Chancellor of the Exchequer Philip Hammond has used his spring Budget to announce an increase in National Insurance Contributions (NICs) from 2018, which will mean self-employed people earning over £16,250 will end up paying more in this tax from April 2018. Those with an income below this figure will end up paying less.
From that date, which is when the abolition of Class 2 NICs takes effect, the rate of Class 4 NICs for the self-employed will rise from nine per cent to ten per cent, with an additional one per cent rise in 2019.
Mr Hammond said this change was made to reduce the gap in contributions between the self-employed and employees, as the difference in entitlements to pensions and other benefits has all but disappeared.
The announcement has proved controversial, with critics arguing it breaches the Conservative manifesto commitment not to raise NICs and some Tory MPs saying it will deter entrepreneurship. Faced with a possible rebellion, prime minister Theresa may has said the proposal will not be in the Budget finance bill, but will be delayed until the autumn when this year’s second Budget takes place.
However, the move has been backed by the Institute for Fiscal Studies, which believes the gap in contributions between the self-employed and the rest is too large.
In addition, Royal London has produced a study to show that, thanks to new pension rules introduced last year, the self-employed will still be better off.
It showed that while someone earning £25,000 a year would pay £7,720 extra over 40 years, the change in the state pension from £119.30 a week to £155.65 would be worth £37,800 more over half that time.
Commenting on this, director of policy at Royal London Steve Webb, who was a pensions minister in the coalition government, said: “The new state pension represents a very significant boost for the self-employed which will be worth significantly more than the cost of the NICs increases which have been announced.”
This means that, despite the NIC increase, being self-employed will not make people worse off once the changes come in.