Self-employed could face higher tax bill
Self-employed taxpayers could be hit with a higher tax bill if the income tax and national insurance contribution systems are simplified, under government proposals.
Plans to merge income tax and national insurance contributions systems will be investigated further by the government and the current low level of NI contributions that those in self-employment pay could be increased if the two tax systems are aligned.
George Bull, senior tax partner at accountants Baker Tilly, explains: "The self-employed currently pay either class two contributions, which are set rates, and class four contributions, which are a percentage of earnings and both on balance are lower at the moment than the equivalent that those in employment pay."
Class two rates are set at £2.50 a week and class four contributions are set at no charge on the first £7,225 of profits, 9% on profits from £7,226 to £42,475 and 2% on profits above this per year.
The Treasury's document, known as a call to evidence, lists fourteen areas of questioning surrounding the possible merger of income tax and NI contributions but does not substantially address the issue of self-employed people.
Bull is also concerned at the lack of detail on what will happen to those making class three NI contributions (typically people making additional payments to top up their contribution levels).
Despite these reservations Bull calls the government's consultation a "brave development" and one that would "make administration much simpler".
He says that currently "the true rate of tax" is obscured because the two systems collect and calculate tax separately.
Moves to simplify and combine the two systems have been welcomed by other inside experts. Anthony Thomas, president of the Chartered Institute of Taxation, congratulates the government on "finally grasping a nettle that successive administrations have shied away from".
"There are real administrative savings, for employers and for HM Revenue & Customs, in harmonising the way the two taxes are run."
Small companies, who have to operate complicated PAYE systems, will benefit from an easier, combined system.
However, Bull warns that while the income tax system will benefit from simplification, the country, as a whole, cannot afford to collect less tax. He says there is the potential for income tax bands to be narrowed, which could see both winners and losers:
"Taxpayers need to recognise that the same amount of tax will be collected – the question is just who's going to pay for it?"
The initial government consultation will take place over the next two months, with a formal consultation document released in the autumn.
David Gauke, Exchequer secretary to the Treasury says the government wants to create a UK tax system that is "simpler to understand for individual taxpayers." He adds:
"Greater integration of income tax and NICs will be a radical reform, but we believe that is has potential to bring real improvements."
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.