On 8 March 2017, the Spring budget was announced in the UK, and held an undesirable surprise for the self-employed individuals across the country. A proposal to abolish the Class 2 NIC was made, which would mean that the self-employed people would have to pay more National Insurance. Naturally, small traders and self-employed individuals led a huge outcry regarding the decision, despite the claims by the Chancellor that the move was made in order to reduce the disparities between the company employees and self-employed people by “leveling the ground”. However, one could not help but wonder if it is a move to establish more limited companies across the country.
What are the changes?
In the Spring budget, Chancellor Hammond informed that the National Insurance rate for self-employed and sole traders would be rising in April 2018 and then again in April 2019. At present, there are three classes of people eligible for paying the National insurance:
- Class 1, which includes the normal employees. These are paid by them and deducted by their employer.
- Class 2, which includes the self-employed people. The rate to be paid is flat and has to be paid when the annual earnings is over 5,965 pounds.
- Class 4, which deals with sole traders making more than 8,060 pounds annually.
Former Chancellor George Osborne had announced in the previous Spring budget that the Class 2 contributions would be ended by the financial year 2018-19, enabling the self-employed people to save 146 pounds for the same annual income.
Unfortunately, the current proposal aims to nullify that profit by increasing the Class 4 contributions. This means, for the same annual income (8,060 pounds), people will have to pay a 10% NI instead of 9%. This would be further increased to 11% by 2019. Despite the claims by the Chancellor that this would only affect individuals with high earning, the protest and criticism do not seem to abate.
What is the reason behind the proposal?
The government claimed that they are doing this only to remove the disparities between the self-employed and employed people, which currently stands at 507 pounds a year and would be reduced to 218 pounds a year. Another argument was that out of the 4.8 million self-employed people, only 2.5 million are earning enough to be affected by this decision. Furthermore, the government claimed that this decision would enable the self-employed people to have the same benefits as those employed by companies, like payments for sick leave, maternity leave, and holiday leave.
However, there is a twist: it is unlikely that the self-employed people would receive the same incentives as the employed ones. This has led to huge backlash and criticism, which was severe enough to make even the Conservative party criticize the decision.
Is this a case for limited companies?
With the benefits of being self-employed dwindling rapidly, one cannot help but wonder if they would be better off by trading as a limited company?
At present, affiliating as a limited company means that you are legally an employee entitled to all the incentives that come along with it. You can opt for dividend income as an ROI which is not subjected to National Insurance. Becoming a limited company today is easier than ever before since many companies are in this exact business of helping you set up a limited company. You can be both the director and the sole shareholder of your company; yes, it is that simple.
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Author : Evan Kenty at ZDK Formations ltd
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