This year’s Budget saw a couple of key themes emerge of relevance to the financial planning process.
Both were driven by the Government’s disquiet with the “unfair” differences in tax and National Insurance liabilities on the earnings of the employed, self-employed and owner/managers of private limited companies. Of course, as well as the unfairness, there is the cost to the Exchequer of said unfairness.
The proposal to garner the most press attention was that to reduce the difference in NI contributions between the employed and the self-employed.
The Government had already committed to the abolition of the regressive flat rate Class 2 NICs for the self-employed from tax year 2018/19. Chancellor Philip Hammond affirmed his continued commitment to this change.
However, he also announced there would be an increase to the Class 4 rate payable on profits within the band (£8,164 to £45,000 for 2017/18) from 9 per cent to 10 per cent in 2018/19 and to 11 per cent in 2019/20. Harsh, but still below the 12 per cent rate for the employed.
The attack on inequality
The proposal represented clear evidence of the Government’s commitment to remove inequality. But then came the furore. At the heart of the protestations was the pre-election Conservative pledge not to increase certain taxes in the life of the post-election Parliament should the party be elected.
Then-party leader David Cameron said: “we can commit to no increases in VAT, income tax or National Insurance.” And so stated the triple tax lock pledge on page 9 of the Conservative’s 2015 manifesto. Unsurprisingly, Hammond’s Budget announcement resulted in those words being exhumed as proof of government duplicity.
That said, it is arguable those protesting should have done so long ago, when the true meaning of the triple tax lock pledge emerged shortly after the election.
The income tax lock and the VAT lock were the first two clauses in the Finance Act (No 2) 2015. However, the NIC lock was in separate primary legislation – the National Insurance Contributions (Rate Ceilings) Act 2015 – which received Royal Assent in December 2015.
That Act showed that the NIC lock was not all it seemed. Indeed, it always seemed odd there should be a pledge not to increase NIC rates when, before the election, the government had already committed to killing off Class 2 and bringing Class 4 on to a contributory benefits related basis. And that was before anyone had raised the question of what Class 4 contributions should be when the single tier pension started in 2016/17, boosting state pension benefits for the self-employed.
Probing of the Treasury after the election eventually teased out that the NIC lock only applied to Class 1. As such, it was no great shock to see the National Insurance Contributions (Rate Ceilings) Bill, which emerged in July 2015, only deal with Class 1 NICs.
In addition to a Class 1 NICs rate lock, the Bill also provided a guarantee that the upper earnings limit would not exceed the higher rate tax threshold. There were no protests then about the Bill’s (lack of) contents from the multitude now up in arms. Perhaps not surprising considering detailed reading of legislation is not something that many make a practice of in today’s headline driven society.
Room left to manoeuvre
Of course, the Government announced its crusade against unequal treatment of earnings in the shape of the wide-ranging Taylor review of working practices back last November. The review will be nationwide and will stretch over six months. Lots of hard evidence will be gathered.
The so-called “gig economy” will definitely come under the spotlight. We have already witnessed the widely publicised Uber case on whether drivers are employees or contractors.
So, despite the U-turn on NIC increases, we have almost certainly not seen the last of the proposals to remove the inequalities that currently exist between the employed, self-employed and owner/managers of private limited companies. Indeed, let’s not forget the other big financial planning announcement in the Budget regarding the reduction in the dividend allowance.
I will look at what the Government’s other responses might be next week.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn