Self-employed individuals and shareholders should brace themselves for the national insurance and tax increases announced today in Philip Hammond's first Budget.
In a bid to stop the inappropriate use of "self-employed" labour for tax reasons, from April 2018, class 4 N.I. payments for the self-employed will rise from 9% to 10% (and then to 11% in April 2019). The tax free dividend allowance will also drop from £5,000 to £2,000 for shareholders.
These changes are meant to "even up" the tax position between employees and the self-employed, at least to a limited extent, and therefore also to discourage individuals from working via personal service companies (PSCs) to minimise tax / N.I. liability. In January, we published a blog on Changes to Taxation for Contractors in the Public Sector where we set out the IR35 changes being introduced next month to combat the same issue.
Clearly, the government considers that further pressure needed to be applied. However, it is not clear how much of an impact these Budget announcements will have on individuals who are choosing whether or not to work through PSCs. There remain significant potential tax advantages for those operating through PSCs. The danger is that the use of PSCs continues unabated, while a wide group is nonetheless penalised with higher taxes. In that respect there is also a question of fairness. Should the self-employed alone bear the same national insurance burden which employers and employees share between them?
If your organisation engages self-employed contractors, consultants or other individuals via PSCs and you would like further advice on your and their tax and N.I. liabilities, please do not hesitate to contact a member of our employment team.