Update: On March 15th, Chancellor Philip Hammond abandoned plans to increase National Insurance payments for the self-employed. The plan faced widespread criticism for breaking a Conservative Party manifesto pledge not to increase National Insurance, income tax or VAT.
A Conservative Government will not increase the rates of VAT, Income Tax or National Insurance in the next Parliament.
The Conservative Party Manifesto 2015The government has broken that pledge, but is proceeding with it’s questionable attitude to the self-employed.During last year’s Autumn Statement, Philip Hammond, Chancellor of the Exchequer, included existing self-employment tax law amongst “threats to our tax base”. On Wednesday, Hammond furthered this line of thought in his 2017 budget.“People should have choices about how they work,” Hammond announced, “but those choices should not be driven primarily by differences in tax treatment.” He went to claim that the self-employed pay less tax than those in full-time employment, but receive similar welfare benefits. That the self-employed scarcely receive sick pay, holiday entitlement or other such employment rights was not mentioned.“Such dramatically different treatment of two people earning essentially the same undermines the fairness of the tax system,” Hammond continued.The political fallout - from breaking a promise and attacking the self-employed - has been huge. The hyper-conservative Spectator, often a cheerleader for a Tory government, branded the budget a “disaster”. The Telegraph have even claimed it could cost the Conservatives the next general election.But, putting politics aside, how will the budget affect you?The practical impact of Budget 2017In summary, here are the key points for freelancers:
- Class 4 NICs (National Insurance Contributions) will increase from 9% to 10%
- The tax-free dividend allowance will be reduced from £5,000 to £2,000
- IR35 reforms are going ahead
All of these will come into effect on April 2018, followed by Class 4 NICs increasing to 11% in 2019. But what will the practical impact of these changes mean for you?National Insurance changesHow does this all add up? Well, if you’re self-employed and earning over £16,250 in profit, you’ll be paying more national insurance next year.But NI contributions work in layers. And although Class 4 contributions are rising, Class 2 payments (£2.80 per week if you’re earning over £5,965 in profit) are being abolished.But what does this add up to? This handy table illustrates how the combined costs will affect self-employed workers, both in this coming year and the year after:
In addition to the national insurance changes, the personal allowance for income tax is being increased by £500 to £11,500, saving basic rate taxpayers £100 in tax in 2018/19.60% tax-free dividend cutIf you are a small business owner, you’re likely to pay yourself with a small salary plus dividends. A dividend is a sum of money paid to a company's shareholders, often annually.Last year, a tax-free dividend allowance was introduced. This meant that the first £5,000 you earned from dividends would not be taxed.This tax break has now been slashed to £2,000. What does this mean? Well, it depends on your other earnings.If you’re a company director of your own limited company taking a small salary - say, around £8,000 - plus dividends, you’ll be paying an extra £225 in tax.But if you’re earning £45,000 a year (the new higher rate for tax) before you take any dividends, now you’ll pay an extra £975 if you’re earning more than £5,000 in dividends.IR35 goes ahead In this instance, it’s what Hammond didn’t say that has caused concern. IR35 is a law designed to catch ‘disguised employment,’ people who, in practice, are full-time employees, but who use self-employment as a way of avoiding tax. In principle, this is hard to argue against. In practice, however, it has been nightmare.Guidelines surrounding what constitutes ‘disguised employment’ are vague. Genuine freelancers are having to engage in lengthy legal disputes. It’s so poor that many now take out hefty IR35 insurance.However, it was still down to the contractor to decide if they were actually a company or an employee. This is going to change in the public sector, however, where it will be the responsibility of the public body, not the company, to decide a contractor’s employment status.There have been many protests against this upcoming change. Hammond didn’t even mention it. Looks like the changes are, sadly, going ahead.Future-gazing The practical impact won’t be colossal for the average freelancer. At least for this coming year, It’ll likely add up to less than £185 pounds for most.But the sentiment is terrifying. Governments have a history of pitting groups against each other to distract from their own failings. In this instance, the self-employed became a sacrifice for a broken manifesto pledge. Most people, thankfully, can see through it.But with the many, many governmental self-employment reviews coming up this year, things do not bode well for freelancers.Last year, we freelancers contributed £119 Billion to the British economy. An extra £10 Billion on the year before that.With each passing month, we become more integral to our own economy. The government would be wise recognise that.