Friday 10 March 2017

Education wanted re NIC & self-employment

OK - So I get the furore in the newspapers about this 'awful' Tory budget. A big part of me thinks the papers just see budget now and go looking for disaster, after the omnishambles budget of 2012

But genuinely, some of the readers here must be self-employed. How much is this hit going to actually cost you? I just can't see the hit outside of taking away egregious tax benefits.

How big is this storm - a teacup or a hurricane.

As pointed out yesterday, the issue is we cannot trust the press as they are made of many people who are affected by this change directly to the sense of proportionality is lost in a way that say a change on capital allowances would go totally unnoticed.

For example, Business Rates has been a big theme running pre-Budget - but as soon as journalists income is potentially hit, out this goes an in comes RAGE (as written by Sarah Vine).

Personally, many people I know earn a living through self-employment. They try optimize their earnings to around £40k per year. Between expenses and dividends, make their wives/husbands directors etc, contributing to pensions etc, they manage to pay no tax at all, bar NIC's which they need for their state pension entitlements. Their is no contribution at all to the state in real terms.

In a PAYE job to net £40k you would need to earn £63k. This gap at a base level is c.57%.

5 weeks holiday (which the company pays for, not the Government) is worth 10% of wages, so that would take the PAYE earnings needed down , plus pensions contribution from employer perhaps another 5% and other bits add can on another 1 or 2%. So being generous let us say it is worth 20% overall to be employed.

That still leaves a huge gap and also, not unimportantly, a big hole in revenues for the Government. We have not even considered employers NIC here. No wonder employers are keen to get everyone onto consultancy and zero-hours contracts. Self-employment, even up to a mid-level of income is a huge issue for the Government. As the gig economy kicks-in I can quite see why the Government is going to make a stand on this issue.

If only MP's would think of the numbers rather than the headlines.


Steven_L said...

I think it probably makes sense too. I've never been self employed but I've known many contractors in local government boast about how little tax they pay.

A friend working in the north west of England was ranting about these changes to me in January. He's been temping as a paralegal on £25 an hour or so. That works out about £48k cost to the council. HMT get as little back as he can get away with. I don't know the figure but there were all manner of things like a 350 mile weekly commute, and renting room in a house share he was claiming as tax-deductible expenses.

He was livid about it, but the upshot is is he going to get a permanent job at the council instead. Once employers NI and pension kicks in it'll probably not save the council much. But HMT will collect a much bigger wedge from him. I would have though a lot of 'permanent temps' in local government will have to re-assess whether their loss of pension perks etc is really worth it now.

If so, it'll be bad news for accountants. But anything that spells doom and glooom for accountants and lawyers is usually great for the rest of us.

Scan said...

I think the uproar is more to do with fatigue than figures. Fatigue of constantly being taxed (especially the little annoying ones) and constantly seeing the money spent catastrophically badly.

It also sounds like you're coming from a position that we should be taxed to pay for what government wants rather than the default position of government shouldn't be spending money it doesn't have and isn't entitled to.

Charlie said...

I work through a one man Ltd Co because, in my industry, that's pretty much the only way anyone will employ you. I'd love to be a permy with sick pay, holidays, pension contribs and paternity leave. Mrs Charlie is also self-employed, again because in her line of work, that's the only option.

That we pay barely any tax is a fallacy. The money either leaves the company as salary and is taxed as income, leaves as a dividend and is taxed (more favourably, but still taxed, including corporation tax), or stays in the company and is subject to corporation tax.

It's the intent and presentation that grates. Hammond presented this change as affecting well-built company director types, but really it's a signal that any self-employed people are in his sights, and we're not all minted. Trouble is, many people find themselves self-employed through no choice of their own. A better target for some financial pain would have been the corporations who enforce this situation.

Blue Eyes said...

CU the answer is: hardly anything. The main criticism seems to be that Hammond didn't spin this very well. He got rid of one class of NIC and put up the other one a bit to get some compensation from higher earners. In effect it is what has been happening to income tax for several years now.

Some are saying this is step one of merging NI and income tax; ironically one of the things promoted by many of the people now screaming.

