Hammond tackles personal tax ‘unfairness’
Self-employed workers have been hit by an increase in the main rate of Class 4 NICs from 1% to 10% in 2018 and a further increase the following year, in a move Philip Hammond said would reduce the “unfairness” in the NIC system.
The rate of Class 4 NICs will increase from next April in conjuncture with the abolishment of the Class 2 NIC for self-employed, which Hammond announced at the Autumn Statement.
Otherwise, Hammond’s final Spring Budget, a slim document at just 64 pages, provided few surprises in personal tax, continuing with the planned increases in personal allowance and the annual ISA allowance.
As previously announced, the personal allowance limit will increase to £11,500 from April and £12,500 by 2020. The government said that the increases to the personal allowance and higher rate, which continues a seven consecutive-year growth, will save 31 million taxpayers income tax.
However, changes to Class 4 NICs made the most noise. Hammond said that the difference in NICs was no longer justified: “Such dramatically different treatment of two people earning essentially the same undermines the fairness of the tax system,” he said.
Hammond explained that the self-employed earning less than £16,250 will see a reduction in their NIC bill. But David Kilshaw, private client services partner at EY said the 11% increase in Class 4 NIC by April 2019 will be a “deep cut” to those earning above £16,250. “Employed and self-employed alike use our public services in the same way, but they are not paying for them in the same way,” Hammond said.
‘Unfairness’ in the system
Hammond addressed the “unfairness” around dividends in his fair and sustainable tax system crusade by reducing the tax free dividend allowance from £5,000 to £2,000 from April 2018.
Ed Molyneux, founder of FreeAgent, expressed concern that self-employed workers were being treated as an “easy target” by the government. “It is very unfair to position freelancers and contractors as not being on a level playing field with those who are employed.
“These business owners have none of the employment rights or the security that employed workers do and there must be some recognition for that - unless the government wants to cripple this very important and growing part of the UK economy,” he said.
The increase in Class 4 NIC sparked many commentators including a thread on Any Answers to accuse the Conservative party of backtracking on its 2015 manifesto pledge against increasing NICs. However, Jane Ellison has since clarified on Sky News that the rise didn’t break the government's pledge because the commitment was in regards to Class 1, not Class 2.
Savings and pensions
The reduction of tax-free dividends allowance was prompted in part by the increase to the tax-free personal allowance and the increased ISA allowance to £20,000.
Elsewhere the government will improve the tax registration process for master trust pension schemes to join up with The Pension Regulator’s authorisation regime. The government also noted that ISA limits have doubled since 2010, and underpinned this by the introduction of the previously announced Lifetime ISA from April this year.
While the Budget was thin on personal tax changes the government did include a number of consultation announcements within the big red book that will explore benefits in kind, accommodation and expenses.
- The benefit in kind consultation will examine the exemptions and valuation methodology for the income tax and employer NICs treatment of benefits in kind
- The accommodation benefits consultation will look at when accommodation should be exempt from tax
- The expenses consultation will investigate income tax relief for employee’s expenses