Webb justifies Hammond's self-employed tax changes

Webb justifies Hammond's self-employed tax changes

Calculations by Royal London show the state pension boost many self-employed people received under recent reforms is greater than the amount they will lose through recently announced National Insurance changes.

In yesterday’s (8 March) Budget, chancellor Philip Hammond increased Class four National Insurance contributions by 1 per cent from April 2018 and again from April 2019.

Once all other reforms are taken into account, Royal London estimated this would cost an illustrative self-employed person £7,720 over a 40-year working life.

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But it also calculated changes to the state pension mean this self-employed person would get an increase worth £37,800 over a 20-year retirement.

Sir Steve Webb, director of policy at Royal London and former pensions minister in the Conservative/Liberal Democrat coalition government, said: “When assessing an appropriate level of National Insurance contributions for self-employed people, it is important to look at the full picture, including recent changes to the state benefits which the self-employed receive.

“The new state pension represents a very significant boost for the self-employed which will be worth significantly more than the cost of the National Insurance contribution increases which have been announced.”

For an illustrative self-employed person earning £25,000 per year, their annual National Insurance contributions bill will increase by £339 once the full increase to 11 per cent has been introduced.

But from 2018 to 2019 self-employed people will benefit from the abolition of Class two National Insurance contributions, which are currently charged at a rate of £2.80 per week or £146 per year.

If the changes were applied over a 40-year working life, the total additional National Insurance contribution bill would be £7,720.

Meanwhile under the old state pension system, the National Insurance contributions of the self-employed built up rights to a basic state pension but not to the state earnings-related pension scheme.

This meant that someone who was self-employed through their working life could only get a pension of £119.30 a week.

Under the post-April 2016 system, a self-employed person with 35 years of contributions will qualify for the full flat-rate pension of £155.65 per week.

This is an extra £36.35 per week or £1,890 per year of retirement. Over an illustrative 20-year retirement, this would be worth £37,800.

Speaking during his Budget speech yesterday (8 March), Mr Hammond said many of the changes to the pension regime meant the different tax treatment of the employed and self-employed was no longer necessary.

He said: "People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.

“Employed and self-employed alike use our public services in the same way, but they are not paying for them in the same way.”

There has been a sharp increase in the number of self-employed workers in recent years.

They now account for around 15 per cent of Britain’s workforce compared with less than 12 per cent at the turn of the millennium.