Beat the pain of the Chancellor's first budget

Cutting the hedge

Hammered!  As the self-employed reel, we show how to beat the pain of the Chancellor's first budget

Here, The Mail on Sunday's Personal Finance team looks at the implications for the self-employed, savers, consumers and households.

Self-employed 

The UK’s 4.8 million-strong army of self-employed workers and contractors – ranging from builders, plumbers, independent retailers to taxi drivers and musicians – are counting the cost of a Budget bent on raiding the pockets of hard-working entrepreneurs.

Despite belonging to the party of enterprise, with Margaret Thatcher once the fiercest supporter of the nation’s risk-takers, Chancellor Philip Hammond will push up the rate of Class 4 National Insurance contributions by 1 percentage point to 10 per cent from April next year, with a further one point rise in 2019.

The move will result in an extra £800 tax bill for the self-employed by 2019.

The Chancellor defended the tax assault – even condemned by many Conservative MPs – as a step towards aligning the taxation of the self-employed with the 85 per cent of workers who are employees. It is essentially a payback, he says, for entrepreneurs now having access to the £155.65-a-week flat rate state pension on retirement.

Mike Cherry, chairman of the Federation of Small Businesses, has attacked the ‘tax grab on middle-income, self-employed people’ and accuses the Chancellor of ignoring the difference between entrepreneurs and employees.

He says: ‘The self-employed are the risk-takers that spearhead growth and productivity in our economy.’

How bills will rise

The incomes of millions of self-employed workers will be dented by up to £400 a year from April 2018, when the Class 4 rate rises to 10 per cent, according to Mark Groom, employment tax expert at accountancy firm Deloitte.

Their earnings will be squeezed by a further £400 a year when the rate rises to 11 per cent in April 2019.

Who is affected?

Class 4 contributions of 9 per cent currently apply to annual incomes of between £8,060 and £43,000 and 2 per cent above that.

From April 2018, those earning less than £16,250 a year will be a few pounds better off under the new regime, accounting for 60 per cent of self-employed, according to the Treasury.

For example, someone on £15,000 a year will pay £770 in National Insurance in the tax year ending April 5, 2017. But in the tax year starting April 6, 2018, the bill will fall by £7 to £763, as Class 2 National Insurance contributions are scrapped. And it will fall to £675 in the tax year starting April 6, 2019.

But those on higher incomes will be hit hard. A taxi driver, for example, earning £25,000 a year currently pays £1,670 in National Insurance. But in the tax year starting April 6, 2019, that will rise by £173 to an estimated £1,843.

A builder on £50,000 a year currently pays £3,430, but will see that leap by £911 to £4,341 in the tax year starting April 2019.

And an IT consultant earning £100,000 will pay £5,341, some £1,010 a year more.

Dividend Squeeze

Entrepreneurs who set up as limited companies and take income in the form of dividends will also lose out with a planned cut in the tax-free dividend allowance from £5,000 to £2,000 from April 6, 2018.

But they should not despair, as cuts to corporation tax from 20 per cent to 19 per cent next month and then to 17 per cent by 2020, will help offset this newest tax grab.

What you can do

Do not panic. There are practical steps you can take, so you should not just grin and bear it.

- Seek professional help

Emma Jones, the founder of membership organisation Enterprise Nation, says: ‘Our members got hammered in this Budget, but their resilience and hard work means they will carry on regardless.

‘The self-employed or small business owner is too busy to go out and barricade Westminster. So we always suggest when there are any adverse changes like this to consult an accountant who can advise how to mitigate the impact and give tips on how to rein in costs.’

 - Try free consultation

The Institute of Chartered Accountants in England and Wales provides a business advice service that offers an initial meeting with a local accountant free of charge. To arrange an appointment visit businessadviceservice.com.

- Join forces

Sign up with a small business organisation. Membership of Enterprise Nation, IPSE (the Association of Independent Professionals and the Self-Employed), and the Federation of Small Businesses can stimulate ideas and offer fresh opportunities to boost sales – the best way to beat higher bills.

 - Get protected

The self-employed do not have the same safety net to fall back on if disaster strikes, so should ensure their income is protected if they cannot work. Sean McCann, chartered financial planner at insurer NFU Mutual, says: ‘The self-employed may be disappointed to have to pay more in National Insurance contributions but they need to focus on other risks to their income.

‘While someone who is ill and employed may get paid by their employer for a limited time, an accident or illness for a self- employed person could mean dipping into their savings as soon as work stops.

‘With most household savings a paltry £3,000 at most, this makes income protection cover vital for the self-employed.’

Income protection cover, offered by most mainstream insurance companies, provides a monthly tax-free income in the event of serious illness or injury. Try a broker such as LifeSearch or Highclere Financial Services.

- Save for retirement

Entrepreneurs often say their business is their pension. But there is no guarantee. This makes pension saving a must.

Deloitte’s Groom says: ‘Pensions should a be a priority. Small business owners may be losing on National Insurance, but the Chancellor left the current tax relief on pension contributions alone for now. So they should maximise these savings while they can, plus make the most of Isa annual allowances.’

Find an independent financial adviser who specialises in pensions by visiting unbiased.co.uk or financialplanning.org.uk.

 

This article was written by sally.hamilton from Financial Mail on Sunday (Daily Mail) and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.