The National Insurance Rise Debate – A Case for Being a Limited Company?
Last week’s Budget held a nasty surprise for self-employed people around the country – a rise to the amount of National Insurance that you would be required to pay because of a proposal to abolish Class 2 NIC. The move came as a surprise to everyone and instantly caused a great deal of criticism from small business and self-employed people and representatives around the country. Chancellor Philip Hammond stated that these changes would bring more parity between a self-employed sole trader and an employee of a company doing the exact same job. But could the move make a good case for more self-employed people to set up as a limited company rather than remain a sole trader?
The proposed changes
In the Budget, Chancellor Philip Hammond said that the rate of National Insurance to be paid by sole traders registered as self-employed would be rising in April 2018 then again in April 2019. The current system means that there are three classes of NI:
Class 1 contributions are paid by employees and are deducted by their employer
Class 2 contributions are a flat rate paid by self-employed people when they earn over £5965 per year
Class 4 contributions are paid when a sole trade makes more than £8060 a year
Last March, the Chancellor at the time, George Osborne, said that Class 2 contributions would be abolished in April 2018. This would mean that self-employed people would be paying £146 a year less in their NI contributions when they make more than £5965 per year.
However, the changes in this budget proposed to offset that saving by increasing the Class 4 contributions. That would mean that once a person earned £8060, their rate of payment would increase from 9% to 10% in the first year and then in 2019, this would increase again to 11%. This would result in a rise of an average of £240 a year. The Chancellor said that the rise would only affect those earning more than £16,250 per year but there was still a great deal of outcry from both within and outside of the government at the move.
Why penalise the self-employed?
The government justified the move by saying it needed to level out the playing field between employed and self-employed people. Currently, a self-employed person earning £30,000 would be paying £507 less a year in NIC than an employed person. Under the new measures by the time the total increase had taken place, this different would only be £218.
Added to this is the increase in recent years in the number of people who are self-employed. There are currently 4.8 million self-employed people in the UK and of these, only 2.5 million of them make enough money to pay more under the proposed changes. They also justified the move by saying that more people are now entitled to benefits even when they are self-employed so the gap between the two categories has closed somewhat. Currently, self-employed workers are not entitled to such benefits as sick pay, maternity pay or holiday pay entitlements that an equivalent paid employee would be able to access.
The big U-turn
Protests across the country were loud and varied to the proposed changes, with many people pointing out that the self-employed don’t receive the same benefits as those employed people – no sick pay and no paid holidays being two big examples. So loud was the outcry from even within the Conservative party, the government has since announced that the change won’t take place ‘during the lifetime of this parliament’.
This means that the savings will remain in place for the abolishment of the Class 2 system but the increases to Class 4 will not take place for the next few years at least.
The case for a limited company?
The issue has raised an interesting point for many self-employed people – if the government plans to target them for being self-employed, would they be better off trading as a limited company?
Currently, as a limited company, you are treated as an employee for national insurance purposes. This means that you can receive dividend income as a return on investment on shares in your company and this amount is not subject to national insurance. And companies are able to pay their directors whatever amount it wants, therefore legitimately reducing the amount of national insurance that you have to pay.
Setting up as a limited company is also easier than ever before with companies such as Your Company Formations offering services to set up a limited company for someone. This involves registering the business with Companies House and ensuring that all the legal paperwork is in place to make sure the company is legitimate. This often involves an appointment of at least one director and one shareholder, who can be the same person so even if you are a sole trader, this is a route that might be ideal for you going forward. Especially if the spectre of national insurance contribution rises rears its head again!
If you have been thinking about switching from self-employment to registering your business as a limited company, you may want to read our post: What’s better, a sole trader or Limited Company?