Hammond tackles personal tax ‘unfairness’

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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.

Personal allowance

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.

NIC uproar

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. 

Consultations

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

AccountingWEB's Spring Budget coverage is brought to you in association with TaxCalc. Visit our Budget page to keep up with all the predictions, debates and post-Budget analysis.

About Richard Hattersley

Richard is AccountingWEB's practice correspondent. If you have any comments or suggestions for us get in touch.

Replies

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08th Mar 2017 20:31

From 1% to 10% ?

Bless me !

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09th Mar 2017 09:04

Of course Government want to move the self-employed to employed. Small print eh. So at the next general election whoever gets in won't be able to govern because the Tories have put a clause in the small print saying that they will govern for eternity unless the electorate put it in writing that they no longer want the Tories to rule, but they have to give 100 years notice.

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09th Mar 2017 09:20

Is it not the case that Class 4 NI does not contribute to pension and benefits, and so does not represent the self-employed paying a more equitable sum, but is simply a tax hike for them?

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By IANTO
to SteLacca
09th Mar 2017 11:14

I guess there must be some self employed people who will not be entitled to the new flat rate pension, but who are now required to pay NIC as if they will be entitled to it.

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to SteLacca
09th Mar 2017 13:20

Exactly the question no-one seems to be asking! I thought only Class2 NICs counted towards benefit entitlement. How will benefit entitlement work from next year? Since there's a threhold for Class 4, how will self employed on low profits get anyNI credit towards state pension etc?

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to nigel
09th Mar 2017 13:55

They can pay Class 3. About £800 instead of £145.

No idea why they knocked Class 2 down from £4.50ish a week to £2 - was it when they introduced Class 4 as some kind of sop ?

Much as they introduced a £5000 dividend allowance when they introduced Dividend Tax and then dropped it to £2000 when everyone had got over it.

Politicians love to think they've fooled you. But they only fool the gullible.

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to SteLacca
09th Mar 2017 14:44

Class 4 NIC is just a tax with good PR!

Presumably, when Class 2 is abolished Class 4 (or its replacement) will set the entitlement to benefits.

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to Vaughan Blake1
09th Mar 2017 15:04

Vaughan Blake1 wrote:

Class 4 NIC is just a tax with good PR!

I've always thought so and I believe Hammond accidentally described it as such either yesdy or today.

Quote:

Presumably, when Class 2 is abolished Class 4 (or its replacement) will set the entitlement to benefits.

Yes - announced last year. Maybe earlier. A long time ago anyway.

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09th Mar 2017 11:14

Obvious next move must surely be to cut the "unfair" benefits the employed get and the SE don't.
Must keep everybody equal!

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By IANTO
to Karen Watson
09th Mar 2017 11:21

Yes, to be fair, if we are all required to pay the same level of taxes on the same earnings, then we all should have the same benefits. However, I guess HMRC are banking on many self employed people wanting to stay self employed and thus not receiving employment benefits. However, times they are a changing. Recent ET cases indicate a move to more employee benefits.

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09th Mar 2017 11:44

This is an interesting debate but misses a bigger picture. Close companies, those managed by contractors all contribute more to the economy than is being measured or mentioned here. Many close companies pay VAT and corporation tax. From my perspective I paid over £50,000 in CT and VAT last year. In reducing the amount I can take by dividends, the gap between earnings between people such as myself and PAYE employees is closing. I will get to a point where I will close my company and HMRC will no longer get CT or VAT and this will see a net reduction in tax intake. It will be more beneficial to be a PAYE employee as I will not have to complete the paperwork, pay employees and have no benefits as I will have no money to grow my business or improve my lifestyle which is why I am in business in the first place.

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to paul.benedek
09th Mar 2017 12:28

But the vat you pay over will have been reclaimed by your customer.

They don't care if you close your company, much better you become an employee and although they lose the CT they gain your personal tax and both lots of NI.

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By kjevans
to keithsharvey
09th Mar 2017 12:19

But he already pays personal tax and both lots of NI.

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to kjevans
09th Mar 2017 12:30

Does he?

He says " In reducing the amount I can take by dividends"

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09th Mar 2017 12:12

As I see it the actual contribution that the self-employed and employed make should be equal and will fluctuate with earnings. The fact that employees get holiday pay etc. is irrelevant. So lets get rid of NIC and have a flat contribution of 30% (or whatever) on taxable earnings. EERs NIC is another problem but that has to be taken into consideration when working out what corporations should pay (including multinationals). VAT has nothing to do with it cos it's paid by the end user.

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to johnjenkins
09th Mar 2017 12:35

johnjenkins wrote:
VAT has nothing to do with it cos it's paid by the end user.

It's borne by the retailer in reality.

The consumer is only interested in the price he pays - not how much VAT is included.

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to lionofludesch
09th Mar 2017 12:47

The consumer is very interested in the amount of VAT he pays when it comes to domestic building work.

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to johnjenkins
09th Mar 2017 14:08

I disagree.

If you charged him £1000, he doesn't care whether that's £1000 for the work and no VAT or the work's free but the VAT's £1000.

What interests him is what money is going out of his pocket.

Hence the registered trader has to charge £833+VAT to compete with the unregistered trader charging £1000. Granted, the registered bloke can mitigate his position with input tax but he'll never get to the stage where he's better off.

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to lionofludesch
09th Mar 2017 14:23

It doesn't actually work like that in the domestic building industry, although you're certainly right when you say he is interested what goes out of his pocket.

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to johnjenkins
09th Mar 2017 14:43

Does it not ?

What if the two quotes were £1500 from the unregistered trader and £1000 + VAT from the registered bloke ? You think your Joe Public would still pick the one with no VAT?

