The Chancellor’s budget statement on Wednesday could deliver bad news to the self-employed, according to a leading tax and advisory firm, Blick Rothenberg.
Nimesh Shah, a partner at the firm said, “The Chancellor will more than likely focus on business support measures, to stimulate activity and generate employment, but his statement could also deliver bad news for the self-employed.”
He added, “The Government and the Chancellor have made no secret of their desire to increase taxes for the self-employed, and especially those that operate through limited companies. When the Chancellor announced the Self-employment Income Support Scheme (‘SEISS’) at the end of March, it came with a warning that the self-employed would have to pay back that support in the future.
“Under the current rules, self-employed individuals benefit from a lower rate of National Insurance on profits – Class 4 National Insurance at 9%/2% rather than Class 1 National Insurance at 12%/2% which apply for an employed worker.
“A self-employed individual making profits of £40,000 has take-home pay of £31,755; an employed worker with the same salary has take-home pay of £30,840 – the self-employed individual is better off by £915 per year.”
Nimesh said, A number of self-employed individuals operate their business/trade through limited companies and pay themselves through dividends – in recent years and following changes to the dividend tax regime, any tax benefit of receiving dividends has reduced; where a person extracts all the profits from the company as dividend, they may even be worse-off.
“However, many that operate their business through a company choose to pay themselves a small salary (up to the National Insurance threshold) and dividends for what they need for their living – the balance of profits can be left in the company.”
He added, “The Chancellor could announce changes to the self-employed by abolishing the Class 4 National Insurance and effectively harmonising the National Insurance regime for the self-employed and employed worker. For a self-employed worker making profits of £60,000, such a change could leave them £1,215 worse-off per annum.
“A further proposal would be to abolish the lower dividend tax rates (currently 7.5%/32.5%/38.1%) and align to normal income tax rates (20%/40%/25%).
“This change would have a heavy impact on a self-employed worker using a company and paying themselves through dividends. For someone generating profits of £100,000 and paying themselves in dividends, they would see a reduction in take home pay of over £6,000 per annum.
Nimesh said, “Harmonising the dividend tax rates with income tax rates would have wider implications for those with savings in share portfolios, such as pensioners, as they would see a higher rate of tax applied to their income as a result.”