In the recent budget, the chancellor Phillip Hammond announced higher national insurance contributions for the self-employed.
Class 4 NICs for the self-employed would rise from 9% to 10% in April 2018 – and then to 11% in April 2019 – on income up to the higher rate threshold of £45,000.
The new rates are still lower than for employees who pay NI at 12% on the same income levels, while both groups will continue to pay at 2% on income above the higher rate threshold. (Self-employment at Guardian)
I am self-employed. Therefore, this tax rise would mean higher tax rates for myself. However, I support the principle of the tax change.
Firstly, there is a significant tax advantage to being self-employed rather than employed.
This is a factor behind the growth of self-employment since 2008.
There are many factors making it harder to collect tax revenue. (See: Falling UK tax revenue) Growth in self-employment is one factor. It makes sense to reduce this tax gap.
Secondly, I disagree with the general trend of Conservative governments to reduce the ratio of government spending as a % of GDP. The unwillingness to raise taxes (and borrow when state of economy requires) means there is an opportunity cost of less spending on important public services.
This is slightly outdated, but it illustrates the aim to reduce government spending as % of GDP to the lowest levels in the post-war period. Low taxes are not worth the cost of a deterioration in spending on health care, education, social services.
The big issue is whether low taxes are worth the cost of a deterioration in spending on health care, education, social services. Personally, I would rather have more public spending.
Thirdly, I’m not keen on political parties making manifesto commitments to never increase income tax, national insurance e.t.c. It means chancellors struggle to make the correct decisions, but resort to tax gimmicks and spending cuts to get through budgets.
There is a logic to increasing NI contributions for the self-employed, but there is also a legitimate concern that the overall tax changes of the budget benefit the wealthy the most. For example, cutting inheritance tax (for wealthy) and cutting corporation tax, benefits the high-income earners in society. This NI tax rise affects most the middle income self-employed.
Another evaluation is that although the self-employed have lower tax rates, they also lose other perks, such as sickness and holiday pay. This is true, but I’m not sure it is the job of the taxman to compensate for this.
Also, whilst there is a logic to greater equality between employment and self-employment tax rates, there remains a potential for business owners to pay themselves dividends which avoid NI contributions. Again, it will generally be wealthier, high-income earners who are in a position to set up a company and pay dividends rather than income.
Regular readers will know it is rare that I support Conservative chancellors, but on this particular issue, I think the right decision was made.
But, an evaluation of the wider budget and continuation of austerity is another issue.
For a discussion of the macroeconomic issues of the budget. It is worth reading this by Simon Wren-Lewis