Scottish backlash as tax hike hits self-employed

Scottish business leaders and finance experts have slammed Chancellor Philip Hammond’s budget decision to increase National Insurance bills for self-employed.

While Mr Hammond’s decision yesterday left him facing tricky political questions in the form of accusations that he has broken a Tory manifesto pledge not to raise taxes, the move has also been described as a fresh burden on the shoulders of small business owners in a time of economic uncertainty.

Andy Willox, Federation of Small Businesses’ Scottish policy convenor, said: “The Chancellor’s £1 billion tax hike on those that work for themselves is the wrong move at the wrong time.

“Not only does it undermine the Chancellor’s plan for the UK to be the best place to start and grow a business, it puts at risk the success of small town Scotland. What signal is the UK Government sending out by hiking self-employed national insurance contributions while cutting corporation tax?

“It is obvious that many successful local communities have high numbers of people who work for themselves. But, many of the self-employed are people on relatively modest incomes – without the benefit of things like paid holidays and sick leave.

“We’re looking for everyone who cares about those that work for themselves in Scotland to encourage the Chancellor to rethink this wrongheaded move.”

Laura Mair, EY Tax Partner in Scotland, said:“The Chancellor acknowledged today that the world of work is changing, pointing out that he himself has worked both as an employee and as self-employed. But those thinking that this might have made him pause before making changes will be disappointed as today he pre-empted the conclusions of Matthew Taylor’s review into the modern ways of working by raising National Insurance Contributions (NIC) for the self-employed.

“Increasing the NIC main self-employed rate (Class 4) by 1 percentage point in April 2018 and another the year after, raising £645 million in 2019-20 alone, the Chancellor has more than offset the £430 million abolition of Class 2 announced by George Osborne. This amounts to a net rise of almost £50 per month for higher earners.

“In contrast to the concerns of his predecessor, the Chancellor seemed unperturbed by the fact that this was a breach of a 2015 manifesto commitment not to increase National Insurance Contributions.

“But this change is likely to be just the start, with the forthcoming report on employment practices bound to prompt further changes, as the Chancellor considers the bigger picture. In the meantime, his changes to the Dividend Allowance will impose more taxes on another form of work, namely owner-managers, slightly offset by the one percentage point rate cut in corporation tax to 19 percent from April this year.

“All in all, the strategy behind the taxation of work didn’t become much clearer today and the Chancellor has left himself with the opportunity to boldly go where no Government has gone before.”

Defending the move, Mr Hammond said there had been a “dramatic increase” in the number of people working as self-employed - and that the reason for doing so should not be “differences in tax treatment”.

The disparity between the rates paid by the self-employed and employees “undermines the fairness of our tax system”, he said.

However, Liz Camerson, chief executive of the Scottish Chambers of Commerce, said: “The Chancellor may paint this as a move towards the equalisation of tax rates between the employed and self-employed but the reality is that this is a tax increase on the self-employed at a time of economic uncertainty. Coupled with the decision to reduce the tax-free dividend allowance for businesses from £5,000 to £2,000 from April next year, these are measures that will make life that little bit more difficult for individuals and businesses.”

On its own, the change announced in the Budget will affect 2.5 million people.

But a separate category of National Insurance payments, Class 2, are already due to be abolished from 2018, and Mr Hammond said that taken together the two changes meant NI payments for a self-employed person would be on average 60p a week higher.

The Treasury later said that 1.6 million people would, on average, pay £240 more a year and no-one earning less than £16,250 would be worse off.