A little over a week ago the Chancellor of The Exchequer Phillip Hammond announced in his spring budget that he would increase Class 4 National Insurance Contributions from the self employed from 9% to 10% in April 2018, and to 11% in 2019, to bring it closer to the 12% currently paid by employees. This is a move that pissed off, not just the main opposition parties in Westminster, but the core demographic of Conservative voters.
In the United Kingdom, National Insurance (NI) is a system of taxes paid by workers and employers, used primarily to fund state benefits. So you can see why the low tax pro business party might have one or two problems with self starting business owners paying higher taxes, especially when we’ve had to endure seven long years of austerity measures whilst being told that its impossible to tax oneself into prosperity.
However its a moot point because a week later the poor Chancellor was dragged back out to say that on reflection (ie mounting pressure from his own parties supporters) that he would be scrapping the policy and looking to make capital increases elsewhere.
It just seems odd to me that the government would even dare float such a policy, because it would seriously piss off their core base of voters. And then it hit me, that they can actually get away with putting in place policies that a really unpopular, and that’s because the opposition is in such disarray. Jeremy Corbyn has no control over his MP’s, most of whom are in open rebellion against him, and those who are loyal to him are about as effective as trying to cure a migraine with an ice pick.
So thinking they could get away with it may be why they announced it, but whats the reasoning behind the idea? It’s pretty sound logic to be fair and is doing the one thing that the Tories have been criticised for not doing for as long as I can remember. And that’s addressing a tax dodge. It isn’t closing the gap on non-doms or foreign registered businesses, and again will only hit the low income self employed, but nevertheless it is a tax dodge and its a little convoluted so stay with me.
When setting up your own business you register it as a limited liability company with companies house, thus making your company a thing independent of you.
You register as the businesses sole shareholder
You sign an employment contract with your company agreeing to pay yourself minimum wage (or some suitably low wage) for which you will only pay national insurance (and a minute amount of employment tax)
You work your arse off and the business starts doing well making profit, say £100,000 a year, if you had taken this as a wage you would take home £65,467, but by taking it as a shareholder profit you would take home £78, 842 (after paying tax and national insurance on your “wage” and after paying your corporation tax).
The national insurance you would pay in this scenario would only £1,128 for the year, so you see why the government would be anxious to maybe claw a little bit extra back. But alas no, because Conservative voters tend to get a little pissy when taxes go up and the government starts messing with the way they do business.