The Prime Minister has controversially announced a 1.25% increase in National Insurance Contributions (NICs) along with a 1.25% rise in dividend taxation, both of which will be introduced in April 2022 in a move that will impact millions of self-employed workers.
These plans were unveiled on 7th September in Parliament by Boris Johnson, who was recently warned by several senior MPs not to break a pledge made in the 2019 Conservative Party manifesto that ruled out increasing either of these taxes.
However, Johnson defended the tax hikes which will fund a ‘Health and Social Care Levy’. He claimed that it will allow the government to invest around £36bn into the NHS and social care over three years as the Conservatives look to deliver the “biggest catch-up programme in NHS history.”
The PM explained: "I accept that this breaks a manifesto commitment which is not something I do lightly, but a global pandemic was in no one's manifesto."
Chancellor of the Exchequer, Rishi Sunak, also commented: “The new Health and Social Care Levy is the necessary and responsible thing to do to protect the NHS, sharing the cost between businesses and individuals and ensuring those earning more pay more.”
However, in response, Labour leader Sir Keir Starmer said that following these tax hikes, “the Tories can never again claim to be the party of low tax.”
Many national media headlines have focused on NIC, but arguably it is the dividend tax increase that matters most to freelancers and contractors who operate through their own limited companies.
The 1.25% rise in tax payable on dividends drawn from a company above the £2000 tax-free allowance follows unpopular dividend reform rolled out in 2016, which saw the £5000 tax-free allowance slashed considerably.
From April 2022, the amount freelancers and contractors are taxed on dividends will increase, as shown below:
According to government estimates, this move is set to boost the Treasury’s coffers by around £600m annually.
In contrast, the 1.25% NIC rise should see tax receipts increase by an estimated £12bn every year.
But while contractors operating outside IR35 tend not to pay NICs due to the way they extract money from their businesses, sole traders are now facing up to the reality of significantly bigger tax bills from as early as next April.
As things stand, and for the 2021/22 financial year, sole traders pay class 4 NICs of 9% on profits made between £9,568 and £50,270, plus 2% on anything above this. In the 2022/23 tax year, which starts on 6th April 2022, this will rise to 10.25% and 3.25% respectively.
These changes do not apply to class 2 NICs, which sole traders earning up to £6,515 annually are required to pay. This will remain at £3.05 a week.
As a result of incoming changes to NICs, the cost of engaging workers on the payroll will also increase, with employers’ NI to jump from 13.8% to 15.05% next year.
This means businesses that moved all contractors - regardless of their true IR35 status - onto the payroll in response to IR35 reform will pay even more to engage them as PAYE workers.
So in light of the government’s plans, the argument that businesses should reverse PAYE-only working grows stronger.
How changes to NICs will affect contractors working via umbrella companies has not gone unnoticed either. And the impact on umbrella workers is doubly worse than for sole traders.
Umbrella workers are engaged under employment contracts, so they will soon pay more in employee NICs. However, as temporary workers engaged as contractors by an end client, they will also have employers’ NI deducted from their payslip, which could leave them much worse off.
In conclusion, while greater investment in the NHS and social care is key, a number of experts have asked the question why it is the self-employed workforce that will be hit hardest by these reforms - particularly in light of the impact Covid has had on this sector.
This was a point made by Qdos CEO, Seb Maley, in The Express:
"Raising NICs and dividend tax is a move that directly impacts millions of people working for themselves - people who have arguably been hit the hardest by the pandemic. Once again, it seems that the smallest businesses are bearing the brunt of tax reform.
“Yet still, it will be the flexibility, dynamism and skills of the independent workforce that the Government needs most to speed up the economic recovery."
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