Hammond should hold his ground and May should back him. The Times headline this morning suggested that May is thinking about backing down. If moaning Tory MPs think they will get a better government by tearing down their own one...

andrew said...

My OH is a (self employed) hypnotherapist and has always made it clear that she will work until just before paying taxes and then will stop.

Being able to balance her work/life makes her happy.

I have other friends who work as contract project managers.

In the late 90s-mid00s this seemed to be a really good gig.
but since then the rates seem to be dropping.

In bristol/swindon there is a small number of big financial services cos
that they all rotate around.

The thing is that increasingly this is a good thing for the employer, who has a pool of talent they can hire and lose at v. short notice and less so for the 'employee'

As such it seems to me that a lot of the tax advantages are being vacuumed up by the employer and the whole business is tending towards it being the government subsidising come cos through the tax system.

Sort of like tax credits but for some well paid people.

Sobers said...

Its not so much the cash, as the attitude, from what is supposed to be the party of the small businessman and woman. If the Tories aren't going to look after their core vote, and are going to start eyeing them up as 'Enemies of the People' they can forget getting their votes, thats for sure. People who are self employed work many more hours than the employed often for less cash reward than minimum wage, with no security whatsoever, and we thought a Tory government recognised all that effort deserved some small recognition in taxes due. Obviously the people who run the Tory party upper echelons are now so removed from such people they didn't even consider how this would sit with the sort of people who are the bedrock of their vote. They should consider what is happening to Labour as a result of them ignoring and even despising its old core voters, and remember they don't have a God given right to the self employed vote.

Nick Drew said...

Funny thing is, this item was only #3 on the Beeb's running order at 1:00 News.

I really would have thought they'd be rubbing Hammond's nose in this one.

Corbyn's people are utterly, utterly useless. Think what Campbell would have been making of this.

Sobers said...

Incidentally, where it all went wrong was extending Working Tax Credits to the self employed. This has given being self employed a massive safety net that never used to exist, and in the absence of such net much of the recent growth in 'gig economy' jobs would not have occurred, because people wouldn't have gone for the concept of such precarious incomes, particularly if you have a family. Remove WTC from the self employed and see the numbers drop drastically back to the old school self employed, rather than the pretend self employed we are increasingly seeing.

Electro-Kevin said...

Uncertain wages, the 'gig' economy ... yet London and SE house prices still rocket.

Steven_L said...

If the Tories aren't going to look after their core vote...

Their core vote is English pensioners and middle aged, middle class homeowners in general. You know, the sort of people whose houses are earning more than they are.

Why would they give a toss about self-employed NIC contributions?

Sobers said...

"Funny thing is, this item was only #3 on the Beeb's running order at 1:00 News."

Its the ultimate mind f*ck for the BBC, they want to rub the Tories nose in a massive screw up, but it involves people not wanting to pay more tax, which the BBC are instinctively in favour of. Thus they are pulling their punches, it was noticeable that after the initial headlines that stirred the pot, they immediately started bringing in leftist voices (IFS etc) who supported the rise. They couldn't make a really big song and dance about it in the way they did over Cameron's tax affairs say, because that would meant championing lower taxes.

dearieme said...

The cost, in accounting rather than economic terms, will be 7.5% x (£5k - £2k) = a couple of hundred. That's a bloody nuisance, but the the increase in the personal allowance by then will probably supply 7.5% x £1k = £75, and the increase in the higher rate threshold about 7.5% x £3k = the aforesaid couple of hundred. So in 18/19 the poor souls will, neglecting inflation, be better off by about £75 p.a. Storm in a teacup. But then no journalist has ever been discovered who can do arithmetic.

Charlie said...

BE: "Some are saying this is step one of merging NI and income tax; ironically one of the things promoted by many of the people now screaming."

If that's what it is, I wholeheartedly approve and Hammond should come out and say it. However, I doubt that is the reason, as it would affect pension-age people who are still in work, and it is abundantly clear that not upsetting rich pensioners is the Tories' number one priority. This is all about creating the appearance of "hosing the tax dodgers", while not actually raising any significant revenue, which is not the path a Tory government should go down.

Anonymous said...

"manage to pay no tax at all"

They do pay VAT on stuff they buy.

Don Cox

CityUnslicker said...

