How Covid-19 has reignited the national insurance debate

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How Covid-19 has reignited the national insurance debate

There has always been a debate about a streamlining of the national insurance (NI) process with the different classes often causing confusion to individuals. 

And in March, Chancellor Rishi Sunak, reignited that debate when he said: “It is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.”

Many believe he was hinting at the possibility of bringing back his predecessor Philip Hammond's proposed national insurance contribution hikes for the self-employed.

Currently, there are three types of self-employed statuses: sole traders, members of a partnership and directors of a limited company

The table below compares the amount of national insurance paid by an employed person against a self-employed individual.

NI Class

Rate

Who pays it?

Class 1 Primary

12 per cent on earnings between £9,501 and £50,000 PA; 2 per cent on earnings above £50,000 PA

Employees

Class 2

£3.05 per week / £158.60 PA if profits are in excess of £6,475

Self-Employed

Class 4

9 per cent of profits between £9,501 and £50,000; 2 per cent thereafter

Self-Employed

Broadly speaking, an individual receiving a salary of £40,000 would pay £3,660 of national insurance, whereas a self-employed trader making £40,000 of profit (or member of a partnership receiving a profit share worth of £40,000) would pay NI of £2,903.60.

It has long been recognised by tax and financial planners that there is much to be gained by structuring a business and the way it distributes or accumulates profits  to save/avoid tax/NI.--Gary Starmer

Andrew Timms, a partner at UHY Hacker Young, says while self-employed individuals seemingly benefit from a lower rate of NI, there are other factors to consider when comparing to employees. 

For example, employees benefit from statutory sick pay (SSP), holiday pay, and an obligation that work will be provided for them by their employer, whereas the self-employed do not have the same comfort.

They are required to source their own work, and if they are not working then they do not get paid.

Gary Starmer, director at Kingston Independent financial Advisers, describes the national insurance system as "neither clearcut nor fair"; adding that it creates some unfair treatment to income tax payers.

“For example the 7.5 per cent dividend surcharge “hurting” savers, who the economy depends upon to invest in our companies, but only inflicting a flesh wound on the target small company director who pays himself by non NI charged dividends rather than NI charged remuneration,” Mr Starmer adds.

“It has long been recognised by tax and financial planners that there is much to be gained by structuring a business and the way it distributes or accumulates profits to save/avoid tax/NI . 

“All perfectly legal as no one is required to pay more than the current legislation demands.  So while our clients employ and remunerate us to minimise their contribution to the costs of running the country, the opportunities do not need to be presented to us like an open box of tempting high quality goodies. Firstly; it`s too easy, secondly; we in the business know it`s unfair to those who don’t, or can`t take advantage.”

What might Sunak do?

It is difficult to predict what changes may arise from such a broad comment by the Chancellor.

If the Chancellor truly wants to address the imbalance in NI payments, he must focus on the hiring organisations, not the individuals.--Andrew Chamberlain

Mr Timms says there could be some changes to the NI system, but it could also be interpreted that the comment was in relation to the tax treatment of dividends. 

For example, there may be changes afoot to the rates of tax, that could perhaps see the abolition of the dividend allowance (currently £2,000 for 2020/21; reduced from £5,000 in 2017/18 to £2,000 from 2018/19 onwards).

Andrew Chamberlain, director of policy at The Association of Independent Professionals and the Self-Employed (IPSE) believes Mr Sunak could try to raise the rate of Class 4 NI which is paid by sole traders.

"This would mean they would be paying more in total tax and NI than comparable employees, which would feel unfair, and still wouldn’t bring in as much as addressing the real problem – employers’ NI," Mr Chamberlain adds.

“There is little difference between the total NI paid by employees and the total NI paid by self-employed sole traders. However, a hiring organisation that employs someone will have to pay employers’ NI at 13.8 per cent. 

“If they instead engage that person on a self-employed basis, they won’t pay NI at all. If the Chancellor truly wants to address the imbalance in NI payments, he must focus on the hiring organisations, not the individuals.”

In terms of national insurance, in 2018 the government at that time announced that Class 2 National Insurance would be abolished, which Mark Hook, tax partner at accountants Rowleys, believes is the most sensible way to streamline the tax position of the self-employed. 

Mr Hook says: "The reason the abolition did not go ahead however was put down to the impact on those with lower profits and the impact on the pension position. 

"The current crisis could be the catalyst for this to be reconsidered.  I believe some focus from the government on abolishing Class 2 National Insurance and increasing Class 4 National Insurance to be in line with Class 1 NIC would be beneficial. 

"There would need to be a safety net however for self-employed people who earned less than the starting rate for Class 4 contributions.  This should be considered in conjunction with the tightening up of the specific areas around workers’ rights, ensuring that certain self-employed workers are able to achieve similar rights to those that are employed, given that essentially they would be paying the same amount of National Insurance."

Levelling the field

Mr Starmer believes the chancellor should ignore income tax, except for scrapping the dividend surcharge, but level out NI contributions firstly between the standard employed person who is not a shareholder and the true self-employed person while providing the same or vaguely similar benefits. 

Our current Chancellor is in an excellent position to make “taxes” fairer and simpler in one fell swoop.--Gary Starmer

Secondly, charging NI in some fashion on dividends voted from their own companies, underneath a ceiling level of perhaps £50,000 pa, for employee shareholders.

His preference would be to merge income tax and NI into a single band of income tax rates, removing, he says, the current dishonesty and most ways of cheating the system. 

Mr Starmer says: “There might have to be lower charges for persons reaching state pension age but not necessarily. These new rate bands could be set to accommodate the forever increasing cost of healthcare and care of the elderly. 

“Tax saving investments such as pension premiums for the younger persons and Isas for the older age groups could continue though there is an opportunity to merge the two in a similar fashion to Lifetime Isas plus a few more bells and whistles.

"Tax relief on life cover up to retirement would also be an important factor. Corporation Tax could remain at similar levels though a potentially refundable income tax credit on dividends should be reinstated to put right another long standing wrong.

“Our current Chancellor is in an excellent position to make 'taxes' fairer and simpler in one fell swoop. Such a level playing field would in theory diminish the importance of the financial adviser, however, in reality it would change the focus and remove the easy pickings and we wouldn`t have to keep apologising to our clients for the shortcomings of politicians, as far as taxes are concerned, at least.”

Mr Timms adds: “It is not an unjust statement. The measures announced by the Government may be far from perfect, but considering that there was a very short timeframe for these to be designed, announced and implemented, they are generous measures which have already seen hundreds of thousands of people offered more stability and a guaranteed income source in what are unprecedented and unstable circumstances. 

“If the UK wants to have a system which offers support to all its residents in times of need, then it must be a system to which all residents contribute fairly and equally; if nothing else, because as the current climate has shown us – we cannot predict what is around the corner and when we may need to lean on that support system.”  

ima.jacksonobot@ft.com