Chancellor Philip Hammond has softened his attack on the self-employed, cancelling plans to increase national insurance contributions (NICs).
As part of Hammond's first and last Spring Budget last week the chancellor announced individuals with profits above £16,250 will pay more NICs. The move, which broke a Conservative Party manifesto pledge in 2015 that promised not to increase NI, was made to bridge the discrepancy between the amount the self-employed and employees pay.
At present employees earning £32,000 pay NICs of £6,170 including those from their employer, while self-employed people pay only £2,300.
The gap was previously a reflection of differences in state pension benefits for the self-employed, but with the introduction of the new universal state pension in April 2016 that differential has been removed and everyone has access to the same state pension rights.
WIDELY CONDEMNED MOVE
The move was widely condemned and a week on from being announced Hammond has u-turned on the plans.
In a letter to MPs Hammond referenced that 'there has been much comment on the question of commitments made in our 2015 manifesto'.
'It is important both to me and to the prime minister that we are compliant not just with the letter, but also the spirit, of the commitments that were made.
'In light of what has emerged as a clear view among colleagues and a significant section of the public, I have decided not to proceed with Class 4 NIC measures set out in the Budget,' said Hammond.
'There will be no increases in NICs rates in this Parliament. We will continue with the abolition of Class 2 NICs from April 2018. The cost of changes I am announcing today will be funded by measures to be announced in the Autumn Budget.'
Under the planned changes, which have now been scrapped, self-employed people with profits above £16,250 would have paid more NICs - providing a big tax windfall for the government given there are 4.5 million self-employed.
From April 2018, Class 4 NICs (based on self-employed profits) was due to rise from 9 to 10 per cent, and then to 11 per cent in April 2019, on income up to the higher rate tax threshold of £45,000, plus 2 per cent on any profits above £45,000.
SENSE OF FOREBODING
The government had already announced in the 2015 July Budget that it will abolish the flat-rate Class 2 NICs for the self-employed.
Class 2 NICs are based on the number of weeks of self-employment during the course of a year; a full year costs £146. From next April the self-employed will now just pay Class 4 contributions.
The government announced in the spring Budget last week that it will consult in the coming months on the difference in benefit entitlement between employed and self-employed, regarding parental benefits.
Hammond said on Wednesday (15 March) that other areas of difference in treatment will also be reviewed.
Sean McCann, chartered financial planner at NFU Mutual, says: 'The true cost of this decision may still be borne by the self-employed. It's clear that the chancellor will look to recoup money from other sources and many tax reliefs will be in his sights.
'The likes of Business Property Relief - used by many sole traders and partnerships to hand down family businesses free of inheritance tax - could now be under threat and any sense of relief among self-employed people could become a sense of foreboding once the autumn Budget draws near.'
DIVIDEND ALLOWANCE CUT
Those who have set up their own companies will still see a cut to the value of dividends that can be received tax-free, from £5,000 to £2,000.
Eighty per cent of investors are not expected to pay tax under the dividend regime, but the big losers will be small business owners who have hitherto paid themselves dividends as a tax-efficient alternative to a salary.
Freelancers and contractors who run their own limited companies will also feel the pinch.
Additionally, investors with 'unwrapped' dividend-paying investments above the £50,000 mark may be negatively impacted by the smaller allowance.
Dividends above the £2,000 annual threshold will be taxed at 7.5 per cent for basic-rate taxpayers, 32.5 per cent for higher-rate taxpayers and 38.1 per cent for additional-rate taxpayers.
There are various ways to minimise dividend tax liability, but the first port of call should be to take full advantage of tax-efficient wrappers such as Isas. The Isa allowance is set to become even more generous in the 2017/18 tax year, rising from £15,240 to £20,000.
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