National Insurance Contributions U-turn

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Commentators were not expecting much in the way of big announcements in the Budget on 8 March. This was partly due to the preoccupation with Brexit, and partly due to this being the last Spring Budget and the expectation that changes to be introduced in April 2018 will be announced in the Autumn Budget.

Thus it came as a surprise when the Chancellor of the Exchequer, Philip Hammond, announced that as both employed and self employed individuals now receive the same state pension it was unfair that there is a 3% difference in the national insurance contributions (NIC) cost. Thus he proposed to increase the cost of self employed NIC’s from 9% to 11% over the next two years.

Historically, self employed individuals got a raw deal on state pensions compared to employees. An employed person usually received a higher state pension based on the level of wages received whereas a self employed person was only entitled to a basic state pension. This changed in April 2016 and everyone who starts to receive state pension after that date now receives the same weekly amount - £159.55 from 6 April 2017 – provided they have paid 35 years of national insurance contributions.

I have to confess that I had not read the Conservative Party manifesto published before the last General Election. It seems that nobody in the Treasury had read the manifesto either, or if they had read it, had forgotten about their pledge not to increase the main rates of national insurance or income tax. Within days of this oversight being pointed out, the measure was withdrawn and Theresa May has promised not to increase NIC’s in this parliament.

The debate that followed the Budget was not only about broken promises, but about the fact that the self employed are not able to claim some state benefits. Is it therefore reasonable that the self employed pay a lower rate of national insurance? For example statutory maternity pay, paternity pay and statutory sick pay is not available to the self employed.

On a related topic there have been a number of employment and tax tribunal cases recently concerning whether individuals are genuinely self employed or are employees. One of the benefits to a business of engaging freelance workers of course is that there are no employers’ national insurance contributions to pay. The Government has commissioned a report on “non-tax aspects of employment practices” which is due to report later in the year. One possibility is that individuals who provide their services solely or mainly to one client may find themselves re-categorised as employees or subject to some additional tax charge.

In conclusion, whilst we can be certain that the main rates of national insurance or income tax will stay the same until at least 2020; it is likely that there will be other changes to the taxation of small businesses in that time.