Although there was little of substance to Philip Hammond’s budget last week, one particular issue caused some political controversy. It was the proposal to increase the National Insurance contributions for the self-employed from 9% to 11% over a two-year period starting April 2018.
From this date, April 2018, the weekly Class 2 contributions will be scrapped and the scope of Class 4 contributions will be increased such that the entitlement to selected benefits is maintained.
The Chancellor’s justification for the increase was to reduce the gap between NI contributions made by employed persons and the self-employed. Typically, employed persons and their employers make more significant contributions than self-employed individuals earning the same level of income.
At present, the self-employed pay Class 4 NIC at the rate of 9% of profits between £8,060 and £43,000, for 2016-17, compared to 12% for an employee on earnings between the same thresholds. When employer’s NIC contributions of 13.8% are taken into account the imbalance in contributions are even more marked.
Historically, the benefits that an out of work, or retired self-employed person could claim were lower than an employed person, but with the advent of the new State Pension for persons who reach retirement age after 6 April 2016, many of these imbalances have been reduced.
The Treasury estimates that after the 2% increase has been factored in, only persons with self-employed earnings in excess of £16,250 will be paying more in NIC for 2019-20 as a direct result of the change.
Of course, the Class 4 NIC increase may not actually happen. This is a proposal published in a Finance Bill, and until parliament vote the change into law, the measure is ineffective. The Prime Minister has indicated that a final decision will be deferred to the Autumn Budget later this year.