why do self employed pay less national insurance
he bottom 40% of self-employed workers will be spared any income losses from the (NICs) Á if they go ahead Á according to an analysis by the Institute of Fiscal Studies, but the top 10% will be paying around áå430 a year extra. The poorest 10% of self-employed workers will actually be net gainers from the changes. Low earners will gain from the abolition of Áclass 2 NICsÁ, offsetting the rise in the standard rate of national insurance for the self-employed, called Áclass 4 NICsÁ, from 9% to 11% between 2018 and 2019. But the average income loss for self-employed workers, according to the IFS, will be áå120 a year, adding fuel to the controversy over what was the centrepiece of this weekÁs budget. Separate figures compiled by accountants BDO for Guardian Money show how the proposed changes have a limited impact in the first year (2018-19), but rise more sharply in 2019-20. Someone with an income of áå25,000 from self-employment will only pay an extra áå20 NI in the first year of the changes, rising to áå188 in the second year. But someone making áå35,000 will see their NI bill rise by áå120 in the first year, and áå388 in the second year. If the chancellor chooses to align the self-employed NI rate with that of employees, at 12%, then itÁs likely that people earning around áå35,000 will then be paying around áå700 more a year. NI is charged at 9% on self-employed ÁprofitsÁ between áå8,164 and áå43,004, and 2% on everything above that. But from 2018-19 the rate will rise to 10%, then 11% in the following tax year. Regular employees of companies pay 12% NI, and there are no plans for this to rise. However the figures and table (below) come with caveats. We donÁt know the NI threshold for 2018-19 or 2019-20, so the data has been compiled using those for 2017-18.
The BDO table also assumes that all the personÁs income is from self-employment. We also donÁt know precisely when, or if, the NI changes will be approved by parliament. The prime minister this week delayed the controversial rise following, although Labour said ministers were Áin disarrayÁ over the issue. Downing Street insisted on Friday the proposal wouldnÁt be watered down, while indicating it would be introduced alongside improved benefits for the self-employed. The government is fully committed to the headline measure in Philip HammondÁs first budget,Theresa MayÁs spokesman said, adding that the chancellor and other ministers would be talking to MPs and businesses over summer. It is expected that the government will produce a paper in the autumn setting out NI changes, which will look Ápotentially at what new rights could be given to people who are self-employedÁ. This is likely to follow the publication of a
into modern employment practices which is examining how the Ágig economyÁ and temporary contracts are making work more precarious for millions at companies such as Hermes, Deliveroo and Uber. The number of self-employed people in the UK has risen dramatically. In the mid 1970s only 8. 7% of the workforce was self-employed, but it is now estimated at around 16%. Around 4. 8 million people now make the bulk of their income from self-employment, with the biggest growth among lower earners. Since 2005 the number of over-65s who are self-employed has almost doubled. When youÁre self-employed, youÁre responsible for paying tax and National Insurance on your income. ItÁs important to stay on top of all your records in order to work out how much you need to pay. To work out how much tax and National Insurance you should pay, first you need to work out whether youÁre employed or self-employed.
This is usually straightforward, but sometimes itÁs a bit more complex Á for example you could be employed in one job and at the same time self-employed in a different job. The HM Revenue Customs (HMRC) website has a tool called the Employment Status Indicator that will work out your employment status for you based on your answers to a series of questions. ItÁs completely anonymous and wonÁt ask for your name or any other personal details. There are two pages to read before you get to the tool. On the first page, read the information and click ÁAccess the ESI tool and further guidanceÁ. On the second page, read the ÁConditions of useÁ section and if you agree, click ÁI accept the conditions of use Á go to the ESI toolÁ. Answer the questions. The tool uses some technical language, so when you answer the questions remember: As soon as you become self employed you must tell HMRC. The very latest you can register with HMRC is by 5 October after the end of the tax year for which you need to file a tax return. The tax year runs from 6 April one year to 5 April the next. If you register too late you might be liable to penalties. How much tax and National Insurance do I pay as self-employed? If youÁre self-employed, you will probably need to pay National Insurance contributions (NICs) as well as income tax. This currently includes Class 2 NICs (a flat rate charge on the self employed) and Class 4 NICs (contributions based on profits made). Basic State Pension, If you donÁt keep your contributions up to date, or your payments are late, it could make it more difficult to claim these benefits. Plans to abolish Class 2 NICs contributions have been delayed by the government until April 2019.
Some self-employed people also need to register for VAT. Others might benefit from registering voluntarily. To work your tax out correctly youÁll need good records of the money that comes into and goes out of your business. It will be much easier to fill in your tax return if you keep good records as you go along rather than trying to find all your invoices and receipts at the end of the year. You can be fined for failing to keep records. To work these out you should keep any paperwork or electronic documents relevant to your business, including: In April each year, HMRC will send you a letter telling you to complete a tax return online, or a paper tax return to fill in, for the tax year that has just ended. There are different deadlines for completing your tax return and paying the tax you owe. Online tax return: 31 January after the end of the tax year. Paper tax return: 31 October after the end of the tax year. The tax year begins on 6 April and ends on the following 5 April. 31 January is the payment deadline for the balance of what you owe for the previous tax year. Normally you will already have made two payments on account for that year. This is also the deadline for making your first payment on account for the current tax year. 31 July is the deadline for your second payment on account for the current tax year. The nature of Self Assessment means that it can be several months before your tax is due. ItÁs good practice to make provision for any tax owed on an ongoing basis. If youÁre struggling with business or household debt, Business Debtline offers a free debt advice service to self-employed people and small businesses in England, Wales and Scotland.
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