by David Watkinson – Watkinson Black
Millions of self-employed workers will now face higher tax bills because Chancellor Philip Hammond has scrapped plans to abolish Class 2 National Insurance contributions (NICs).
This is payable by those who earn profits of £6,205 or more per year. At the current rate of £2.95 per week it costs about £150 per year. The Treasury estimated that this tax cut would cost the exchequer around £360m per year, meaning Mr Hammond now has hundreds of millions of pounds extra in the national coffers.
The abolishment of Class 2 NICs was due to occur last April, but was delayed for 12 months. The explanation for this delay was that the government wanted to “ensure that there are no unintended consequences for the lowest paid”. However, coincidentally, the announcement was made within days of the Chancellor being forced into a U-Turn when he had to abandon a proposed increase of 1% in the rate of Class 4 NIC, also paid by the self-employed, which many though was against the government’s election manifesto commitments not to increase tax.
So what excuse have they come up with now to explain this second U-Turn on tax for the self-employed? In their own words: “A significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the state pension rise substantially. 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. Furthermore, it has become clear that, to the extent that the government could address these concerns, the options identified introduce greater complexity to the tax system, undermining the original objective of the policy.”
They added “The government remains committed to simplifying the tax system for the self-employed, and will keep this issue under review in the context of the wider tax system and the sustainability of the public finances.”
This view is not necessarily shared by everyone. Mike Cherry, national chairman of the Federation of Small Businesses, voiced many people’s views when he said: “The self-employed community has been let down today, missing out on a promise to reduce their tax burden.”
This situation was created by the government themselves when they decided to increase the voluntary Class3 contribution substantially. Originally Class 3 NIC was 10p per week lower than Class 2 so people with no other contribution record that year could pay that instead of Class 2 to protect their benefits. Now Class 3 is £761 per annum compared to £153.40 for Class 2.
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