Boris Johnson defends National Insurance levy in Parliament
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Boris Johnson and the wider Government announced a Social Care Levy will be introduced from April 2022, as the state attempts to clear NHS backlogs and cover rising care costs. Workers across the spectrum will see their National Insurance payments rise by 1.25 percent but on top of this, dividend tax rates will be raised, while freelancers and businesses earning over certain amounts are to be hit. Unfortunately, those who work for themselves will have to juggle these commitments on top of existing IR35 and/or umbrella problems.
Rebecca Seeley Harris, former adviser to the office of tax simplification and chair of the Employment Status Forum, explained: “The levy set out today by the Prime Minister will be made on both the employed and self-employed whose income falls above the Primary Threshold/Lower Profits Limit of £9,569. The dividend rate will be increased to 8.75 percent and 33.75 percent respectively. This will increase from April 2022.
“The Treasury report states that only 40 percent of individuals are affected by the increase because of the combination of the £2,000 tax-free allowance and the personal allowance. But this 40 percent is made up of those who were also excluded from any meaningful help during the pandemic. They are the forgotten and now bear this burden too. Thousands are still struggling, especially those in events, hospitality and the arts.
“What’s more, in the case of umbrella company workers, most will end up paying both the employers and employees NICs rises so they will be taxed twice. This is obviously another blow to workers who are already in a precarious position. This will include care workers and NHS staff (working in the sector that the levy is supposed to fund) going through umbrellas – more and more are expected to be self-employed or must agree to be employed through agency umbrellas, many of which are unethical. It’s an untenable situation for them.”
Umbrella companies emerged as IR35 tax changes were proposed. In short, umbrella companies are set up as a standard limited company and are operated by a third party who acts as an “employer” on behalf of its contractor employees. The benefit of using such a structure is that the end client and agency involved are shielded from tax claims and employment rights issues.
However, umbrella companies have faced severe criticism in recent years for apparent unethical, and even illegal, actions. Despite this, umbrella companies remained crucial for many companies who were hit by IR35 changes.
In 2000, IR35 tax legislation was introduced by the Government which altered how contractors and self-employed workers are hired. From 2017, public institutions became required to assess the tax status of contractors they hired. In April 2021, these rules were extended to the private sector and medium to large businesses were forced to set the tax status of contractors.
Many experts warned this would raise costs for companies and hinder the hiring of freelancers. James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, commented on how these difficulties will be worsened in light of the new changes. “Limited company professionals already had a corporation tax hike earlier in the year so this news will really hurt at a time when many are still trying to recover from the impact of IR35 off-payroll reforms and the economic fall out of COVID-19,” he said.
“We had hoped that this cohort of workers would be left alone but this will be seen by self-employed professionals as yet another cynical indictment by the Conservative government on so-called personal service companies. The Government are blinkered to the benefits that these companies, self-starters and entrepreneurs bring to the economy, and the value they offer companies across the UK. We will continue to work with BEIS to ensure policy reflects the changing nature of work and that workers’ rights are upheld.”
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This sentiment was shared by Andy Chamberlain, the Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE).
“After the financial damage of the pandemic, exclusion from support and the changes to IR35 taxation, this new tax hike on dividends will make it almost impossible for freelancers to continue to work through a limited company,” he said.
“To limited company directors – from project managers to graphic designers – this is salt in a year of wounds. While social care is of course crucial for the country, after the financial devastation of the pandemic, it is simply not right that struggling working people – particularly the scarred freelance sector – should be paying for it.”
To illustrate how these changes will impact the self-employed sector, IPSE shared exclusively with Express.co.uk three case studies from struggling freelancers.
Anthony Dixon detailed he had no choice but to work through an umbrella company following the Government’s changes and now, his costs are set to rise further.
“I started my business in 1994 providing database/BI development services and ran it successfully until this year when my current client (a bank) introduced a blanket ban on my type of business model (HMRC would call it a PSC),” he said.
“So considering we’re in the midst of a global pandemic I felt I had no choice but to work via an umbrella company when I now pay employers NI and the apprenticeship levy along with the usual employees NI and tax and have no employment rights. [The] announcement means I will face a 2.5 percent tax increase in 2023 because as I’ve outlined above I have to pay employers and employees NI.”
Neil Spellings, a contracting Cloud infrastructure and enterprise architect, also faced similar difficulties: “I’ve been forced into an umbrella arrangement and had a drastic reduction in salary as a result. As such the double hit on NI will impact me even further.”
Ben McCaulder provided insight on how the changes will create friction between companies and small enterprises, let alone between taxpayers and the state.
“In terms of the effects they are slightly unusual on my business,” he said.
“We’re a small specialist consultancy of six staff. I and two others are shareholders and directors. As such not a PSC as such. We pay ourselves ‘properly’ with reasonable market rate salaries, proper PAYE tax etc. Yes there are also shareholder dividends but we’re a long way from the bare minimum salary and big fat dividends.
“The impact has been really annoying as larger companies we work for are simply refusing to listen and take into account properly our status. They then have in some cases forced IR35 onto the contract without my agreement or opportunity to step away before ‘inside’ was insisted upon as they’ve been so chaotic and poorly managed that they didn’t even start the assessment process (in my view wholly biased) until after the start of this Financial Year. So I was working I thought under agreed terms then they refused to pay unless under IR35 terms retrospectively.
“I left that one as soon as I could. In addition I have refused lots of other work as it has been decreed inside again without consideration of the status of the individual to be undertaking it.
“In my field I compete with people from larger consultancies. They undertake the same work but simply because they work for a larger company aren’t even being challenged on R35 status. I can evidence such instances and that my status in terms of tax is no different to those of an employee of a larger company.
“As such notwithstanding the truly poor bit of legislation larger companies are applying it incorrectly and are using it as a smokescreen to exert more control over the supply chain and of course cream off more money for themselves.”
Ever since the new plans were announced, Boris Johnson faced calls to reverse the decisions or at least, reduce the raise.
Despite the push back, MPs voted 307 to 251 to approve the Health and Social Care Levy Bill at its third reading in mid-September.
The legislation will now be scrutinised in the House of Lords before it is officially rolled out next year.
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