Government cancels NIC increases for self-employed
Chancellor Philip Hammond has softened his attack on the self-employed, cancelling plans to increase national insurance contributions (NICs).
As part of Mr Hammond's first and last Spring Budget last week the Chancellor announced individuals with profits above £16,250 will pay more NICs. The move, which broke a Conservative Party manifesto pledge in 2015 that promised not to increase NI, was made to bridge the discrepancy between the amount the self-employed and employees pay.
At present employees earning £32,000 pay NICs of £6,170 including those from their employer, while self-employed people pay only £2,300.
The gap was previously a reflection of differences in state pension benefits for the self-employed, but with the introduction of the new universal state pension in April 2016 that differential has been removed and everyone has access to the same state pension rights.
The move was widely condemned and a week on from being announced Hammond has U-turned on the plans.
In a letter to MPs, Mr Hammond referenced that "there has been much comment on the question of commitments made in our 2015 manifesto".
"It is important both to me and to the prime minister that we are compliant not just with the letter, but also the spirit, of the commitments that were made.
"In light of what has emerged as a clear view among colleagues and a significant section of the public, I have decided not to proceed with Class 4 NIC measures set out in the Budget,' said Mr Hammond.
"There will be no increases in NICs rates in this Parliament. We will continue with the abolition of Class 2 NICs from April 2018. The cost of changes I am announcing today will be funded by measures to be announced in the Autumn Budget."
Under the planned changes, which have now been scrapped, self-employed people with profits above £16,250 would have paid more NICs - providing a big tax windfall for the government given there are 4.5 million self-employed.
From April 2018, Class 4 NICs (based on self-employed profits) were due to rise from 9% to 10%, and then to 11% in April 2019, on income up to the higher rate tax threshold of £45,000, plus 2% on any profits above £45,000.
The government had already announced in the 2015 July Budget that it will abolish the flat-rate Class 2 NICs for the self-employed.
Class 2 NICs are based on the number of weeks of self-employment during the course of a year; a full year costs £146. From next April the self-employed will now just pay Class 4 contributions.
The government announced in the spring Budget last week that it will consult in the coming months on the difference in benefit entitlement between employed and self-employed, regarding parental benefits.
Mr Hammond said on Wednesday (15 March) that other areas of difference in treatment will also be reviewed.
Dividend allowance cut
Those who have set up their own companies will still see a cut to the value of dividends that can be received tax-free, from £5,000 to £2,000.
80% of investors are not expected to pay tax under the dividend regime, but the big losers will be small business owners who have hitherto paid themselves dividends as a tax-efficient alternative to a salary.
Freelancers and contractors who run their own limited companies will also feel the pinch.
Additionally, investors with 'unwrapped' dividend-paying investments above the £50,000 mark may be negatively impacted by the smaller allowance.
Dividends above the £2,000 annual threshold will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
There are various ways to minimise dividend tax liability, but the first port of call should be to take full advantage of tax-efficient wrappers such as Isas. The Isa allowance is set to become even more generous in the 2017/18 tax year, rising from £15,240 to £20,000.
This story was originally written for our sister magazine, Money Observer.
An unexpected one-off financial gain in cash or shares, generally when mutual building societies convert to stock market-quoted banks. Also windfall tax, a one-off tax imposed by government. The UK government applied such a measure in the Budget of July 1997 on the profits of privatised utilities companies.
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.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.