Tax. It is also unclear how the self-employed will pay for their state benefits in future once Class 2 is scrapped, as it is the Class 2 contributions, rather than Class 4, which entitle the self-employed to state benefits.
Asked by Treasury Committee chair Andrew Tyrie whether the differential in NIC rates should remain in the long term to reflect the “additional risk” taken by the self-employed, the Chancellor replied in Parliament that the idea behind the rate increase was to “close the gap” and not to equal it.
The Chancellor added that he will look closely at the forthcoming review by Matthew Taylor on the implication of different ways of working for employment rights as to what needs to be done and then issue a “fairer policy”.
But whilst the NIC U-Turn is welcomed, there remains a concern about the extra tax to be collected from those who run their own companies.
The announced £3,000 reduction in the dividend tax-free allowance from £5,000 to £2,000 in April 2018 will affect many company shareholder/directors.
They will be worse off by £225, £975 or £1,143 a year depending on whether they pay tax at the basic rate, higher rate or the additional rate. For a couple who share the running of their company, this is doubled to £450, £1,950 or £2,286 depending on their tax rate.
The change is subject to the passing of the 2017 Finance Bill, which is published on 20 March 2017.
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