Top 40 accountants Bishop Fleming are calling on the government to be open and honest about its plans to reform National Insurance Contributions paid by the self-employed.
The firm fears that the promised £145 a year saving for the self-employed from the scrapping of Class 2 National Insurance Contributions in April 2018 will be cancelled out by a corresponding tax rise. Whilst some will be better off, many could face an effective tax rise of up to 2 per cent.
The self-employed currently pay both Class 2 National Insurance Contributions at the rate of £2.80 per week and 9 per cent Class 4 on profits, where earnings exceed £8,060. But only Class 2 buys entitlement to state benefits, such as the Employment and Support Allowance and State Retirement Pension; Class 4 is a straightforward tax.
As part of the government’s long-term plan to align National Insurance Contributions with income tax, it wants to scrap Class 2, meaning Class 4 will have to be reformed so that the self-employed can continue to buy entitlement to benefits.
Bishop Fleming claims the government is not being open on the reforms it is going to make, and is hiding behind reports by the Office of Tax Simplification (OTS) on tax and National Insurance Contributions alignment as an opportunity to increase taxes on the self-employed.
Whereas business owners currently pay 9 per cent Class 4, employees and directors pay 12 per cent Class 1. The accounting firm says the Chancellor is very likely to close the 3 per cent gap by increasing Class 4 under the auspices of giving the self-employed the same benefit rights as employees that they would otherwise lose after the demise of Class 2. That would be a 33 per cent increase in the rate.
Bishop Fleming partner, Andrew Browne comments, ‘The chancellor looks likely to use the OTS reports to justify this large tax rise. Whereas there is currently a tax lock on increases to National Insurance Contributions before 2020, this only applies to Class 1 paid by employees. Class 4 were left out of the lock, so allowing Philip Hammond to increase Class 4 in line with what employees pay.’
Mr Browne cited the example of a self-employed person currently earning £43,000 a year (the Class 4 upper earnings threshold) would have to pay an extra £900 in Class 4 National Insurance Contributions – that’s an extra 2 per cent in tax, even after the Class 2 saving.
Browne adds, ‘The Chancellor will seek to justify the rise on the grounds of simplification – as National Insurance Contributions and tax rates will then be the same – yet this will not actually simplify anything; it just increases the tax take.’
According to Browne, the government is likely to say the increase will give the self-employed access to the same state benefits as employees. However, he remarks, ‘The majority of self-employed have made clear in past surveys they did not want to buy these extra benefits, so they will be sold something they don’t actually want. What they do want is the £145 a year saving they were promised.’