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Increase in Taxes for Freelancers & Self Employed

The Chancellor Rishi Sunak announced in March 2020 that there may be a tax increase in the future for Self Employed and Freelancers in the UK, so what does this mean to you today and why?

After the furlough scheme was announced for employers whose businesses were struggling to protect their employees at the start of the coronavirus pandemic there was a cry of help from the millions of self-employed workers who were struggling to pay their bills as well. Chancellor Sunak then revealed a grant scheme for the self-employed, freelancers and contractors that would cover 80% of their monthly income. This allowed them to be paid up to £2,500 a month if they were struggling to pay their bills if their earnings were decreasing due to the COVID-19 pandemic.

After the announced of a package of measures to help self-employed workers through the crisis the Chancellor then hinted there could be an increase to National Insurance (NI) contributions for the self-employed, freelancers and contractors. He surmised that this would compensate for the coronavirus pandemic bailout and bring them in line with employed workers NI tax payments.

Speaking to the UK’s 5 million self-employed workers, he said, ‘it was becoming increasingly difficult to justify the inconsistent contributions of those who work for themselves compared with employees. If we all want to benefit from state support, we must all pay equally in future,” 

In a televised address, Mr Sunak said: “I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses.

“If we all want to benefit equally from state support, we must all pay in equally in future.”

The comment was said to be a reference to the fact that self-employed people pay lower rates of National Insurance and experts have said the Chancellor is likely to be planning a tax rise.

Many accountants said at the time, Sunak’s plans to raise NI payments for freelancers is “beyond doubt”.

In a response to this self-employed workers, freelancers and contractors justified it and said, they pay a lower rate of tax due to the risks they take when working for themselves. They do not have a guaranteed income every month, there will periods when they are not working, they don’t have the same employment rights that an employed worker does, as well as not receiving the benefits that employed workers do. Benefits such as pensions contributions, maternity pay, sick pay, holiday pay, health insurance, gym membership, car allowances and many more which are individual to the company you are employed by. 

The UK’s self-employed, freelancer workers contribute over £300 billion to the UK economy.

The UK’s Budget revision is due to take place in the autumn which is when Chancellor Sunak will most likely announce tax changes which may include the tax increase for the UK’s 5 million self-employed workforce. 

What does Self Employed mean in the UK?

A person is self-employed if they run their business and they take responsibility for its success or failure. If you are self-employed you are not paid through PAYE and you do not have the employment rights and responsibilities of employees.

PAYE is HM Revenue and Customs’ ( HMRC ) system which collects the UK’s Income Tax and National Insurance from employment. If none of your employees are paid more than £120 or more a week, are paid expenses and given company benefits, have another job or get a pension then as an employer you do not need to register for PAYE.  However, you do still need to keep payroll records.

What is a Freelancer in the UK?

A freelancer is also referred to as a freelance worker, working or going freelance or self-employed worker when it comes to employment. They can also be referred to as, a contractor or consultant. A freelancer is a person who is self-employed and someone who is not committed to a specific employer or business in the long term. 

The UK’s Internal Revenue Service consider freelancers as self-employed. If you earn money through being a freelancer you still have to submit your annual taxes as a business owner. You can take additional deductions being self-employed, however, you do have to pay self-employment tax. 

Increase in Taxes for Freelancers & Self Employed

The Proposed Changes

The proposed changes and increases to NI payments from self-employed workers or freelancers mean that as an example; IT and management consultants or contractors who work and are paid through their own company. Their company invoices a business for their services and are deemed as employed by a third party and the changes propose they will pay the same NI as employed workers.

Nimesh Shah of accountants Blick Rothernburg said: “Given that self-employed individuals have been granted an almost identical package of support to the employed worker, albeit, with some restrictions, this could be the precursor opportunity for the Government to end the disparity in the two tax regimes, which it has been wanting to do for some time.”

At this time, a self-employed individual pays 3% points less in National Insurance contributions on profits up to £50,000 compared to employees. Previous attempts to increase the NI tax failed after fierce criticism from the freelance worker sector.

Is this History Repeating Itself?

In March 2017, the Chancellor at the time, Philip Hammond attempted and subsequently failed to push through the same reforms during his time at Number 11.

At the time the government stated that self-employed people now have much the same pension and benefit rights as those in employment, so the disparity in National Insurance rates can no longer be justified.

