For millions of self-employed, they have long enjoyed a small ‘tax’ break with paying lower national insurance contributions (NIC) compared to employees by paying class 2 NIC on profits between £6,204 and £8,424 at a rate of £2.95 per week (£153.40 pa) and then Class 4 at 9% on profits between £8,424 and £46,350 and 2% on profits over £46,350. This compares to employed people paying employee Class 1 NIC at earnings over £162 per week (£8,424 pa) to £892 per week (£46,384 pa) at a rate of 12% and 2% over £46,384 pa. Meaning an employee earning £46,384 pa pays £4,555.20 pa NIC and a self employed person with profits of £46,384 pa pays £153.40 (class 2 flat rate) and £3416.40 (class 4 9% rate), a total of £3,579.80 pa. In this example, an employee earning the same as a self employed person pays £975.40 pa more NIC.
That said, employees get better statutory sickness, maternity and other benefits. The saving for being self-employed on NIC, we assume an incentive/ assistance to be entrepreneurial and create work/employment and also to compensate for lower benefits.
In 2015, the Chancellor proposed changes to NIC for self employed which received a huge outcry and were withdrawn.
Reports online suggest that the Chancellor is to push ahead and reintroduce changes to self employed NIC and withdraw the £2.95 class 2 flat rate meaning millions of self-employed will be worse off.
If the Chancellor aligns employed and self employed NIC, it could mean self-employed paying up to £19 a week (£1,000 pa) more NIC. Many will call this a stealth tax and we agree unless the Chancellor also brings in line all other benefit and pension entitlements that employees receive.