Tax Cut Policy Reversal For Self Employed of Birmingham – Is it Good or Bad?
Those people in Tamworth and Birmingham who are self-employed might have been looking forward to the scrapping of Class 2 National Insurance Contributions (NICs). However, the Treasury’s analysis of the Coalition pledge found that around 300,000 people who make profits of less than circa £6,000 a year would be five times worse off with regards to voluntary contributions. The policy should have come in to effect in early 2018, but as a solution to this issue has not been found, the policy will not be put in place at all. Clearly some will be winners and some losers, but is this recent announcement good or bad for you?
What Was The Cut To Class 2 Contributions All About?
> Class 2 NICs were going to be be completely abolished, meaning sole traders that are currently required to pay these by earning up to £8,500 a year would no longer need to make payments in order to receive a state pension. They would therefore have saved them around £150.
> Those who are self-employed, earn less than £6,205 and want to receive a state pension currently must voluntarily pay the Class 2 amount. The change in policy would have meant that these people would have to pay Class 3 contribution amount (for those earning more than £8,424 annually), which is 5 times more.
The Ins and Outs
The reversal on the £150-a-year tax cut for self-employed people was announced through a written statement on Thursday. National Insurance Contributions (NICs) would have been no more for over three million workers, but ministers cited concerns about the effect on low earners as the reason why it would not be right for the policy to be effected during this Parliament.
George Osborne announced the cut to Class 2 NICs in his last Budget in 2016, and when the implementation of the policy was delayed last year, the current Chancellor said the government was “committed to abolishing Class 2 NICs to simplify the system”; Hammond, however, has admitted a no-deal Brexit will force government cuts. While the written statement to MPs said – “This change was originally intended to simplify the tax system for the self-employed. We delayed the implementation of this policy in November to consider concerns relating to the impact on self-employed individuals with low profits.” – abandoning the policy will save the government £350 million a year for the next 3 years.
Reading between the lines, the uncertainty of a Brexit economy certainly looks to be an influencing factor and it’s not an insignificant sum to save when the NHS requires an extra £20 billion a year from 2023. The Chancellor will announce how the coffers will be spent in the Autumn budget, on 22 November, and it appears no other plans to implement a cut are in the pipeline.
On the positive side…
“Having listened to those likely to be affected by this change we have concluded that it would not be right to proceed during this parliament, given the negative impacts it could have on some of the lowest earning in our society.”
Treasury Minister, Robert Jenrick
If you’re one of the circa 300,000 self-employed who are earning less than £6,205 a year and voluntarily paying Class 2 NICs – in order to access a state pension – then this is good for you. The implementation of the new policy would have meant a move to Class 3 contributions (voluntary) for you and your weekly payments would have been increased from £2.95 to £14.65. That’s an extra £608.40 out of your pocket, a whopping 10% of a £6,000 income.
And the negative…
“The self-employed community has been let down today, missing out on a promise to reduce their tax burden. This raises serious questions once again about the government’s commitment to supporting the self-employed.”
Federation of Small Businesses Chairman, Mike Cherry
Millions of self-employed workers who earn profits of between £6,205 and £8,424 a year would have saved around £150 a year by not having to pay Class 2 National Insurance, at £2.95 a week. Already branded as a ‘stealth tax’, the u-turn is being seen by some as a betrayal on the self-employed, the ‘engine of the economy’, while the corporate giants receive perceived (or otherwise!) tax breaks.
Clearly, £150 would be a more modest gain compared to the £600 loss that the lowest earners would suffer, in order to gain access to the state pension. Nevertheless, whether this about turn on NICs has affected you positively or negatively, we don’t anticipate there will be any changes from the current system anytime soon. When the Chancellor dared to raise Class 4 NICs rates for self-employed people who enjoyed more than a £8,424 profit, he was accused of breaking the Party’s manifesto pledge and the angry reaction ensured those plans were ditched. Chancellor’s play a lose / lose game!
If you are self-employed and require advice on your taxes, assistance with your Self Assessment return – next due 31 January 2019 – or strategies to grow and improve your business’ profits, please contact us to book a no obligation, free consultation.