Millions of self-employed workers face a rise in their National Insurance rates, bringing them closer in line with conventional employees.
The change will particularly hit partners in professional firms, such as accountants, surveyors and lawyers.
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The situation now
People who work for themselves pay two types of National Insurance, a tax that funds benefits like the state pension and job seeker’s allowance.
For the 2017-18 tax year they pay Class 2 NI at £2.85 a week on profits between £6,025 and £8,164.
If profits are above £8,164, these are subject to Class 4 NI at 9pc. Profits above £45,000 are taxed at 2pc.
This is in contrast to employed workers who pay Class 1 NI at 12pc on earnings between £8,164 and £45,000. As with the self-employed, they pay 2pc on earnings above £45,000.
But the Chancellor said the current system “undermines the fairness of the tax system”.
To combat this, from April 2018 Class 2 NI will be abolished as planned, and Class 4 NI will rise from 9pc to 10pc. In April 2019 rates will rise again, to 11pc.
All self-employed people earning less than £16,250 will pay less in NI as a result, Mr Hammond said in today’s Budget .
Why change the system?
The number of self-employed workers has exploded in recent years – from just 3.8 million registered self-employed in 2008 to 4.6 million in 2015.
When the new single-tier state pension took effect in April 2017, the old system of basic and additional pensions were abolished. Payments under the new system are more generous than the old basic state pension and as the self-employed did not have access to the additional pension, they will see increased pensions as a result.
But until the Chancellor announced the increased in the self-employed’s NI rates, they had not paid for the uplift in the new system.
Mr Hammond said it was unfair that an employee earning £32,000 will pay £6,170 in NI, between themselves and their employer, while someone working for themselves will pay just £2,300.
He added differences in relation to benefits given to parents will also be addressed via a consultation.
In line with other workers, the self-employed have a “personal allowance” which means they can earn up to £11,500 in 2017-18 without paying income tax.
But in contrast to employees, they pay income tax on the previous tax year’s profits, revenues after business expenses. They can also deduct certain costs and even losses from previous years in some cases.
A self-employed person pays both income tax and National Insurance on the 31 January based on profits from the previous year. So in January 2017 they would pay the balance due from the 2015-16 tax year.
However, HMRC will ask for payments “on account” for the following year’s expected profits on both January 31 and July 31 each year.