why do self employed pay less national insurance

he bottom 40% of self-employed workers will be spared any income losses from the (NICs) if they go ahead according to an analysis by the Institute of Fiscal Studies, but the top 10% will be paying around 430 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 class 2 NICs, offsetting the rise in the standard rate of national insurance for the self-employed, called class 4 NICs, from 9% to 11% between 2018 and 2019. But the average income loss for self-employed workers, according to the IFS, will be 120 a year, adding fuel to the controversy over what was the centrepiece of this weeks 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 25,000 from self-employment will only pay an extra 20 NI in the first year of the changes, rising to 188 in the second year. But someone making 35,000 will see their NI bill rise by 120 in the first year, and 388 in the second year. If the chancellor chooses to align the self-employed NI rate with that of employees, at 12%, then its likely that people earning around 35,000 will then be paying around 700 more a year. NI is charged at 9% on self-employed profits between 8,164 and 43,004, 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 dont 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 persons income is from self-employment. We also dont 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 in disarray over the issue. Downing Street insisted on Friday the proposal wouldnt 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 Hammonds first budget,Theresa Mays 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 potentially at what new rights could be given to people who are self-employed. This is likely to follow the publication of a
into modern employment practices which is examining how the gig economy 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 youre self-employed, youre responsible for paying tax and National Insurance on your income. Its 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 youre employed or self-employed.


This is usually straightforward, but sometimes its a bit more complex 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. Its completely anonymous and wont 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 Access the ESI tool and further guidance. On the second page, read the Conditions of use section and if you agree, click I accept the conditions of use go to the ESI tool. 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 youre 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 dont 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 youll 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. Its good practice to make provision for any tax owed on an ongoing basis. If youre 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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