Self-employed workers could see their take-home pay squeezed by hundreds of pounds a year as a result of changes to the National Insurance system announced in today’s Budget.
Contribution rates for self-employed workers will rise from 9% to 11% over two years, equivalent to around £430 a year for someone earning £30,000. The rate will rise to 10% in April 2018, and then to 11% in April 2019.
Self-employed workers will still pay a lower rate than employees, who pay 12%.
The Chancellor, Philip Hammond, said the increase was to ensure people who do similar work for similar pay are treated fairly by the tax system.
Historically, self-employed workers paid lower National Insurance contributions, and received fewer state benefits in return. But since the state pension was overhauled in April 2016, this gap has closed.
The move goes against the Conservative party’s manifesto commitment to not increase National Insurance, VAT or income tax rates until 2020. But Mr Hammond said the increases will partly be offset by the scrapping of Class 2 contributions from April 2018, which will save most self-employed workers £145.60 a year (based on 2016/17 rates).
Find out more: Use the Which? tax calculator to settle your tax and National Insurance bill
Dividend tax rates
In addition to higher National Insurance contributions for self-employed workers, Mr Hammond announced that private business owners and people who hold shares outside an Isa or pension will have their tax-free dividend allowance slashed from £5,000 to £2,000 a year.
The tax rate on dividends will not change, but higher-rate tax payers will pay an extra £975 a year as a result.
| Dividend tax rates and thresholds for 2017 and 2018 | ||
| 2017/18 rates | 2018/19 rates | |
| Tax-free allowance | £5,000 | £2,000 |
| Basic-rate taxpayers | 7.5% | 7.5% |
| Higher-rate taxpayers | 32.5% | 32.5% |
| Additional-rate taxpayers | 38.1% | 38.1% |
Income tax rates
No changes to income tax rates were announced, but the Chancellor confirmed that the personal allowance will rise to £11,500 from April 2017. No commitments were given to the personal allowance or the higher-rate tax threshold beyond 2017/18, though the government said it would increase the personal allowance to £12,500 in this parliament.
| Income tax rates and thresholds for 2017 and 2018 | |||
| 2016/17 tax year | 2017/18 tax year | 2018/19 tax year | |
| Personal allowance | £11,000 | £11,500 | £11,500 |
| Basic-rate (20%) tax threshold | £11,001 to £43,000 | £11,501 to £45,000* | £11,501 to £45,000* |
| Higher-rate (40%) tax threshold | £43,001 to £150,000 | £45,001 to £150,000* | £45,001 to £150,000* |
| Additional-rate (45%) threshold | £150,000+ | £150,000+ | £150,000+ |
* Higher rate tax threshold will remain at £43,000 in Scotland
Isa allowances
No commitments were given to increase the annual Isa allowance, beyond the existing plans to increase the annual subscription limit to £20,000 a year from April 2017.
Capital gains tax
Rates for capital gains tax were also frozen. Higher-rate taxpayers will continue to pay 20%, except for second properties, where a higher 28% rate is charged. Basic-rate taxpayers pay 10%, or 18% on second property profits. Allowances rose by £200 for 2017/18.
| Capital gains tax (CGT) rates and allowances for 2017 and 2018 | ||||
| CGT rate on non-property profits | CGT rate on second or more property profits | 2017/18 CGT allowance | 2018/19 CGT allowance | |
| Basic-rate taxpayers | 10% | 18% | £11,300 | TBC |
| Higher and additional-rate taxpayers | 20% | 28% | £11,300 | TBC |