The National Insurance (NI) increase will affect all contractors, some more than others
Posted on 14th September 2021 by Paul Mason - Head of Tax Partnerships, Markel Tax
The political fallout from the NI increase for the Health and Social Care Levy will continue for some time yet. From the fact the Conservatives broke a manifesto promise by introducing the levy, to arguments over whether the increase will actually cover the country’s social care requirements, the Prime Minister is being attacked from all sides.
The question is, what impact will the NI increase have on the contractor market?
The changes will have a significant impact, as from October 2023 people with assets:
- Less than £20,000 will have their care costs fully covered by the state;
- Between £20,000 and £100,000 will still need to contribute, but still with state support.
It is widely regarded that those freelance contractors with long track records will not qualify to be fully covered by the state and many could find themselves with assets in excess of £100,000 at the end of their careers.
Adults in employment – including those over state pension age – will pay an additional 1.25% from April 2022, which will mean someone earning £20,000 per annum will be approximately £130 worse off. Those earning £60,000 per annum will pay a further £630; and those earning £100,000 will be £1,130 worse off each year.
In the past, limited company (PSC) contractors would have been protected to a certain extent from such a change but the realities of the off-payroll working (IR35) rule changes implemented in April 2021 are that many contractors have been forced to take employed roles directly with end clients and as employees will feel the full impact of the NI increase.
Even those working on ‘outside IR35’ engagements, whose company is being paid gross and who can therefore remunerate themselves on the basis of a lower salary but higher dividend, will also be affected. In addition to the 1.25% increased NI contributions (NICs) their company will make as an employer and the 1.25% they will pay in employee NICs, the 1,25% increase will also apply to the tax on dividends.
We must spare a thought for those contractors from April 2022, who find themselves working through their PSC on an ‘inside IR35’ engagement taxed at source by the fee payer or operating through Umbrella companies are likely to suffer a double whammy.
If day rates aren’t increased to allow for the 1.25% NIC increase that employers will also be paying, you can be sure that stories will emerge of how this increased employers NI cost will have been passed on, ensuring contractors will see a further reduction in their take home pay.
The self-employed will not escape either and will face the same additional burden faced by employees as it is expected that class 4 contributions currently payable on profits at 9% up to £50,270 and 2% thereafter will increase to 10.25% and 3.25% retrospectively.
We all appreciate that there is a problem with how social care is funded in the UK, or under-funded as the case may be. It is an issue which has been exacerbated by the Coronavirus pandemic. The reality is that we are all going to have to start paying more tax to fund the recovery from the effects of the pandemic on the UK economy.
No tax rise is ever going to have an equal effect on taxpayers. Yet contractors who might have genuinely been ‘outside IR35’ previously, but because of the risk averse nature of their end clients, can no longer engage through their PSCs and are paying much more tax than they were.
The Government winning Wednesday’s vote is only going to add to their pain.
Contact our team today to find out how we can help you protect yourself against the risks associated with IR35. Call 0333 321 1403
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