Don Cox - we all do that 'tis true.

Interesting comments all. I am not persuaded this is an attack on self-employment. I know the whole tax dodging is real, so I have little time for people who insist it isn't.

Still, my bigger gripe is that the Govt should be collecting the taxes, YES. because in this case the benefit does not seem to go on the whole to the workers, but the companies get cheap labour - at the expense of the Government.

There is no point creating lots of jobs, as the UK does, if it generates no tax revenue to pay for everything - it is as noted above part of the fallacy of working tax credits etc.

the Uk could well be creating millions of jobs that suck in immigrants and yet generate no return for the Government to pay for the infrastructure costs which are increased by the immigration.

Also, from capitalist perspective, why should employers pay NIC when they can choose workers who avoid it. This hollows out the tax base. Yes by all means lets have less taxes - but that is a different argument to the one here generated by the self-employment issue.


Blue Eyes said...

Agreed CU. Lots of the above comments are from a particular sort of self-employed person. Generally if you read C@W then you are a net creator and to be encouraged - that is our elite readership. However the same commenters do not seem to appreciate that there are plenty of scams and dodges about which need dealing with.

If I was wielding the pen I would scrap employers' NI altogether, merge employees' NI and income tax and dividend tax, ban employer pension contribution, severely limit paid sick leave and flatten the whole thing out.

Charlie said...

"I would scrap employers' NI altogether, merge employees' NI and income tax and dividend tax, ban employer pension contribution, severely limit paid sick leave and flatten the whole thing out."

So would I and, I think, anyone sane person who took a look at our tax code with a view to simplification. It would immediately reveal an individual's tax burden to them.

A simpler tax system, easier to enforce by HMRC with their current (or fewer) resources, should be the government's main priority once Brexit is finished. I would love to see the left tie themselves up in knots, instinctively against the revelation that people would experience when they see how much the state takes, while unable to make an argument against making it harder to use fancy accounting to hide money from the taxman.

Steven_L said...

Temps pay VAT??? I wish I had some of what you lot are smoking tonight!

If you are a temp, paying VAT (aka getting a circa £100k pa contract) is a good problem to have. I know a girl was made redundant from a cushy oil and gas job who is temping in a London investment bank and now has that exact problem. But getting paid £500 a day is a bit of a first world problem, and being from West Africa she accepts that, registered for VAT and coughs up.

I know a [another ex-oil and gas worker] very hard working self employed joiner / builder who is getting a lot of work and has to pay VAT, PAYE and ENIC. He only started up 2 years ago. When he had to become VAT registered, he couldn't just up his prices by 20% and make his fork out.

He found he had to stump up 20p on every £ of value he added, and funnily enough his customers never get a VAT invoice from HMRC.

Anonymous said...

The problem is, this isn't about tackling scams - it's about the HMRC playing Canute with a changing tax base, desperately trying to force the tide back into the PAYE ocean.

PAYE is easier for them, and rather than deal with the fact the economy is evolving, they're getting their taxation sabots out.

As said previously, I work in both the public and private sector, and, yes, I've seen the scammers. And they're vastly outnumbered by the people who are being told "your way of working is unwelcome"

Let's see what the consequences are. I'm quite prepared to be wrong about this, but I suspect this is going to pretty detrimental for the economy.

This, along with how badly "austerity" has been handled, I'm genuinely unsure if politicians have gotten increasingly less competent or the increased amount of exposure is just illuminating the failures that have always existed.

Sobers said...

My solution to the problem would be to create a halfway house between self employment and full employment. Basically take all the employment protection that employees get, monetise it, plus the employers NI contribution, and give it to the worker, then tax them at the same rate as the self employed. I reckon double the rate of the current minimum wage should do it, which would be about 30K/yr. The worker would still be formally employed, PAYE would apply, as would contracts of employment, so the State could be assured of getting its tax revenue, the company could have flexible work force and lower HR costs, the worker would get a decent wage (but would have to work for it in the same way a self employed person would, no safety net, no holiday/sick pay/redundancy etc). So the benefits and risks of self employment would be better aligned with such a contract, while traditional employment would have lower risks, better benefits but lower pay.

Where's the problem?