The Chancellor’s budget statement on Wednesday could deliver bad news to the self-employed, said leading tax and advisory firm, Blick Rothenberg.
Nimesh Shah, a partner at the firm, said: ‘The Chancellor will more than likely focus on business support measures, to stimulate activity and generate employment, but his statement could also deliver bad news for the self-employed. The Government and the Chancellor have made no secret of their desire to increase taxes for the self-employed, and especially those that operate through limited companies. When the Chancellor announced the Self-employment Income Support Scheme (SEISS) at the end of March, it came with a warning that the self-employed would have to pay back that support in the future.
‘Under the current rules, self-employed individuals benefit from a lower rate of National Insurance on profits – class four National Insurance at 9%–2% rather than class one National Insurance at 12%–2% which apply for an employed worker. A self-employed individual making profits of £40,000 has take-home pay of £31,755; an employed worker with the same salary has take-home pay of £30,840 – the self-employed individual is better off by £915 per year.’
Nimesh added: ‘A number of self-employed individuals operate their business through limited companies and pay themselves through dividends – in recent years and following changes to the dividend tax regime, any tax benefit of receiving dividends has reduced; where a person extracts all the profits from the company as dividend, they may even be worse off.
‘However, many that operate their business through a company choose to pay themselves a small salary (up to the National Insurance threshold) and dividends for what they need for their living – the balance of profits can be left in the company.The Chancellor could announce changes to the self-employed by abolishing the class four National Insurance and effectively harmonising the National Insurance regime for the self-employed and employed worker. For a self-employed worker making profits of £60,000, such a change could leave them £1,215 worse off per annum.’
Nimesh noted: ‘A further proposal would be to abolish the lower dividend tax rates (currently 7.5%–32.5%–38.1%) and align to normal income tax rates (20%–40%–25%). This change would have a heavy impact on a self-employed worker using a company and paying themselves through dividends. For someone generating profits of £100,000 and paying themselves in dividends, they would see a reduction in take home pay of over £6,000 per annum.
‘Harmonising the dividend tax rates with income tax rates would have wider implications for those with savings in share portfolios, such as pensioners, as they would see a higher rate of tax applied to their income as a result.’
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