The UK 2017 budget has been seen by many as an attack on the self-employed and small businesses, for one primary reason: an increase in the rate of Class 4 National Insurance Contributions (NICs) from 9% to 10% in April 2018, and to 11% in 2019. Employed people currently pay 12%.
Though the chancellor said that the difference in NICs between the employed and self-employed can no longer justified, many people insist this is unfair because the self-employed receive fewer benefits such as company pensions, sick pay and holiday pay.
In 2016, the government abolished the flat rate weekly contributions of Class 2 NICs which means that the self-employed pay their total NICs as part of their self-assessment. This was a result of the government’s 2015 announcement to abolish Class 2 NICs in April 2018.
As a result of this and an increase in personal allowances (the amount of income a person can get before they pay tax), which will be £11,500 from 2017, those who make profits of less than £16,250 a year will be better off according to the Resolution Foundation.
The second blow to small business owners came in the form of a significant reduction in tax-free allowance on share dividends from £5,000 to £2,000. In other words, from April 2018, shareholders that receive company dividends will now have to pay tax on any amount over £2,000. This may have the effect of encouraging company owners to pay profits into a pension rather than pay dividends, though the Federation of Small Businesses called the move “a further disincentive for businesses to invest and grow”. This move alone is expected to net an increasing amount for the Treasury, bringing in an estimated £930 million in 2021-22.
2017 Budget Summary for the Self-Employed
Overall, this wasn’t a particularly encouraging budget for the self-employed due to a raise in National Insurance Contributions and a reduction in tax-free dividends. But neither was it really negative, in fact, the overall budget has been deemed ‘boring’ by virtually all other pundits.
From a tax perspective, many self-employed people will be better off by 2019 than they were in 2016/17, particularly those who earn profits of less than £16,250 a year, which includes most Kleeneze distributors and others involved in the Direct Selling industry. Those earning significantly more than this will be worse off but as always, with some smart planning, some or all of the losses can be mitigated by moving money to areas such as pensions or other investments.
In addition to this, one main advantage the self-employed have over the employed is that they can pay themselves first and are then taxed, whereas employed people are taxed and then paid. See ‘Tax For Kleeneze & Direct Sales Distributors‘. It is important that all business related activity is claimed as a business expense.
To learn more about National Insurance rates for the self-employed, please visit the Government’s Self-employed National Insurance rates page and post your comments or questions below.