The self employed will pay more tax in the next few years. It may be in the form of national insurance but let's not quibble because NIC is tax by any other name. Those who use limited companies to avoid PAYE liabilities will also be penalised.
Two issues arise. The first is whether or not this is appropriate. The answer is that the NIC change is, and will not impact most self employed people who earn too little to pay it. As for the tax upon dividends, I think that inappropriate. I see no reason why dividends are so heavily penalised when other unearned income, such as interest, rents and trust distributions, are not: a general surcharge on unearned income to effectively create an NIC charge for those with such income would have made much more sense, but woukd gave upset the landlord classes too much. The Tories know where their hearts really lie, and it's always been with the rentiers and not the entrepreneurs.
The second issue may be more important. The taboo that taxes cannot increase has been broken. Of course they can. And when occasion is right they should. Now, for example, was the occasion for a corporate tax increase. But it did not happen. It will require a better Chancellir to do that.
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Absolutely correct in my view Richard.
Yes. Let us increase corporate tax rates to screw over our domestic enterprises that can’t evade them. How about abolishing corporate tax altogether? Or are the lemmings repeating the message so much that they can’t see the wood for the trees?
Abolish it and you open the door to the most massive tax abuse
Income fleas the country
Or is never distributed so no tax paid
NO way!
We have fleas in the country already, my friends dog is proof of that 😀
Should we consider the merits of allowing an artificial person such as a company to exist in our society when they are often used in an abusive fashion? Should we allow them to be opaque and obscure their real ownership? Should we start to tax them similarly to partnerships – look through to tax the individual on the basis of the profits made in that entity? Sorry that there are several questions. I realise that you are busy and you might have mused over this in some of your other work. Please refer me to that if that is the case.
In haste, start here
http://www.taxresearch.org.uk/Blog/2007/08/09/arctic-systems-moving-small-business-taxation-on-in-the-uk/
And this
http://www.taxresearch.org.uk/Documents/Intheshade.pdf
I share many of your concerns
As somebody with self-employed income not enough to pay Class 4 contributions, I used to pay Class 2 contributions (£2.80pw), which counted towards my state pension. I’m more miffed by the abolition of Class 2 contributions than the new changes.
It’s seems my only option now, if I want to build up my state pension entitlement, will be to pay Class 3 voluntary contributions, which are over £14pw (on an income of £6/7000pa 🙁 ).
I guess this is reasonable value if I live three years beyond retirement age, but I’m somewhat annoyed that if I were unemployed or still had a young child, I’d be credited with NI contributions anyway.
I think this needs some kind of impact assessment, because I believe there are a number of people (mainly women) in my situation, who earn ‘pocket money’ amounts from self-employment. We’re not in anything like the same situation as owners of small businesses or subbies. In my case, I work to make up for the shortfall in a delayed state pension age. The temptation, of course, is not to declare any income.
Sue
I agree: this is disgusting, I know
You are being abused
I am sorry
Richard
Wow, does this mean that self employed people on less than the Class 4 NI threshold will no longer be bruising up an entitlement to a State Pension, unless they contribute £14pw Class 3 contributions?
Do you think that most of the people affected by this change even know about this?
I may or may not be, but I had no idea about this. It’s deplorable, if so.
As far as I know that is the case
An impact assessment?
From the Tories?
Dream on my friend. They do not care.
Sue,
Class 4 contributions are due to be reformed when Class 2 are withdrawn.
“A new zero-rate band will be introduced into Class 4 NICs on profits between the Small Profits Limit (SPL, which replaces the Class 2 SPT) and the Lower Profits Limit (LPL, £8,060 in 2016-17). Class 4 NICs will be treated as having been paid on these profits. This means that everyone who was previously liable to pay Class 2 NICs based on their profits will be able to gain access to benefits through Class 4 NICs, whether paid or treated as paid. They will be able to gain a qualifying year for benefit entitlement purposes for each tax year in which their profits are above the SPL.3
This is part of a response to consultation at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/573606/abolishing_class_2_NICs_response_web.pdf
So you may not need to pay Class 3
I think that the gap between tax and NIC paid by the employed and self-employed was marginally closed yesterday. And I think its fair that the two sides pay equal contributions for access to the same social benefits. The new state pension has levelled the State Pension playing field and we all – at the moment – have equal access to the NHS.
I think maybe it is time to ring-fence close companies and distinguish them for tax purposes from listed companies?
Employed persons cannot save their gross income, they have to save out of taxed income. The same applies to the self-employed. Companies on the other hand can retain profits at much lower marginal rates, and their shareholders can grab those retained profits without any NIC charge and after reasonable additional tax charges on the dividend income received.
