UK Budget 2017: A summary for freelancers

UPDATE: Since this piece was first published, Theresa May has put the brakes on the NICs changes coming into effect just yet. Widespread criticism of the move to increase National Insurance payments has meant that the tax rises will now not go before MPs until the autumn. Although the prime minister says she thinks the rises are both fair and necessary, she said the chancellor will listen to the concerns being voiced.

The Spring Budget contained a nasty surprise for the 4.8 million self-employed workers in the UK: rises in National Insurance Contributions (NICs).

This means that as of April 2018, the rate for Class 4 NICs will be 10%, a rise of 1% from current levels. The following year there will be another 1% rise, taking it up to 11%. These changes will apply to anyone earning more than £16,250 a year.

The budget contained another nasty surprise for self-employed workers: a reduction in the current tax break levels regarding dividends payments. This means that the self-employed will have to start paying tax on any dividend income over the new threshold of £2,000, rather than the current threshold of £5,000. That change will also come into force in April 2018. This change will result in a tax rise for many shareholders.

So, why has Philip Hammond, the Chancellor, made these changes and what will they mean to the average self-employed person?

Traditionally, self-employed people have been liable to pay a lower rate of NICS than those in employment because they receive fewer state benefits. Employees currently pay 12% in NICs. However, now that self-employed people purportedly have equal access to the new state pension, the Chancellor thinks the difference in NICs is no longer justified. As a result, he is closing the gap between how much self-employed workers pay in NICS, compared to employed workers.

According to Hammond, all self-employed people earning less than £16,250 will be better off with the new rates. How and why? From April 2018, Class 2 NICs will be abolished. This is a flat rate tax of £150 paid by those with the lowest incomes. Analysis from the think tank, the Resolution Foundation, tallies with Hammond’s claim that those self-employed people with lower earnings will benefit from the new rate. It found that more than half of the self-employed workforce will be better off in 2019-20 because they will gain more from the abolition of Class 2 NICs than they will pay in the Class 4 NICs increases.

The Resolution Foundation says that around 50% of the UK self-employed population earn less than £13,000 a year. It issued the following analysis:

  •   A self-employed hairdresser (with average earnings of £12,700) will be £70 better off in 2019-20 as a result of the combined reforms;
  •   A self-employed taxi driver (with average earnings of £17,300) will be £20 worse off; and,
  •   A self-employed management consultant (with average earnings of £51,100) will be £620 worse off.

One of the many criticisms of Hammond’s new Budget is that by increasing NICs for the self-employed, the Conservative party is breaking its 2015 election manifesto pledge not to raise national insurance rates.

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