This week as part of our Guide to ISA Investing we reveal the top rated and top performing stock and fund ideas – as well as sharing where the experts stash their cash, the latest news from the 2017 Budget Report and how to reduce your tax bill.
The self-employed and those that run their own companies face a big tax rise, following announcements in the Budget.
The Chancellor Philip Hammond said these moves were to “improve fairness” between different types of employment. The five million people who are self-employed in the UK will face a phased rise in National Insurance contributions. Class 4 NICs, paid by the self-employed, will rise from 9% to 10% from April 2018, and then rise to 11% in April 2019. This compares to the 12% rate paid by employees.
The Class 4 NICs are paid on earnings above £8,060. Until now the self-employed have also paid Class 2 National Insurance, to qualify for the State Pension, but the previous Chancellor, George Osborne, announced that these would be abolished in 2018. Hammond said he would not be reversing this decision.
These new changes would raise £145 million by 2022 according to the Chancellor. However he added that for the “average” self-employed person these changes would cost them just 60p a week, or £3,120 a year.
Raid on Dividends
Hammond also announced sweeping changes to the way dividends are taxed. This, he said, was to “discourage” the self-employed setting up their own businesses purely to reduce their tax bills.
This change will also have a knock-on effect on many investors too, who also face the prospect of higher tax payments on any dividends they receive.
The dividend allowance, on which no tax is due, will be cut from £5,000 a year to £2,000 from April 2018. Basic-rate taxpayers will then pay 7.5% tax on additional dividend payments, rising to 32.5% for higher-rate taxpayers and 38.1% for additional rate taxpayers.
This change will cost basic rate taxpayers £225 a year, higher rate taxpayers £975 a year and Additional Rate Tax Payer £1,143, according to calculations from accountancy firm Blick Rothenberg.
Hammond added there were perfectly good reasons for people to incorporate – form their own business – or work in a self-employed capacity, but these decisions should not be driven by tax considerations.
Flat Rate Pension Paved Way for Changes
Historically the self-employed paid lower national insurance rates, but did not always have the same entitlement to the state pension and other benefits, such as the state second pension.
But the introduction of the flat-rate pension effectively removed this difference. Hammond said this different in NI payments “was no longer justified”: the self-employed enjoyed the same access to public services and benefits as employee so should pay similar tax rates.
However, many criticised these NI and dividend increases, saying Hammond broke the Conservatives pledge during the election campaign last year not to raise direct taxation.
Nilesh Shah, chief executive of accountancy firm Blick Rothenberg said: “It is nonsense to focus on use of public services by the self-employed as a way of justifying the increase to NIC for the self-employed.
“This group takes risk to creative value and jobs, and also have to pay into their own pensions without the comfort of employer contributions.”
Barnaby Lashbrooke, founder of virtual assistant platform Time Etc, added: “Instead of preserving Britain's culture of entrepreneurialism, Mr Hammond has instead imposed heavier NICs on the self employed, who don't get the luxury of paid annual leave, employer pension contributions or enhanced parental leave pay, and must support themselves through periods of no work.
"For those reasons alone, self-employed workers should not be expected to contribute the same as employees.”
He added: “The rise in self-employment has little to do with tax avoidance. It's partly the result of a skills shortage – talent is in high demand – as well as advancements in technology that have enabled the sharing economy.”
Good News for ISAs
The change to dividend taxation will make ISAs and pension even more attractive to investors. It may also encourage many of those who own their own companies to divert pay into pensions, rather than paying a dividend.
Les Cameron, head of technical at Prudential, said: “The combination of pension freedom and the dividend tax credit being abolished last year has seen business owners look closely at their remuneration strategies and favouring pension contributions. This effective increase in dividend taxation should see more planning in this area.”
“I Will Lose Out in Dividend Grab”
I’m part of the so-called ‘gig’ economy — quite literally in my case as part of my work sees me turning up at various festivals, pubs and other halls in a bid to sell a few books.
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Like many people these days – women in particular – I juggle various different jobs. I am a freelance journalist, author, copywriter, and have even dabbled in a bit of marketing.
I have been an employee in the past. At the time, I had no particular inkling that I was paying higher National Insurance rates.
Even if I had I don’t think I’d have complained though: I got a regular monthly wage, plus higher levels of maternity pay, paid annual leave, vouchers to help pay for childcare, a loan to help pay for my annual travel, plus an element of job security. None of these are available to me now.
I am not complaining, I made the choice to become self-employed, and then set up my own business, for reasons that were right for me. It certainly wasn’t for tax reasons, as I now earn less a result. Sadly my poetry books haven’t yet generated the JK Rowling-type sales!
This changes in today’s Budget will eke away a bit more of these earnings. It’s not huge – probably about a couple of hundred pounds a year. Still that’s a couple of hundred pounds I won’t be spending in the shops or saving for my retirement.
Many people find self-employment thrust upon them, thanks to redundancy, or longer working hours, making it harder to combine work and family.
Taxing them more may look “fair” on a spreadsheet, but it won’t feel entirely justified for many self-employed or small business people who are simply struggling to get by.
