THE self-employed have been hit with a double tax raid after Chancellor Phillip Hammond increased their national insurance payments by two per cent, and more than halved the amount of tax-free dividend they can take from their business.
The Chancellor said the move was designed to close the gap between the amount contributed by the employed and self-employed, who “use public services in the same way but are not paying for them in the same way”.
It has, however, been roundly criticised, with Jon Greer of Old Mutual Wealth noting that those who work for themselves miss out on “perks” such as sick pay and holiday entitlement. that are “enjoyed by those in employment”.
Tim Walford-Fitzgerald, private client principal at chartered accountant HW Fisher & Co, agreed. Noting that, while those working for employers will still pay slightly more national insurance than self-employed people when the full effects of the change come into force in 2019, he said the rise “does nothing to reduce the inequality of rights enjoyed by those working for themselves compared to people in stable employment”.
“The regular wage slip is a world apart from the increased risks and uncertainty involved in running your own business,” he said.
“These tax changes do not reflect the practical distinctions between employment and self-employment.”
Indeed, Pearse Flynn, chief executive of personal insolvency practice Creditfix, said the increase in national insurance rates “could prove very harmful to the personal finances of tens of thousands of people across the UK.
“In such a challenging economic environment,Individuals working for themselves to make a living are often at the sharp end of any cutbacks in consumer or business spending,” he said.
“It’s a real concern that the changes announced today will take even more money away from these individuals, with the potential to tip the balance and force people into borrowing more and increasing personal debt in order to make ends meet.”
Similarly, the reduction in the tax-free dividend allowance, which was one of the few shocks of Mr Hammond’s Budget given the allowance was only introduced last year, will leave those who pay themselves via dividends with less of an income.
As many self-employed people choose to remunerate themselves in this way, with dividends incurring a lower rate of tax than salaried income, Mr Greer at Old Mutual Wealth said the cut in the allowance from £5,000 to £2,000 “will be really unwelcome for business owners” as it will “effectively reduce the amount they can take free of tax from their business by 60 per cent”.
Jason Hollands, managing director at wealth management group Tilney, agreed, labelling the cut “aggressive” and “clearly aimed at employees and directors of small businesses who might remunerate themselves partly or wholly through dividends rather than salary”.
The knock-on effect of all this, according to Rachel Vahey, product technical manager at financial services company Nucleus, could be the derailment of one of the Government’s key personal finance priorities – to get people to save more for retirement.
Unlike their employed counterparts, who have been auto-enrolled into a statutory pension scheme that is contributed to by employers, the self-employed must take responsibility for their own pension provision.
With most being left with less spare cash when the national insurance rises and dividend tax cuts take effect, Ms Vahey fears they will become less likely to save for their retirement.
“These increases will put pressure on the self-employed, leaving them with less disposable income,” she said.
“This comes at a time when it’s becoming apparent fewer self-employed are saving for their later-life income. Out of 4.5 million self-employed, the Department for Work & Pensions estimates an average of only one in seven paid into a pension last year,” she said. “If these individuals have less take-home money available to save, this increases the danger they will reach later life with little or no savings.”
That said, Sean McCann, chartered financial planner at NFU Mutual, said that, for business owners who can afford to lock some of their cash away until retirement, the impact of the Budget changes could be to encourage them to save more into pensions, which have a £40,000 annual tax-free allowance.
“The national insurance announcement could make pension contributions even more attractive to entrepreneurs who wish to take money out of their company in a tax efficient way,” he said.
For those who may not want to lock their cash away for so long, Mr Hollands at Tilney said that investing via an Individual Savings Account (ISA), where any gains are paid tax-free, would allow investors to claw back some of the additional tax the Government will raise. via the Budget announcements.
“It is a powerful reminder of the importance of fully utilising ISA Individual Savings Account allowances, which are currently £15,240 per year and set to rise to £20,000 from April 6 this year,” he said.
Clare Francis, savings and investments director at Barclays, agreed: “The surprise announcement that the dividend allowance will fall from £5,000 to £2,000 in 2018 underlines the importance of maximising the stocks and shares ISA allowance, as returns are tax free,” she said.
“If you haven’t taken advantage of this tax year’s ISA allowance yet there’s still time – you have until April 5 and can invest up to £15,240.
“Then from the April 6, you’ll have a brand new allowance that you can make use of, and the good news is that the annual ISA allowance is rising to £20,000 for the 2017/18 tax year, meaning you will be able to invest even more of your money tax efficiently.”
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules here