A proposed cut in taxes for 3 million self-employed people has been permanently shelved by the Chancellor, Philip Hammond, much to the dismay of those across the country.
But why was the plan scrapped at the last minute? And why are some self-employed people celebrating the move? We take a closer look at the details.
The Proposed Cut
The original plan was to abolish Class 2 National Insurance contributions for self-employed people. Currently, anyone earning between £6,205 and £8,164 a year is liable to pay them, and the move was expected to save 3 million individuals around £150 per year. Announced by George Osborne in 2016 (which frankly, feels like a lifetime ago!), it was designed to simplify the ever-confusing tax system for the self-employed.
The eligible 3 million were expected to move automatically onto reformed zero-rate Class 4 National Insurance contributions automatically, allowing them access to their state pension on retirement or accrue entitlement to state benefits without the extra cost.
Why the U-turn?
A statement directly from the government stated: ‘We delayed the implementation of this policy in November to consider concerns relating to the impact on self-employed individuals with low profits.’
While the three million who will still have to pay this so-called ‘stealth tax’ are understandably unhappy, there are 300,000 low-income self-employed earners who are rejoicing. Those earning under £6,205 (or the Small Profit Threshold) are eligible for an exemption on paying their Class 2 National Insurance payments.
Many small business owners, however, choose to pay these voluntarily to ensure they’ll be eligible to claim their state pension when they reach pensionable age. The current cost of Class 2 National Contributions is £2.95 per week. Had these been abolished, these low earners would have to pay Class 3 contributions instead, at a much higher cost of £14.65 per week – a huge difference when your profits are low to start with.
‘Having listened to those likely to be affected by this change we have concluded that it would not be right to proceed during this parliament, given the negative impacts it could have on some of the lowest earning in our society,’ said the government statement.
There’s been anger on both sides of the political spectrum when Shadow Chancellor, John McDonnell, took to Twitter claiming, ‘This is yet another betrayal of the self-employed. These people are the engine of the economy and have been let down again, while giant corporations have seen their tax bills slashed.’ He is, of course, referring to the headline-worthy fact that Amazon’s tax bill has been tiny this year (check out our blog on the subject here!).
Even Tory’s own Rees-Mogg has spoken out, stating the move goes against ‘Tory values’.
While the plans to scrap Class 2 National Contributions have been shelved indefinitely, the government has assured that it does fully intend to simplify the taxation system for the self-employed as part of a wider strategy. So changes could still be coming. Watch this space!