Launching a brazen raid on freelancers, Mr Hammond said their rate of Class 4 NICs will increase for many of them from 9% to 10% from next April, before rising to 11% in 2019.
Every sole trader earning more than £16,250 a year will therefore be stung by the increase, with the biggest rise -- an almost hefty £800 extra in tax -- hitting freelancers commanding £50,000 or more.
On this yearly basis, the hike means some self-employed will be up to £368 worse-off, rising to another £368 loss next April, experts at Kingston Smith calculated for Freelance UK.
NICs raid (continued)
The chancellor said he will raise some £145million as a result, specifically thanks to the extra tax set to be paid by an estimated 2.45million people who work for themselves.
But Mr Hammond, previously a self-employed businessman before he entered politics, declined to mention that the NIC rise contravenes his own party’s 2015 manifesto.
In it, the Conservatives vowed not to increase the rates of National Insurance Contributions on any taxpayer if they were elected, which they were.
Little wonder, then, that “hard-working” self-employed people who now face a sharp NICs sting will “feel that the chancellor has it in for you,” says freelancing body IPSE.
However, any sole trading self-employed person earning less than £16,250 will actually pay less in NI due to the changes.
The sense of being targeted is strong though, because Mr Hammond actively helped other parts of the enterprise community, such as SMEs -- promised a new million-pound relief package from business rates.
Free Agent, an accounting platform for sole traders reflected: “We are worried that the government increasingly sees the self-employed as an easy target.”
And it’s a target that Kingston Smith tax partner Mike Hayes worries the government is lining up to hit -- again and again.
“This appears to be the start of a stream of measures affecting the self-employed," he warned. "Further announcements should be expected in future budgets.”
‘Similar levels of tax’
Hayes' ominous prediction refers to the chancellor telling MPs yesterday: “People doing similar work for similar wages and enjoying similar state benefits [should] pay similar levels of tax.”
It also refers to the initial preliminary findings from the Taylor Review, which Mr Hammond claimed in his speech are an indicator that individuals primarily ‘go it alone’ to avoid tax.
The Freelancer and Contractor Services Association objects. “The chancellor stated that tax should not be the main driver for the mechanism in which people choose to work but [he] clearly believes it is.
“However, evidence suggests otherwise,” it said. “Research [from the government’s own business department entitled] ‘Understanding Self-Employment 2016’ found that only 1% of over 2,500 respondents cited tax as the main reason for choosing self-employment.”
It was not the only claim made by Mr Hammond yesterday that was quickly shot down by advisers to one-person ventures.
Mr Hayes, of Kingston Smith said: “The chancellor argues that the new state pension does not justify a differential in the rates of NI.
“However, this ignores different employment rights -- and above all job security and financial risk.”
‘Additional Tax for Running Your own Business’
Derek Kelly, another adviser to freelancers, is also mindful that the realities of working alone in business can be trying enough, without being punished for the decision, notably at a time when their activities are most needed.
“How do we reward [the people helping Britain currently] decouple itself from Europe?” he asked. “We increase NICs for self-employed people without providing the safety net that employees receive from NIC contributions!”
Unimpressed, Mr Kelly said the chancellor should have just been “honest” yesterday and renamed ‘National Insurance Contributions’ as ‘ATRYB’ -- ‘Additional Tax for Running Your own Business.’”
‘Smart’ cut in tax-free dividend allowance
But the NICs hike is not the only assault Budget 2017 unleashed on business soloists. In fact, incorporated freelancers will have their tax-free dividend allowance reduced to £2,000, from £5,000 currently.
“[Mr Hammond] has been smart, as a number of self-employed people would have probably looked to incorporate their business and avoid paying this additional NI levy,” said SJD Accountancy, where Mr Kelly is the CEO.
“However, by reducing the dividend allowance, he has made it less attractive for these people to incorporate a business.”
‘Very little understood’
So for the creative industries, the talent they rely on faces a double blow. Its ‘Ltd’ workers face losing £3,000 of tax-free income, and its sole traders face bigger NI bills.
“Tax changes for the self-employed…need to be properly analysed so that they are truly fair and do not damage growth,” warned a worried-sounding Creative Industries Federation.
“Freelance workers are incredibly important to the creative industries but their working practices and needs are very little understood in policy terms.”
But it’s not just in the creative industries. “The [chancellor’s] decisions to raise National Insurance and to cut the dividend allowance will be potentially devastating for freelancers… across the country,” said Emily Coltman, chief accountant at FreeAgent.
She added: “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 they
[the government] want to cripple this very important and growing part of the UK
Chris Bryce, IPSE's CEO agrees. “These punitive measures will have a severely detrimental effect on the self-employed workforce,” he said, because “whether you work as a sole trader or through a limited company, you will be facing higher bills.”
More positively, one of the few helping hands Budget 2017 offers the business community can be received by such independent workers. At the very least, it will offer a reprieve.
It comes in the shape of the chancellor offering to postpone by 12 months the introduction of Making Tax Digital, for some taxpayers, including certain sole traders.
The announced delay to MTD means self-employed people will not be required to start filing at least quarterly digital tax updates until:
- April 2018 if they have profits chargeable to income tax and pay Class 4 NICs and their turnovers are in excess of the VAT threshold
- April 2019 if they have profits chargeable to Income Tax and pay Class 4 NICs and their turnovers are below the VAT threshold
- April 2019 if they are registered for and pay VAT
- April 2020 if they pay corporation tax
Reactions last night ranged from “a win-win result” and a “welcome relaxation to small businesses,” to others saying the delay “does not go far enough”.
The chancellor said: “In response to concerns about the timetable expressed by business organisations, and by several of my Right Honourable Friends including the Chairman of the Treasury Select Committee.
“I have decided that for businesses with turnover below the VAT registration threshold I will delay by one year the introduction of quarterly reporting at a cost to the Exchequer of £280 million.”
‘Little positivity’ (but a lot of resilience)
FreeAgent is among the supporters of the delay but like many, it sounded underwhelmed. “There is little else in the Budget for the micro-business sector to be positive about,” it said.
However, whether the negative contents of the Red Book are enough to prohibit freelancers from freelancing is a different matter.
‘“Changes in tax will not stop the many benefits that both individuals and the country receive from being their own boss,” said SJD’s Mr Kelly.
“Enjoyment, work-life balance and the lack of office politics will still outweigh the additional tax that the chancellor has imposed.”
Other Budget 2017 announcements with the potential to impact creative freelancers include the chancellor committing to:
- Increase the entry and exit threshold on the ‘cash basis’ accounting scheme, plus make simplifications to aid working out whether expenditure is tax-deductible
- Lift in April the registration threshold for VAT to £85,000 (up from £83K now)
- Lift the deregistration threshold for VAT to £83,000 (up from £81K now)
- Increase the personal allowance to £11,500
- Proceed with introducing the April 6th off-payroll rules for public sector freelancers
- Increase the ISA allowance to £20,000
- Give £200m to local projects to leverage private sector investment in full-fibre broadband networks
- Invest £16m in 5G mobile technology
- Uplift the National Living Wage to £7.50 per hour
- Provide £5m to help people back into “employment” after a career break
- Offer £2,000 a year voucher for childcare for the working parents of under-12s
- Give working parents of 3/4-year-olds free childcare entitlement of 30hrs a week
- Freeze fuel duty but leave sin taxes alone, meaning no U-turn on incoming rises.