Budget 2017: self-employed income tax bill to rise

8 March 2017

Self-employed workers have been dealt a blow in today’s Budget, as Chancellor Philip Hammond has announced a forthcoming increase in taxes.

Currently, the self-employed pay Class 4 National Insurance Contributions (NICs) at a rate of  9% on profits of between £8,060 and £42,999.99, while profits of £43,000 and above attract a 2% tax rate. 

But from April 2018, the 9% rate will increase to 10%, and then to 11% in April 2019. The bandings and the 2% rate for higher earners will, however, remain the same. 

The government says this change is to reduce the gap in national insurance rates paid by the employed - who currently pay 12% - and the self-employed, especially given the self-employed have had access to the new state pension since April 2016.

Chancellor Philip Hammond said: “Historically, the differences in NICs between those in employment and the self-employed reflected differences in state pensions and contributory welfare benefits.

“But with the introduction of the new state pension, these differences have been very substantially reduced.”

The Budget also confirmed the abolition of Class 2 National Insurance Contributions for the self-employed from April 2018. These currently cost £2.80 per week for those who pay make profits of more than £5,965. Those who make less than this don’t have to pay Class 2 contributions, although they can make voluntary contributions.

The Government says the combined changes mean those with annual profits of more than £16,250 in 2019-20 will have to pay more in NICs.


Entitlement to benefits

Class 2 NICs enable entitlement to the basic state pension, the new state pension, contribution-based employment support allowance, maternity allowance and bereavement benefits – once you’ve earned a certain number of qualifying years for each benefit.

To make up for this, the government has confirmed it will reform Class 4 NICs so self-employed people can continue to build these benefit entitlements.

In addition, today’s Budget revealed that the government will consider whether there is a case for greater parity in parental benefits between the employed and self-employed.


Changes ‘will not be welcomed’

Steven Cameron, Pensions Director, Aegon UK comments: “The introduction of higher NI rates for the self-employed will not be welcomed by this group but were perhaps to be expected. This is because there is an increasing division between employees and the self-employed with the latter paying rates around 3% lower than those of employees.

“NI contributions notionally pay for state pensions and with the self-employed being key beneficiaries by now receiving the same single state pension as employees, it’s not unreasonable to reflect that in NI rates. However, this justification would have been easier to use had the changes to NI happened at the same time as changes to state pension entitlements.

“In addition, employees receive other benefits such as statutory maternity and sick pay from the NI system which the self-employed and those in the gig economy don’t qualify for.”

Fiona Tait, pensions specialist at Royal London says: "The decision to raise NICs for the self-employed did not come as a surprise following last year's levelling of the state pension playing field. It does not make sense for one group of workers to pay a lower contribution and receive an equal benefit.

"Some commentators had in fact expected an increase to 12%, in line with the rate paid by employees, so it is good that the Chancellor has recognised that the self-employed still do not benefit from sick pay and redundancy benefits or, currently, parental leave."

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