Self employed solace
The government (rightly) backed down on this change – after I’d written this article.
But I’m leaving it here because I suspect that this change, or something similar, will occur after the next election.
That NI change
This week, the news has been dominated by an announcement to increase tax – actually it’s National Insurance (NI) – on the self-employed.
And as a small business owner myself this is of great interest.
But do you know the real story?
Yes, we know that Philip Hammond has lost a lot of friends by increasing national insurance (NI) for the self-employed.
(and by cutting the tax free slice of dividends for shareholding directors and other investors)
And yes, it does appear that the government may have broken the headline of a silly manifesto promise. So I’m not going to defend him on that.
But is this change fair?
Well, if we set aside the political clumsiness, the ‘think tanks’ on both sides of politics believe that it is.
And that probably means that these changes would have happened eventually anyway – under any government.
What’s more interesting is the enormous difference in the amount of NI levied on the self-employed vs Employeees.
How so? Well, you see, on top of what employees pay in NI, employERS also have to pay NI on their employEES earnings.
And that’s currently payable at the eye watering rate of 13.8% on earnings above £156 per week.
Now, of course, employers do not pay NI for their self-employed contractors.
And that could be one reason that there’s such a boom in self-employed contracting work at the moment.
But I think we can expect the chancellor to come back on this in the future – as the government lose a lot of revenue as the self-employed numbers rise.
Okay, but what about the benefits?
Well, we hear in the news that the self-employed are entitled to fewer benefits (like maternity / paternity pay or sickness benefits) and that’s true.
So, we might expect total NI rates for the self-employed to remain below those for employees going forward.
But the biggest state benefit of all, for most people, is the state pension.
And, unless I’ve missed something . . . this is the real story.
You see, in the past, the self-employed have received a much lower total state pension than employees.
(I won’t go into the details of our historic multi-tiered state pensions here because that would take up another 80 pages! Suffice to say this is why Steve Webb introduced a simplified, single tier pension in 2016)
The thing is that state pensions changed for the better for the self-employed who reached state pension age (SPA) after 5 April 2016.
For most* of those reaching SPA after that date (if they had enough NI payment credits) the state pension entitlement jumped by c. 30% when compared to those retiring beforehand.
* Those with little or no other income at SPA will have received extra income – in the form of “pension credit” to bring their total income up to the new single tier pension level.
The typical self-employed persona who reached SPA before 6 April 2016 with a full basic state pension entitlement – now enjoys a weekly amount of just £119.30 p.w. for a single person.
Those who reached SPA on or after 6 April 16 are entitled to £155.65 p.w.
Do you know what that’s worth?
Well, it depends on your assumptions about how long you’ll live in retirement and the price of inflation linked annuities.
But, roughly speaking, we might say that if you’d had to fund this extra basic state pension for yourself then you’d need a personal pension fund of c. £50,000
Yes, fifty thousand pounds.
So, do you think all this noise about paying a bit more NI is reasonable reporting?
Right, so why didn’t the government just say this?
Well, that’s easy to answer.
If you were in government (on any side) – would you really want to highlight that CLIFF edge change to pensions that happened in 2016?
If you did, you might just see a few million older (pre 6 April 16) retired self-employed people standing outside Westminster demanding a better deal on ‘their’ state pension.
The truth is that we can’t afford to give these ‘retired-ex-self-employed’ people a 30% increase in state pensions.
Especially as they didn’t pay in for it.
Now, in a ‘theoretically’ perfect world, the new, improved, single tier state pension might have been phased in over a number of years.
It could have been phased in over, say, 30 years to be fair – so the self employed would enjoy the higher rate as they pay more NI for it.
But if government had done that we’d have ended up with 30 different levels of state pensions.
And then we’d be back to the bad old days when no one had a clue how state pensions worked.
So they opted for the big bang approach
And the result is that those reaching SPA now (and for several years to come) will get a VERY GOOD deal compared to what they’ve paid in.
Perhaps the press might like to write about that instead of telling people to be victims of alleged government wrong doing all the time.
The fact is that we are fortunate to live in one of the fairest societies in the world. And our governments – of any moderate complexion – do their best to uphold these principles of fairness.
Yes, there are bound to be winners and losers at the edges of any change to the tax or NI system. But in my 30 years of experience in this area, they do their best to resolve those issues too.
And I can’t see any big losers here – only winners.
So, if we’re all agreed that the ultimate aim of any society is to keep moving to a fairer system . . .
. . . why do we keep moaning when it happens?
Take care out there
And don’t believe everything you read in the press.
Paul
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