Over the last couple of weeks, I have considered the National Insurance changes Chancellor Philip Hammond proposed in his spring Budget and then, following the now famous U-turn, swiftly removed.
The proposals served as evidence of the Treasury’s disquiet over the differences in the total NI liabilities of an identical sum generated from the employed and the self-employed.
The Treasury is also concerned about the differences in the tax paid in respect of earnings generated from work carried out and services delivered through a limited company for the owner/manager of that company.
Dividends remain exempt from NI but the rate of tax payable on those in excess of the dividend allowance increased by 7.5 per cent from April last year. The dividend allowance itself is to be reduced from £5,000 to £2,000 in 2018/19.
An independent review on modern employment practices was launched at the last Autumn Statement. Headed by the Royal Society of Arts chief executive Matthew Taylor, its aim is to fully understand the impact of modern working practices and how the different labour markets work.
A particular focus will be on the implications of new forms of work on worker’s rights and responsibilities, as well as on employer freedoms and obligations.
This review is an important means of informing the Government’s commitment to “creating and supplying an economy that works for all, not just the privileged few”. It is all very current given the recent publicity around the rights associated with employment in the so-called gig economy, in particular for Uber and Deliveroo workers.
It is important to note the Taylor review has terms of reference that prevent it from recommending the Government closes loopholes in the tax system. However, Taylor has indicated it will not shy away from at least highlighting situations where it believes tax unfairness exists.
Tackling tax unfairness
The Government is clearly concerned about the financial implications of the current employment trends.
The Institute for Fiscal Studies points out that, under the current system, it is considerably less expensive for an employer to engage a self-employed person or contractor to carry out work than a full-time employee with all that brings in terms of PAYE, NI and employee rights.
Meanwhile, the Trades Union Congress states the self-employed represent 15 per cent of the current UK workforce. When comparing the tax and NI it is estimated would be gathered from this group if they were employed, the Government is around £2bn per annum down on the deal.
Be all that as it may, around 40 per cent of the 2.2 million work opportunities created since 2008 have been self-employed.
The push for planning
Financial planners have a big role to play for this growing community. At the very least, appropriate protection should be in place for their families. They are the most key of key people, and the financial damage incurred by their loss would be felt immediately by those they are financially responsible for.
Income protection, critical illness cover and life cover should be the foundation of a robust financial plan for a self-employed individual.
Unfortunately, a relevant life policy to provide tax deductible non-assessable premiums and tax-free payment of benefits is not available to the self-employed. But all of the ordinary (non-tax advantaged) insurance types referred to are very able to do the job required of them.
I will take a look at dividend taxation for owner/managers of private limited companies next week.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn