Self-employed workers will face higher national insurance bills from next year under government plans to narrow the gap between taxes paid by them and by salaried staff.
The increase is part of a wider plan to boost the NI tax take, as employees earning more than £43,000 also will face an increase from April. The Treasury forecasts that revenue from NI will rise by £38 billion in the next five years. Corporation tax, by contrast, will increase by only £9.9 billion over the period.
Philip Hammond highlighted a “dramatic” increase in the number of people classed as self-employed in Britain in recent years, a 20 per cent rise since 2008 to 4.6 million. The sector now makes up at least 15 per cent of the national workforce.
The lower taxes paid by people who work for themselves are a big reason for the increase, he said. The changes come amid the growth of self-employed workers, such as taxi drivers, fast-food couriers and cleaners, who have fuelled the growth of the “gig economy”.
The taxman takes £6,170 in NI from a salaried worker earning £32,000, including employer and employee contributions. A self-employed worker, however, would pay £2,300 on that sum. Traditionally, self-employed people have paid less NI to compensate for receiving fewer state benefits.
To close the gap, Mr Hammond announced that self-employed workers would pay an extra 1 per cent from the start of the 2018-19 tax year. The increase will be added to the class 4 NICS bracket, which is paid by people whose profits are more than £8,060 each year.
A further 1 per cent increase will follow in 2019-2020, meaning that a self-employed worker will put 10 per cent of their income towards NI contributions next year and 11 per cent from April 2019. An employed worker contributes 12 per cent when they earn more than £8,060 a year, or £155 a week.
On its own, the change – which breaks a 2015 Tory manifesto commitment not to raise National Insurance levels – is set to hit almost 2.84 million self-employed people by an average £240 a year.
However, some lower-paid self-employed workers will receive a tax cut under separate plans to abolish Class 2 NICS, paid on profits above £5,965. The Resolution Foundation noted that, under these changes, a hairdresser earning £12,700 would have £70 more in 2019-20.
As a sop to the self-employed, the chancellor said that he would launch a consultation in the summer to address discrepancies in maternity leave. At present, self-employed women do not qualify for statutory maternity pay, but can access the state maternity allowance. There is no statutory paternity pay for self-employed men.
Employed workers also face a rising bill for national insurance, with those earning more than £43,000 paying up to £240 per year more from April. At present employed workers pay 12 per cent national insurance on earnings up to £43,000, after which it drops to 2 per cent. The government has raised the level at which workers pay 12 per cent national insurance to £45,000, and only then will it drop to 2 per cent.
The rise in contributions for the self-employed provoked a mixed reaction. Chas Roy-Chowdhury, head of tax at the Association of Chartered Certified Accountants, said: “Self-employees are subject to a lower national insurance contribution because they do not receive the same entitlements and benefits as their employed counterparts, such as holiday and sick leave.”
Torsten Bell, director of the Resolution Foundation, said: “There are lots of good reasons for people to be self-employed but unfair and expensive tax advantages shouldn’t be one of them.”
How will the self-employed pay NI? Class 2 NI, a flat rate of £2.80 a week on earnings over £5,965, will be abolished from April 2018. Class 4 will go up to 10 per cent of earnings over £8,060, and in 2019 will rise again to 11 per cent. What about everyone else? Employed workers will pay 12 per cent NI on income up to £45,000, instead of £43,000 at present. After £45,000 that falls to 2 per cent. That means extra NI for anyone earning more than £43,000, rising to £240 more for people earning over £45,000. Will there be more changes? The Taylor review is looking at how the tax system and employment legislation can keep up with modern practices. Matthew Taylor will release his conclusions this summer.