Chancellor Phillip Hammond announced his 2017 Spring Budget to the House of Commons yesterday which included a rise in National Insurance Contributions (NIC) for self-employed workers.

During the announcement, Hammond addressed the self-employed and how it could pose a threat to the tax base. “As our economy responds to the challenges of globalisation, shifts in demographics and the emergence of new technologies, we’ve seen a dramatic increase in the number of people working as self-employed or through their own companies,” Hammond said. “Indeed many of our most highly paid professionals work through limited liability partnerships and are treated as self-employed. People should have choices over their employment status but those choices should not be driven primarily by differences in tax treatment.”

Self-employed workers will see a hike in the amount of tax they are set to pay as their National Insurance contributions, the main rate of Class 4, will rise by 1% to 10% next year, and to 11% in April 2019. The increase works out at around 60 pence more a week on average and will raise £145 million for the Treasury and add up to an additional £2.06 billion in over four years. However, Hammond also stated that all self-employed people earning less than £16,250 will still see a reduction in National Insurance Contributions.

Many have criticised Hammond’s tax hike on the self-employed due to the lack of additional benefits accessible to them such as sick pay, unemployment, etc. They have also pointed out that the change contradicts promises made in the Conservative election manifesto not to raise these taxes.

Fiona Coombe, Director, Legal & Regulatory Research, Staffing Industry Analysts, commented,

“The measures to increase Class 4 National Insurance contributions (NICs) coupled with a cut in the tax-free dividend allowance for small companies make it less attractive to be self-employed or to run a small business, even if the reasons for doing so are entirely legitimate. Looked at purely from a tax perspective it is fairer to equalise payments of NICs for employees and the self-employed if both have access to the same state benefits.”

“However, it doesn’t recognise the fact that the employed receive additional benefits paid by their employer, such as sick pay and holiday pay, which are not available to the self-employed.”

Julia Kermode, Chief executive of The Freelancer & Contractor Services Association (FCSA), also commented,

“The Chancellor wants to grow a fairer economy but there is nothing fair about the announcements.  Once again, microbusinesses and the self-employed are coming under attack for not paying enough tax with Mr. Hammond believing that employees are being penalised by an unfair system.  This is wholly unjustifiable and today’s measures are targeting the wrong people.  We have seen a raft of tax policy changes penalising self-employed professionals over the last few years leaving them financially worse off and under-valued by a Government that purports to recognise the important role they have played in the country’s economic recovery to date.  It would have been sensible for the Chancellor to await the full outcome of Matthew Taylor’s review that is due out in the summer before he announced today’s kneejerk moves that will see policy changes that will have serious negative implications.”

"The Treasury states that the increase in self-employed NICs levels the playing field between employees and the self-employed believing that there is a minimal difference in state benefits funded by NICs for both groups of workers. In my view this argument is fundamentally flawed - self-employed people do not have access to NICs funded statutory benefits like unemployment benefit or sick pay and when it comes to maternity allowance, employees receive at least 57% more than self-employed workers, based on our analysis of a 2012 XpertHR survey,” Kermode said.

"The Chancellor also claims that the self-employed have the same entitlement to the new state pension. However, self-employed workers are not part of the new auto-enrolment model, so they cannot access the tax relief that is afforded to employees and funded by NICs under the new scheme. Furthermore, they will need to have paid 35+ years of NICs in order to receive the state pension, and many self-employed people are not going be in this position so it is far from a level playing field. The Chancellor is justifying the increase to class 4 NICs by saying that self-employed are already paying less because they have removed class 2 NICs. But this removal was originally announced at budget 2014, which predates their election, therefore cannot be a justification. The Conservatives have gone back on their word as there was no mention to such increase in their manifesto.”

Samantha Hurley, Operations Director at The Association of Staffing Companies (APSCo), commented, “We were disappointed that, despite press reports to the contrary, a Government review into how different workers are taxed failed to materialise. APSCo has been lobbying for a number of years for a complete review of tax and national insurance contributions for Personal Service Companies (PSCs) and the self-employed, rather than the ill-conceived bolt-on legislation such as the public sector off payroll rules.”

“However, we eagerly await the results of the Matthew Taylor Review referenced by the Chancellor – and at which APSCo was invited to present evidence. We hope that the review will address the issue of differentiation between the professional and potentially vulnerable ends of the labour market, simplify employment status legislation and suggest a vehicle to allow professional contractors to work through whichever employment model they choose. However, we are very concerned that the Chancellor made clear that preliminary thoughts from the review suggest that the main drive for individuals to incorporate as companies is to maximise tax savings. In the professional sector this is simply not the case – these are bona fide business to business relationships where the individual has no guarantee of continuity of assignments, has genuine business risk and liability – and none of the benefits enjoyed by permanent employees.”

Hammond’s Budget also announced a crackdown on tax avoidance schemes (POTAS).  The new legislation will ensure that promoters of tax avoidance schemes cannot circumvent the POTAS regime by re-organising their business by either sharing control of a promoting business, or putting a person or persons between themselves and the promoting business. This will ensure that HMRC can apply the POTAS regime as intended.

As announced at Autumn Statement 2016, the government will introduce a new penalty for a person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC. This new regime reflects an extensive consultation and input from stakeholders. The government will also remove the defence of having relied on non-independent advice as taking ‘reasonable care’ when considering penalties for a person or business that uses such arrangements.

Hammond also announced that the government will remove the ability for businesses to convert capital losses into trading losses from 8 March 2017. He stated that this will eliminate an unfairness in the tax code which is being exploited by certain businesses.

Also announced in the Budget, Hammond stated that the UK must increase productivity growth and said a key element will be the National Productivity Investment Fund, which will invest £250 million over the next four years to continue to build the pipeline of high-skilled research talent necessary for a growing and innovative economy as £90 million will provide an additional 1,000 PhD places in areas aligned with the Industrial Strategy. Around 85% will be in STEM disciplines, and 40% will directly help strengthen collaboration between business and academia through industrial partnerships and a further £160 million will support new fellowships for early and mid-career researchers in areas aligned to the Industrial Strategy.

The Budget announced an allocation of £500 million a year in funding for technical and vocational education, with plans to replace 13,000 existing qualifications with 15 “routes” designed to be more relevant to employers’ needs.

These qualifications will be known as “T-Levels”, providing training routes, specific to different industries, including finance, engineering and digital. These will start in the 2019/20 academic year.

The Budget also announced that income tax rates will not rise and there will be no changes to VAT or other National Insurance. Furthermore, the living wage will also rise to £7.50 in April.