Be Excellent To Each Other

Is the National Insurance increase Philip Hammonds’ Pasty Tax?

Yesterday, we reported on what, in my view, was the dullest budget in my career as a tax advisor. That isn’t to say that every previous budget has been full of excitement, but never before have we struggled to fill just three pages without resorting to ‘padding’. It was actually more difficult than normal to get our report out, and the team did a great job.

Then I got the train home, and started thinking about the National Insurance changes that led the news headlines. The mainstream press have focussed on the potential breaking of the 2015 Manifesto commitments, but I have little interest in that. I’m far more vexed by the reasons given for the changes, and whether they stack up.

First of all, for those watching the speech, the build up to the announcement was big on words, but little on detail. As the chancellor started to reach his climax, those of us watching on TV were starting to shift uncomfortably in our seats. This was going to be big, given the detailed introduction. This was going to hurt ‘us’. And then it came, a 2% increase in Class 4 NICs.

Oh. Just that?

The change will raise a fair amount of additional revenue for the Government, up to £645m in 2019/20 before the savings start to reduce (a result, I assume, of the presumption that fewer people will ‘volunteer’ for self employment status if the tax benefits are eroded. But in a typical budget, that isn’t a significant change. The 2% increase to IPT will raise £840m per year. The apprenticeship levy that takes effect in April will raise £2.6bn in its first year. In tax policy terms, the Class 4 increase is small potatoes.

However, do the reasons and justifications for the change stack up? Here I must declare a vested interest. I am self employed, and therefore pay Class 4 National Insurance and so my tax cost will be higher from 2018 due to the increase. However, let us consider the words from the Chancellors speech.

People should have choices about how they work, but those choices should not be driven primarily by differences in tax treatment.

I agree. However, we should also consider who is determining whether (say) a minicab driver is to be self employed, rather than employed, and ensure that the incidence of tax changes fall on the person who makes that decision, a point which this statement…

The lower National Insurance paid by the self-employed is forecast to cost our public finances over £5 billion this year alone

…neatly supports. The 2% increase in Class 4 NIC virtually bridges the employee NIC gap and raises £645m as noted above. The remaining £4.4bn must therefore be the employers saving. If we are tackling the ‘gig economy’ as suggested…

As our economy responds to the challenges of globalisation, shifts in demographics, and the emergence of new technologies we have seen a dramatic increase in the number of people working as self-employed

.. then why is the mechanism to address “new challenges” not targeted at those challenges, and instead applied to the whole self-employed base? New legislation takes effect from April 2018 to deal with off payroll working in the public sector, to bring people doing employment type jobs onto the payroll, and in fact we were awaiting the announcement that it would roll out to the wider employer base in the near future. After all, applying that measure to the wider commercial sector alone would fundamentally deal with the main issue presented in the speech:
But a fair system will also ensure fairness between individuals, so that people doing similar work for similar wages and enjoying similar state benefits pay similar levels of tax.

And as the chancellor tells us, the measure is ostensibly fair, as the chancellor also identifies that the fat cats will be equally affected:

Indeed, many of our most highly-paid professionals work through Limited Liability Partnerships and are treated as self-employed.

Hi! That’s me. Well, apart from the highly paid part obviously. But it isn’t fair, because of the way that the National Insurance system works – in that the increase in Class 4 National Insurance only applies up to the ‘Upper limit’ – that is £45,000 of profits next year. Above that, it remains 2%. So at £45,000 of earnings, you’ll pay in the region of an extra £740 when these changes take effect. At £450,000 of earnings, you’ll still only pay the same £740 extra per year.

This increase is therefore likely to be a mere scratch on highly paid professional working in the city (and will be largely adjusted out anyway by the increase in the Higher Rate income tax threshold that arrives at the same time), but a more material issue for the self employed plumber outside London.

Which makes the following statement all the more difficult to comprehend in context:

I have considered the possibility of simply reversing the decision to abolish Class 2 contributions, but the Class 2 NIC is regressive and outdated.

Which I now read as “I discounted the very regressive option and decided to instead choose the option that is still very regressive only slightly less so”.

So before I close this thesis, give my compliance partner a mild heart attack and have my other fellow partners wondering whether I’ve completely lost it by getting so irate at such a small issue, I’ll summarise my issues with the Class 4 Increase.

1. It isn’t fair. It takes an issue of tax saving on one party (the potential employer) and moves the part of the incidence to another party (the potential employee.

2. It isn’t fair. The incidence applies to all self employed taxpayers, whereas legislation exists to challenge the problem at source if only it were ‘switched on’ for the private sector.

3. It isn’t fair. The charge is regressive, with lower earners suffering far, far more in percentage terms than high earners.

The Pasty tax in the Omnishambles budget of 2012 never made it to the statute books. I hope that this change similarly never sees royal assent.