I beg to differ ......

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to lionofludesch
09th Mar 2017 15:19

What Joe public would probably do is ask if the registered trader would do the job for £1000 cash without charging VAT. Therein lies joe public interest in VAT.

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09th Mar 2017 12:32

Fairness in taxation ?

I'd like to discuss what I'm prepared to pay over a nice meal with Dave H in some swanky restaurant - just like the multi-nationals.

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09th Mar 2017 14:36

Amazing how respective bean counters (I refuse to call them Chancellors) can make such a hash of EVERYTHING.
A young person with 6 O levels and 2 A levels could do better than this utter joke!
Embarrassing that he , like the rest , is utterly and totally clueless.
Dividend tax will hit old people who have saved money , like me! National insurance is a total mess .Do any of you (or Me) have any idea what is happening? Business rates - putting off the inevitable.
MTD - more questions now than answers.
But why expect any more? They are politicians and you do not need a brain to become one!

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09th Mar 2017 20:59

The increase in personal allowance and basic rate band thresholds this year and next (plus the abolition of Class 2 NI) will generate a greater tax saving than next year's increase to the Class 4 NI cost for the self-employed. Running some quick calculations, the increase in thresholds next month means that the self-employed would have to earn £43,000 in 2018/19 to end up paying much more tax/NI than in the current tax year and, even then, it's only an extra £93.40. Once you earn above £43,000, the excess reduces, until someone earning £45,000 pays £146.60 LESS than this year. And then, in 2019/20, when the NI rises to 11%, someone earning £43,000 will pay £441.76 more than they do now, but this excess drops to £221.76 once earnings hits £45,000. If we factor in the certain rise in PA and BR bands next year and the year after, it is almost certain that no S/E tax/NI bills will rise as a result of the new Class 4 NI rates.

Yes, the tax advantage of being self-employed will be slightly eroded, but they'll still pay less than they do now!

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By IANTO
to charliecarne
10th Mar 2017 08:31

I think you miss the point entirely. No one is arguing that the rise isn't affordable, the point is that the self employed are being targeted by HMG when this is the very group which is generating much of the overall increase in revenues. Most who go self employed earn more than they did as employees and thus pay more tax.

HMG distorts the argument by saying they are "losing" tax revenue by claiming that the self employed pay less tax on their income than an employed person would pay on a similar income. Yes, that is one of the benefits of being self employed, but HMG fail to acknowledge as I've just pointed out, that most self employed people earn more than when they were employed and pay more taxes and deliberately fail to mention that they don't receive employment benefits. This is the bargain, take the risk and have a better income, but lose your benefits. It's all smoke and mirrors again!

This is not an issue about the detail of the numbers, it's a principle of targeting the wealth creators. BTW, since the dividend tax was introduced and with the recent increases, my tax bill has risen by £2500. Not an insignificant amount.

Additionally, in order to keep my costs competitive, I've only had one rate rise in the last 12 years. So HMG has lost tax revenue from me hasn't it!

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to IANTO
10th Mar 2017 09:07

The company has favoured limited companies over unincorporated businesses for the past 20 years or more.

I've no idea why.

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to IANTO
10th Mar 2017 09:07

The company has favoured limited companies over unincorporated businesses for the past 20 years or more.

I've no idea why.

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to IANTO
10th Mar 2017 09:59

My point, IANTO, is that this "targeting" is hardly punitive as the amounts are relatively small. Its purpose is not to hammer the 'engine room of the economy' but to harmonise tax (as NI is just another tax) rates.

The counter to the argument that the S/E should pay less as they receive no employment benefits is that they don't pay an additional 13.8% er's NIC (yes, I know it's the employer, not the employee, that nominally bears this cost but, as part of the overall employment cost, salaries are kept lower due to this additional tax on employment).

I would be willing to bet that the strategy on the rise in Class 4 rates is to go one stage further in 2020/21 and take Class 4 rates to parity with Class 1 at 12%. Whether that presages an ambition to merge income tax and NI is open to debate.

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to charliecarne
10th Mar 2017 10:06

I missed the bit about harmonising benefit entitlement, Charlie.

It seems to have been overlooked that that's why Class 4 rates are lower.

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By IANTO
to lionofludesch
10th Mar 2017 10:29

Exactly. The financial benefits of being self employed are there to compensate for the loss of employment benefits. If HMG wish to harmonise the tax position, then they had better harmonise the employment benefits also.

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By IANTO
to charliecarne
10th Mar 2017 10:27

"they don't pay an additional 13.8% er's NIC" not true for incorporated individuals like me. MyCo pays EER's and would pay EE's if I were under 65.

Yes, I know all the ins and outs of the IR35 arguments, but everyone who works like me pays EER's.

Note also I didn't incorporate for tax reasons. I was made redundant at 49 from my position effectively as DPM and was obliged to go contracting. The agencies I registered with demanded that I incorporate before they would act for me. So please, let's get the facts straight!

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to IANTO
10th Mar 2017 11:18

It's true that there is any number of scenarios as to who, in reality, bears the cost.

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to IANTO
10th Mar 2017 11:34

IANTO wrote:
"they don't pay an additional 13.8% er's NIC" not true for incorporated individuals like me. MyCo pays EER's and would pay EE's if I were under 65.


As you're working via a company, the Class 4 hike has no impact on you. You DO pay Er's NI and the S/E will pay a slightly higher Class 4 NI in future.
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By IANTO
to charliecarne
10th Mar 2017 12:21

and I'm also subject to the dividend tax, now at £2500 p.a. compared to zero previously

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