Philip Hammond’s Spring Budget, with its U-Turn on National Insurance Contributions (NICs), alienates the very businesses the government should be encouraging, claims Top 40 accountants, Bishop Fleming.
Matthew Lee, Managing Partner at Bishop Fleming, described the Budget as: “making a bad turn worse”. He is concerned that the government is “out to get” businesses and will now find “new ways” to tax them instead of through NIC hikes. Mr Lee said he had “five major points of disappointment” with the Budget.
Businesses are our wealth generators, whether they are sole traders, partnerships or companies. Whilst the U-Turn on NICs is welcome, the announced £3,000 cut in the dividend tax-free allowance from April 2018 will hit small company owners hardest, with tax rises of £225, £975 or £1,143 per year depending on whether the person is a basic rate, 40% or 45% taxpayer. You can double this for a company run by a couple.
The Chancellor made erroneous comparisons between tax paid by employees and the self-employed as justification for taxing the latter more. There is no direct comparison between the two as the self-employed take far greater risks with their livelihood, and do not enjoy the job security or perks of an employee. Entrepreneurs are constantly having to generate income in order to live and pay their overheads. It is right that the tax system should recognise this difference and motivate the self-employed.
The Chancellor also overlooked the fact that whilst an employee pays 12% NICs on their wage, the self-employed employer will pay 13.8% on that wage. For example, a self-employed person left with a profit of £50,000 after paying an employee £25,000, would pay total NICs of £5,760 compared to the employee paying £2,033 – which is nearly three times more.
The substantial increase in business rates from April, which will destabilise property-based businesses such as retailers, factories and public houses, cannot adequately be softened by a sticking plaster of temporary reliefs. Business rates are fundamentally inequitable and need to be based on the performance of the business, not on the theoretical value of its premises. It is perverse and anti-business that a tax which is chargeable before even a £1 of revenue has been earned should be allowed to continue, with only a vague promise of reform kicked into the long grass.
Whilst the announced one year delay for the smallest of businesses in having to keep digital tax records and submit quarterly returns is welcome, it does not detract from the fundamental point that Making Tax Digital will significantly increase the compliance costs of all businesses. VAT-registered businesses will still be forced to join the project next year, with little time to prepare, as the promised software, support and detailed rules are not yet available. Not only should there be a longer delay before tax digitalisation takes place, but it should be optional for many small firms and self-employed workers.
It is greatly disappointing that the Chancellor chose to ignore the imminent plight of landlords who will lose tax relief for their finance costs. From April this year, landlords will be increasingly taxed on their rental income regardless of the interest they have to pay on their borrowings, putting many out of business, with the consequent knock on effect on the supply of homes to rent. In areas where landlords are forced to increase rents to cover tax rises, this will make it more difficult for employers to recruit employees.”
Matthew Lee said: “When you take into account the buy-to-let restriction in tax relief, recent cuts in pension contribution rates, and the fall in the rate of corporation tax, we have seen a significant shift to move taxation off the very largest businesses and onto the individual – and the self-employed in particular. The Chancellor needs to stop seeing small, hard-working businesses as an easy target for extra tax grabs, and instead encourage and motivate them through a simpler tax system that is not an obstacle to growth.”
Mr Lee added: “The fact that he didn’t do that was an important missed opportunity and will affect business confidence.”
For the tax year to 5 April 2017:
• Employees pay Class 1 NICs at 12% on earnings between £155 and £827 per week and 2% on earnings above that.
• Employers pay Class 1 NICs at 13.8% on their employees’ earnings over £156 per week, with no upper limit.
• The self-employed pay Class 2 NICs at a flat weekly rate of £2.80, plus Class 4 NICs at 9% on profits between £8,060 and £43,000 and then 2% on profits above that.
The example mentioned above with a profit of £50,000 after paying an employee £25,000, creates an NIC liability as follows:
Employee NIC (£25,000 – (£155 x 52)) x 12% = £2,033
• Class 1 (£25,000 – (£156 x 52)) x 13.8% = £2,330 (A)
• Class 2 (£2.80 x 52) = £145 (B)
• Class 4 ((£43,000 – £8,060) x 9%) + (Balance of £7,000 x 2%) = £3,285 (C)
• (A) + (B) + (C) = total NICs paid by employer £5,760.
The table below illustrates the amount of NICs paid by a self-employed employer (Class 1, 2 and 4) compared to those paid by the employee (Class 1) on a range of profits and wages, and shows how many more times the self-employed’s NIC bill is greater than that of the employee.
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