Class 4 NICs hike, 'a taxing sign of things to come for self-employed'

A new 1.25% increase to Class 4 National Insurance may be ‘just the tip of a tax hike iceberg’ for sole traders, on top of being a new permanent cost to factor in to freelancing.

Such is the alert from experts quizzed by FreelanceUK about the levy which, from April, will hit all self-employed people whose income falls above the lower profits limit of £9,569.

Announced by Boris Johnson, the levy means that self-employed NICs will be payable then to HMRC at 10.25%, yet it will not apply to Class 3, or Class 2 (the flat rate paid by the self-employed with profits above the small profits threshold).

'Deeply damaging'

While sole traders may welcome these two exclusions, IPSE implies that they are critical because even on its own, the prime minister’s Class 4 hike will be “deeply damaging” to self-employment.

And given fresh IR35 changes, and a new 1.25% levy on dividends to mirror the NI hike, the freelance body added yesterday that the PM is “making it almost impossible to work as a freelancer.”

Further ominously, three experts in freelancer taxation do not foresee much let-up for sole traders.

'Cause to be nervous about Autumn Budget 2021'

“It is highly unusual for a government to announce tax changes outside of a Budget,” Matt Fryer, head of legal at Brookson Legal said in a statement to FreelanceUK.

“With the Budget [newly] announced to be heard on October 27th, it does make you nervous as to what else they may have in the pipeline in terms of tax hikes.”

Accountant Carolyn Walsh shares the tax-raising outlook, but sees self-employed sole traders specifically in the government’s crosshairs.

'Government isn't going to stop at 10.25%'

Boss of CWC Solutions, Ms Walsh told FreelanceUK: “For the self-employed, a rise [in National Insurance] was on the cards but the proposed hike gave access to statutory benefits like statutory sick pay. So my gut feeling now is that it’s not going to stop at the new 10.25 rate.

“It might mean that, in time and with calls to shore up worker rights, Class 4 NICs for the self-employed will eventually be set to an almost equal basis as Class 1.”

Another tax adviser to freelancers, Kevin Austin, managing director of Access Financial confirmed last night but kept it short, and not very sweet: “The tax rises have only just begun,” he warned.

'Increase in freelancing industry schemes'

Potentially worse for the self-employed sector, there is a fear that by making bonafide freelancing more taxing, the government could drive atypical workers to less conventional, even abusive work forms.

Rhys Thomas, managing director of WTT Consulting explained: “It feels increasingly like [government] policies [are] being put in place, if not supportive of, risk being a catalyst for, an increase in mass marketed tax avoidance schemes in the UK's freelancing industry over the coming years.”

He added that the dividend tax hike from April would hit those who managed to work outside IR35 since the new off-payroll rules took effect, just as other individuals were still feeling the effects of being left out in the cold during the pandemic.

'Short-term need to maximise take-home pay'

“The lack of [government] support for the self-employed over the last 18 months [is] again [something that risks] resulting in a short-term need to maximise take-home [pay],” said Mr Thomas.

In a Treasury document about the new 1.25% levy, officially called the ‘Health & Social Care Levy’ because it is designed to fund social care and NHS backlogs, the government says 40% of individuals will not have to pay it whatsoever.

Interestingly, the levy will be introduced from April 2022 when NICs for the self-employed will increase by 1.25 per cent and be added to the existing NHS allocation, points out employment tax expert Susan Ball

'Protecting the lowest paid self-employed'

But from April 2023, Ms Ball said that once HMRC’s systems get updated, the 1.25 per cent Levy will be “formally separated out,” and NIC rates will return to their 2021-22 levels.

For its part, the government says that because the levy will  not apply (at any stage) to Class 2 or 3 NICs, the government is “protecting the lowest paid self-employed workers and people making voluntary contributions.”

Rebecca Seeley Harris, a tax lawyer, isn’t overly impressed. “The Treasury report states that only 40% of individuals are affected by the increase because of the combination of the £2,000 tax-free allowance and the personal allowance.

“But this 40% is made up of those who were also excluded from any meaningful help during the pandemic.”

'The Forgotten'

Boss of ReLegal Consulting, Ms Seeley Harris continued: “They are the forgotten, and now bear this burden too. Thousands are still struggling, especially those in events, hospitality and the arts.”

But the impact won’t just be felt in the creative industries.

Olivia Graham, head of compliance at Stonebridge Contracting, which places freelance workers in the construction sector, took to LinkedIn to register his disapproval.

'Shameful'

“The Conservative’s [2019] manifesto aimed to ‘recognise the importance of the UK’s 5.8 million small businesses and the self-employed to the economy.'

"However these changes break the promises made and directly impact self-employed workers, many of whom felt that they were not supported during the pandemic by the government,” she posted. “Shameful conduct.”

 

14th September 2021

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