At the very least company law could be changed to treat distributions to the shareholders of close companies as if it was earned income – it would do away with the need for complex IR35 legislation, and shareholder/directors of close companies would be on a more equal footing with their employed counterparts.
I see no realistic solution to the rebalancing of existing tax contributions made by the employed, self-employed and small companies unless distributions from smaller close companies are treated as earnings – subject to income tax and NIC.
All Philip Hammond did yesterday was marginally increase the NIC cost of being self-employed, and marginally reduce the value of taking the lions share of income from small companies as a dividend. Taken together, the argument – be self-employed or incorporated – has not moved.
As long as the small company alternative is available, small business owners will be drawn to the implied NIC savings of the low salary, high dividend strategy. It will take a brave politician or Chancellor to close that particular door.
I agree
But I think the answer is ‘look through’
See http://www.taxresearch.org.uk/Blog/2007/08/09/arctic-systems-moving-small-business-taxation-on-in-the-uk/
Look through would do the trick, but the OTS recently promoted and then decided against this approach following consultation. One of the objections was look through would reduce cash available for investment i.e. taxing undistributed reserves. So yet again the notion that its OK to create low-taxed cash cows is acceptable.
If we had decent banks this would not be an issue
I agree there is a point to be made about this issue in terms of levelling contributions between employed and self employed people (although the wages of the self employed can be notoriously lower than those in employment especially since the 2008 crash and the severe austerity since 2010). For a tax system to work, people have to pay it.
Indeed there was someone from the Resolution Foundation banging on about this on Channel 4 last night. But the focus of this is too narrow for me. It is a storm in a tea cup really when one thinks of the others issues concerning tax.
It does not alter the fact that if the Government genuinely wanted to go fishing for more income then it should have done some more levelling elsewhere – looking into the Trust funds where the more well off people’s income is being stored; taxing corporations more effectively; dealing with the offshore problem. Oh – and how about printing to some bloody money to generate tax returns?
And to top it all Hammond went after ordinary working people yet again under the guise of making things fairer whilst mooting yet lower tax rates for inheritance?
Who is Hammond kidding? Certainly not the Tory MPs in more marginal seats that’s for sure.
I have recently been quite upset about this budget. But another way of looking at it is that May & Hammond pus the BREXIT brigade are beginning to believe that they can get away with anything – rather like the Cocky Cameron did. I hope that they continue to misjudge things like this – it might work against them in the end.
“Bruising up”? Building up!!
Damn autocorrect!
In a way, the disparity between highly-taxed wage income and other income has been reduced, by increasing the tax on self-employment income and dividend income.
The big problem now is the disparity between under-taxed rental income and all other income. If dividend tax were renamed “investment tax” and applied to rents etc, we could get rid of employee NI, equalise the three rates, and have much more equal taxation of all forms of income (albeit possibly retaining a tax break for pensions and the T&S, Arctic Systems and retained-profits advantages for incorporation, which are a different matter.)
The recent changes could be a step towards a better situation, although I doubt the Tories are going to increase the taxes on landlords.
The Tories have always been rentiers
The main tax difference between employees and the self-employed is secondary Class 1 NICs, paid by employers at 13.8% without a cap.
We could simply abolish secondary Class 1 NICs, and increase the rate of primary Class 1 NICs and Class 4 NICs by 13.8% instead. Then a basic rate employee can see they actually pay over 40% in tax.
Do you really think that will help anyone?
If the aim is to align the tax treatment of employees and the self-employed, the main difference is secondary class 2 NICs. Income tax rates are the same, and after this change primary Class 1 NICs and class 4 NICs will be broadly the same.
I hope the aim is not alignment: when undertaken properly they are genuinely different
Tweaking NI rates to raise an immaterial amount of tax is totally missing the point. The real point is that the giants of the gig economy and the economically independent agencies (of course they’re not a PE, LoL) to which they subcontract most of actually doing what they do have created a new type of false self-employment. This enables them to avoid the minimum wage, employee rights etc. and most relevant to this thread, employer’s NIC. What is needed and what will amongst other things address Mr Hammond’s perceived revenue gap is a new definition of what constitutes employment that is relevant to the modern economy. But that would interfere with Silicon Valley’s inalienable human right to trample the populous underfoot without making any contribution to the societies in which they operate so it’s not going to happen.
Agree with a lot of that
The employment tribunals appear to be getting a grip on this by finding that some in the”gig” economy have certain employment rights as “workers” even if they are not employees.
How difficult would it be to require class 1 NICs to be paid in respect of any “worker” even if they are not an employee?
It seems an obvious requirement