Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.
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.
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.
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.
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 firstname.lastname@example.org
To contact the editor responsible for this story: Penny Sukhraj at email@example.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)