Spring Budget: U.K. to Pocket $5.7 Billion from Self-Employed

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By Ben Stupples

The U.K. Chancellor has raided the pockets of self-employed individuals at the government’s Spring Budget, making tax changes that aim to raise 4.7 billion pounds ($5.7 billion) in the next five years.

Self-employed individuals face a 2 percent overall rise in their national insurance contributions, and business owners will see their tax-free dividend allowance cut by 60 percent to 2,000 pounds, Philip Hammond said March 8 to lawmakers in the House of Commons at his Spring Budget speech.

Raising 2.1 billion pounds and 2.6 billion pounds respectively by 2022, the measures will raise the most in tax for the U.K. from the policies listed by Her Majesty’s Treasury in the official costings document published with the 2017 Spring Budget, according to an analysis by Bloomberg BNA.

Self-employed Create Tax Gap

Hammond’s move addresses a growing tax gap from the rise of self-employed individuals in the U.K. Employees make up 85 percent of the U.K.’s workforce, but there has been substantial growth across the country in the number of self-employed individuals, accompanied by even faster growth in individuals owning and managing their own business, according to the Institute for Fiscal Studies.

In addition, the measures will be an important source of income for the British government after the Chancellor refused borrowing excessive amounts and pledged to cut the U.K.’s debt levels further.

“Just as a strong economy requires a tax system that is competitive, a strong society requires one which is fair,” Hammond said during his Spring Budget speech. “And because I have committed to funding my spending decisions in this Budget, rather than borrowing more I make no apology for raising additional revenues, and for doing so in ways which enhance the fairness of the system.”

According to HM Treasury’s policy costings document, self-employed individuals with annual profits of 8,060 pounds or more a year face a 1 percent rise in their annual national insurance payments to 10 percent in April 2018, and then a further rise to 11 percent the following year.

Despite the increase, however, that still leaves self-employed individuals facing a lower rate than the total amount that companies and employees have to pay, which can reach as high as 15.8 percent.

Owner-managed Businesses

Self-employed individuals pay less each year towards the U.K.’s state benefits, known as national insurance, than full-time employees. Individuals who own and manage their businesses, meanwhile, benefit from being able to pay themselves through dividends from their companies, which are taxed at a lower rate than the income tax that company employees and self-employed individuals pay.

An employee earning 32,000 pounds a year will pay a total of 6,170 pounds towards the U.K.’s state benefits, known as National Insurance, Hammond told U.K. lawmakers March 8. A self-employed individual, however, will pay just 2,300 pounds in National Insurance contributions., he added. Some state benefits, such as a state pension, depend on an individual’s National Insurance contributions.

Future Tax Reform?

Responding to the Chancellor’s Spring Budget, Jim Meakin, London-based head of tax at global tax and accounting firm RSM, said the move to close the gap between self-employed individual and employees indicates a “direction of travel” over the British government’s future tax policies.

“Last year’s Budget red book stretched to 148 pages, this year’s was just 64 pages,” he added in a March 8 emailed statement on Hammond’s first and last Spring Budget as the U.K. moves to a single Autumn Budget next year. “Perhaps the chancellor is holding back from more significant tax reform.”

Lynda Finan, meanwhile, Leeds based-legal director at global law firm DLA Piper, described the cut in tax-free dividend allowances from April 2018 as more of a “cost-saving exercise” than an attempt from the Chancellor to target individuals who both own and manage their companies avoiding tax.

The move targets “the ‘discrepancy’ and ‘unfairness’ that exists between employees and individuals who operate through their personal companies,” she said in a March 8 emailed statement. In fact, though, “the reduction of the dividend allowance will apply to all shareholders in any company.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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