Budget 2017 – employed v self-employed

In the Spring Budget chancellor Philip Hammond announced two measures intended to level the playing field between employed and self-employed individuals, an area which been under review in recent months. It is anticipated that the result of both measures will generate over £4bn by 2021/22 and close the tax gap between different business structures.

The new measures relate to national insurance contributions (NIC) and the dividend tax allowance.

Class 4 NIC will increase to 11% by April 2019

The government announced at the 2015 Summer Budget that class 2 NICs would be abolished from April 2018, and the chancellor confirmed this. This will further widen the gap between the national insurance paid by a self-employed individual (currently 9%) and that by an employee (12%). In addition, from April 2016 self-employed individuals are now entitled to the same state pension as employees.

To address the disparity in rates, it was announced in the Spring Budget that from April 2018 class 4 NIC will rise from 9% to 10%, with a further 1% increase to 11% from April 2019. It is estimated in the Red Book that this will raise around £2bn by 2021/22. In his speech the chancellor commented that, on average, this will be an increase of 60p per week per business. According to the Red Book (paragraph 3.5) only unincorporated businesses with profits greater than £16,250 will see an increase to their overall NIC liability.

While this measure will leave class 4 NIC 1% lower than class 1 primary NIC, this may be ironed out once the chancellor has considered the different levels of contributory benefit entitlement for employed and self-employed NIC.

The government will also need to consider the interaction between pensions and NIC payments. Where a contribution is made by an employee to an occupational pension it will often be through salary sacrifice meaning that class 1 primary NIC is calculated on a lower earnings figure. This will not be the case for the self-employed individuals operating as sole traders or partners in a partnership.

Dividend allowance

The chancellor announced that the dividend allowance will reduce from £5,000 to £2,000 from April 2018. From April 2016 individuals are entitled to a £5,000 allowance in which dividends will be taxed at 0%. The allowance is available to all taxpayers regardless of their level of income.

The intention of the reduction is to level the playing field between self-employed individuals and those operating within a company. A Tax Information and Impact Note has been published and the reduction to the allowance will be legislated in Finance Bill 2017. The measure is expected to generate revenue of £2.6bn by 2021/22.

Anonymous
  • Please lobby the chancellor to include an age limit for the 7.5% Dividend surcharge. The unintended consequence of this legislation is that OAP's are being hit hard, especially those who have saved and depend on dividend income in their retirement and are now too old to invest in ISA's.

    John Auber FCA

  • ICAEW has repeated, without challenge, the claim 'according to the Red Book only unincorporated businesses with profits greater than £16250 will see an increase to their overall liability'. It's not true. Those with profits between £6k and £8k (approx.; between LEL and PT) will see an increase if the self-employed individual wants to accrue state pension entitlement as they will have to pay class 3 NI of  £14.25pw, £741pa at 17/18 rates.

    This is in contrast to an employed person with equivalent earnings who pays no NI but whose NI record is credited due to being on low earnings.

    And would such class 3 entitle the self-employed person to contributory ESA, for example; it doesn’t at present.

  • “…pension contribution through salary sacrifice meaning that class 1 primary NIC is calculated on a lower earnings figure. This will not be the case for the self-employed individual…”

    …nor indeed does anyone come along and make an extra contribution out of their own pocket towards my pension

    …so 1% extra contribution to staff auto pension and now 1% extra NIC in both 18 and 19 …I think the government has just spent the staff’s pay rise …but wait “only unincorporated businesses with profits greater than £16,250 will see an increase to their overall NIC liability” …so that’s something to aspire to

  • There was no mention about employers NIC. I am sure this will be introduced in future for the self employed people.

    Raju. Mehta