The previous Chancellor, Philip Hammond proposed any tax benefits would be closed off to the self-employed and indicated the NI ‘tax break’ was no longer justified. He proposed at the time that any self-employed workers earning over £16,250 a year would see an increase to their tax payments. 

There was widespread criticism at the time due to a lack of alignment between the benefits available to self-employed workers versus employed workers which included auto-pension enrolment and sick pay. He also faced extreme party criticism at this time after backtracking from the Tory 2015 manifesto pledge on not raising taxes. Subsequently, this forced him to rethink and he made a U-turn on the proposal. 

Self-employed workers stated and still do that the lower rates of NI tax they pay are a justified trade-off for the risks they take in working for themselves with no guarantee of income, no employment rights, no company benefits and having to have savings of money they’ve earned for times when they aren’t working or when freelancer contracts do not come to anything as well cover their holiday or sick periods.

Employed Benefits some of which can include:

  • Auto-enrolment into company pension schemes and pension contributions
  • Maternity pay
  • Sick pay
  • Holiday pay
  • Health insurance
  • Gym membership
  • Car allowances 
  • Expenses

As well as many more which are individual to the company you are employed by. 

Some reports in the last 6 months have stated that the Chancellor is considering bringing the 9% Class 4 NICs rate paid by the self-employed into line with the 12% rate for employees which is a way the Treasury is reported to be looking at raising revenue after the billions spent on the coronavirus (COVID-19) support packages.

The Association of Independent Professionals and the Self-Employed (IPSE) has claimed:

Chancellor Rishi Sunak’s plan to raise the national insurance contributions (NICs) paid by self-employed workers would be unjust.

IPSE has said that making the 1.5 million self-employed pay for the support they did not get would be unfair as many self-employed workers were not entitled to claim anything if their company is set up as a limited company. It also said that given the slump in the number of self-employed individuals it would also be uneconomical to squeeze these workers further.

Andy Chamberlain, Director of Policy at IPSE, said: ‘The last few months have financially hammered the self-employed, with over two-thirds seeing a drop in demand for their work. Government support was some help to a proportion of the self-employed.

‘More noticeable, though, was the 1.5 million who fell through the gaps, leaving many financially devastated. The idea that this 1.5 million should now suffer a drastic tax hike to pay for the support they never got is unjust, uneconomical – and unbelievable. If the government is really considering this, it must stop now.”

Research published by the Association of Independent Professionals and the Self-Employed (IPSE) has shown that freelancers experienced a drop in income during the coronavirus (COVID-19) lockdown and the research showed an average drop of 25% during the second quarter of this year.

The reduction in revenue for self-employed workers and freelancers was caused by an unprecedented downturn in the number of days worked on average over the quarter. Between March and June 2020, self-employed workers and freelancers worked on average less than 6 weeks out of 13, which is a 50% decrease in their earnings.

This, combined with a 3% fall in freelancers’ average day rates, lead to a decline in average quarterly earnings from £20,821 in the first quarter of 2020 to £15,709 in the second quarter.

Inna Yordanova, the Senior Researcher at IPSE, said: ‘It’s been clear for some time that the economic impact of coronavirus has fallen particularly hard on freelancers.

‘Freelancers are a vital and extremely productive part of the workforce who have historically always been essential to recovery from economic depressions. If they are to play this crucial role, however, the government must make sure that in the event of a second wave, all freelancers have the support they need. Otherwise, going through another full lockdown and the resultant slump in work and income could be utterly devastating for them.’

How can Hayvenhursts Accountancy Services Help you?

At Hayvenhursts we are experts in all types of accountancy services and can help you understand your rights and how you can manage your business if there is an increase in Taxes for Freelancers & Self Employed announced.

We don’t offer a standard accountancy service, we get to know you and your business and will work alongside you to ensure your business has all the accountancy and expert business services that you need now and in the future. 

We use our highly trained and experienced team members to put together a team of tax experts for you who will understand your business sector, you and your needs which results in a service which is individual to you. We will work alongside you to identify savings, tax payments, improved cash flow and business efficiency through our defined and relevant accountancy and business services. These services will establish savings and opportunities for you which will improve your business’s short and long term success. 

Contact us today and find out how we can help you and your business.

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