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Autumn Budget 2018: private contractors face National Insurance crackdown under IR35 reform

Find out how your income tax will be affected

Autumn Budget 2018: private contractors face National Insurance crackdown under IR35 reform

As part of the Autumn Budget 2018, Chancellor Philip Hammond has announced that reforms to IR35 – which previously hit the public sector – will now be rolled out to private sector businesses, meaning some contractors may see their National Insurance contributions go up.

Reforms to the off-payroll working rules were introduced to the public sector in 2017, and there’s been a consultation on bringing the stricter rules into the private sector between May and August this year.

Which? explains what the changes are, and what they’ll mean for your tax bill.

What is IR35?

IR35 targets people working off-payroll through an intermediary business – usually this is a personal service company (PSC).

You’re classed as being ‘inside’ of IR35 if the person providing the services for the company would be an employee if the PSC wasn’t in place.

There are three main ‘tests’ that can check whether you’re operating inside IR35:

  • whether you have control over how work is completed – for example your working hours, or the location where the work is carried out. If the choice isn’t down to you, you will likely be inside of IR35
  • whether there’s a mutuality of obligations – for example, is the company obligated to give you more work once you’ve finished the task. If it is, you may be inside of IR35
  • whether you personally have to complete the work you do. To be outside IR35 there should be a substitution clause in your contract, and you should be in control of the substitute.

Under Mr Hammond’s plan, the responsibility of deciding whether a contractor is correctly working outside IR35 will move from the contractor themselves to the organisation employing them. This mirrors a change introduced to public sector organisations last year.

Why is there a clampdown on this rule?

As we recently wrote in the lead up to the Budget, the changes are mainly to target ‘synthetic self-employed’ people who set up PSCs with the sole purpose of paying less National Insurance.

While those employed by PSCs have to pay the same Class 1 rates of National Insurance as other employees (in addition to employer’s contributions), those who are employing themselves through a PSC can effectively ‘underpay’ themselves to reduce the amount of NI coming out of their wages, and reap more rewards through dividends – which are taxed at a lower rate and are exempt from National Insurance contributions.

Following the roll-out of the reform in the public sector, Mr Hammond asserted that there was still widespread non-compliance in the private sector and that’s why the changes are being extended.

When will the changes take place?

The extended IR35 rules will be rolled out to large and medium-sized businesses in April 2020. Medium-sized businesses are those with 50-249 employees; large businesses are those with 250 or more employees.

What are National Insurance rates in 2019-20?

National Insurance rates will stay the same in 2019-20 – but the thresholds have gone up, meaning you can earn more before paying a National Insurance contribution.

This could be good news for lower earners, who can now earn £208 a year more before they’ll need to pay any National Insurance.

The thresholds for higher earners has also increased to £8,632, while the 2% surcharge will now kick in at £50,000.

But the rates you pay will remain the same, as shown in the table below.

Employed 2018/19 Employed 2019/20
How much you earn Class 1 rate How much you earn Class 1 rate
Less than £8,424 0% Less than £8,632 0%
£8,424-£46,350 12% £8,632-£50,000 12%
More than £46,350 2% More than £50,000 2%

Following a previous call to scrap them, Class 2 NI rates are here to stay, rising by 5p a week, with a slightly increased lower profits limit.

In 2016, Philip Hammond announced that Class 4 rates were going to be raised to 11%, but a huge backlash meant that the changes were soon cancelled.

Class 4 rates have remained at 9% and 2% respectively, which you pay in addition to Class 2 rates.

Self-employed 2018/19 Self-employed 2019/20
How much you earn Class 2 and Class 4 rates How much you earn Class 2 and Class 4 rates
Less than £6,205 0% Less than £6,365 0%
£6,205-£8,424 £2.95 per week (Class 2 only) £6,365-£8,632 £3 per week (Class 2 only)
£8,424-£46,350 9% + £2.95 per week £8,632-£50,000  9% + £3 per week
More than £46,350 2% + £2.95 per week More than £50,000  2% + £3 per week

Like Class 1 contributions, the thresholds for payment have also changed.

You can see how the amount you can earn before paying Class 2 and Class 4 has crept up in the graph below.

Class 3 contributions – which are usually paid by anyone who has gaps in their National Insurance contributions – have also gone up slightly, by 35p a week.

Gaps in your National Insurance contributions could affect your state pension in retirement, and may also affect your entitlement to some benefits.

These changes will come into force from 6 April 2019.

Unemployed/exempt 2018/19 Unemployed/exempt 2019/20
Type of contributions Class 3 voluntary contributions Type of contributions Class 3 voluntary contributions
Amount £14.65 per week Amount £15 per week
  • Find out more: National Insurance rates – we explain more about the current rates, and which rates you’re likely to pay.

How much National Insurance will you pay?

As to how the changes might affect how much tax you pay, we’ve come up with some worked examples.

Someone who is employed and earns £30,000 a year would have had to pay £2,589.12 for Class 1 National Insurance during the 2018-19 tax year. But in 2019-20, they’ll have to pay £2,564.16 – a difference of £24.96. It’s unlikely this will be particularly noticeable over the course of the year, but it’s likely to be welcomed.

As for self-employed workers, someone who has profits of £20,000 a year would pay £1,195.24 in 2018/19 through a mix of Class 2 and Class 4 contributions. But in 2019/20, the total they’ll pay is £1,176.52 – a difference of £18.72.

Use our National Insurance calculator for the 2019-20 tax year

Simply enter your employment status and your annual income/profits into the calculator below to find out how much National Insurance you’ll pay in the 2019/20 tax year, starting on 6 April 2019.

The calculator assumes self-employed workers will pay Class 2 contributions.

Why have National Insurance thresholds changed?

Chancellor Philip Hammond announced that the age of austerity was coming to an end, but that ‘discipline will remain’.

This could be the reason for the fairly small change in National Insurance, which will mean people are paying slightly less tax.

In the run-up to the Budget, there has been much speculation about the increase of this tax – from upping it by 1% to help fund care costs and the NHS, to an eventual 5% hike necessary to fund the state pension.

We wrote an in-depth article about the possible changes a couple of weeks ago.

There’s been none of the hikes mentioned, which should benefit workers in the next tax year.

What is National Insurance?

National Insurance is a tax you pay on your earnings, in addition to income tax.

Every person in the UK is issued with a National Insurance number before they start work – usually when they’re 16. They’re set by the Department of Work and Pensions, and they’re used by the government to track how much tax you pay throughout your working life.

There are different rates depending on if you’re employed or self-employed – and self-employed people only have to pay the tax on their profits, via a self-assessment tax return.

The contributions you make are paid into a government fund, which pays for some state benefits such as statutory sick pay, maternity leave, some unemployment benefits and the state pension.

National Insurance and the state pension are intrinsically linked; to qualify for the maximum amount of state pension when you are eligible to retire, you must have made at least 35 years’ worth of state pension contributions.

If you’re not working for a stretch of time, you may be eligible to claim National Insurance credits, which will fill the gap between contributions.

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