Concern for contractors over reiterated plan to raise national insurance

The contractor sector is concerned and cross at the government reiterating it will go ahead with a 1.25% hike to national insurance contributions from April.

The reiteration by Boris Johnson and Rishi Sunak, in an article for the Sunday Times at the weekend, came after the business secretary and other top Tories privately criticised the hike.

Former HM Treasury secondee, Rebecca Seeley Harris, believes that at odds with the prime minister and chancellor, Kwasi Kwarteng and his allies were probably onto something.

'Government should rethink'

“People are being crippled by the cost of living as it is, but the NI rise will hit those working through an umbrella the most,” the tax lawyer began in a statement to ContractorUK.

“These [workers] will effectively be paying both [inflated] employer and [inflated] employee contributions, even though it is illegal to deduct employer NIC from wages directly.

“Or if you’re a contractor working via a limited company…you will [still] pay the [1.25%] rise on any dividends that you distribute. So I think the government should rethink.”

'£255 extra in tax per worker'

According to the reiterated Treasury plan, national insurance contributions for employees, employers and the self-employed will increase for the 2022-23 tax year by 1.25%.

From April 2023, the NIC rates will fall back to the 2021-22 level, but with a new 1.25% Health and Social Care Levy added on, estimated to raise £17billion a year.

The projected cost per worker -- £255 a year -- is a burden that umbrella company Orca Pay Group says contractors should try to get out in front of, and now.

'Ask if employment costs are included'

“Contractors must ask whether the ‘employment costs’ are included or excluded from the agreed rate [from April] they have with the agency,” advises Orca’s CEO Robert Sharp.

“For contractors who agree a contract with ‘employment costs’ inclusive of the agreed rate, it means that the employment costs will be deducted from the rate that they have agreed.

“So £300 may be the assignment rate, but once Employer NI, Apprenticeship Levy, pension if applicable and umbrella margin gets deducted, their actual pay rate may be just £260.”

'We've always supported people through the pandemic'

In their article at the weekend, Mr Johnson and Mr Sunak called themselves “tax-cutting Conservatives,” who believe “people are the best judges of how to spend their money.”

They wrote: “We have always supported people through the pandemic and we will continue to look at the best ways to support people through the recovery.”

Even more galling for contractors who received little or no covid income support, and due to irk the contractor sector at large (still adjusting to unwieldy IR35 reform), the pair continued:

“We want to…turn the UK into the enterprise centre of Europe and the world. We want lighter, better, simpler regulation…[ but] we are also Thatcherites, in the sense that we believe in sound money. There is no magic money tree.”

'Ask for an updated pay illustration'

Crawford Temple, CEO of Professional Passport says it’s contractors who need to be the enterprising ones -- if they are to avoid a 2.5% tax hike upending their livelihoods.

“I urge any contractor who is currently working under a contract that extends beyond April to ask their umbrella for an updated pay illustration that takes the new rates into account.”  

“That way, they will at least know the impact that the increase will have and can prepare appropriately for this.”  

In a statement to ContractorUK, Mr Temple further advised: “They could also approach the agency to see if any rate increase is available, due to the higher levels of national insurance.”

'Cumbersome'

But it is the policy itself which raises questions according to Tim Stovold, a partner at chartered accountancy firm Moore Kingston Smith.

“If the objective was to raise a large amount for the Treasury with everyone contributing a small amount, wouldn't a smaller increase to the income tax rates have been a better idea?

“The 1.25% increase to NI and the dividend tax rates makes for a cumbersome tax system. How have we ended up with a 39.35% rate of tax?!”

In a post after the PM floated the hike last year, Mr Stovold also asked: “What is the logic for workers and savers to carry the burden but leaving buy-to-let landlords alone, for once?”

'Guarantee'

However to Mr Kwarteng, it is not just logic which the hike in contributions goes against.

In the summer, the business secretary reportedly said, “I don’t see how we could increase National Insurance,” given the Tory manifesto (2019) called retaining its level a “guarantee.”

Earlier this month and for its clientele of dividend-paying contractors, advisory Qdos described the 1.25% increase as “another blow” dealt by “short-sighted tax reforms.”

Interestingly, “obvious paths to side-step the charge on dividend income,” exist, Mr Stovold has advised, like “pensions, ISAs and bonds, to hold dividend-generating investments.”

That may partly explain why approached on Friday, Qdos’s CEO Seb Maley acknowledged that it’s not limited company contractors who will feel the sting of higher NICs the most.

'Will hit umbrella workers doubly hard'

“The incoming social care levy will hit umbrella workers doubly hard,” Mr Maley told ContractorUK.

“Not only will their income be affected by the employers’ NICs rise, but the increase in employees’ NICs will also reduce the amount they take home after tax.

“It’s no wonder the chancellor is [being called] to rethink this hike, which poses a real threat to those operating via umbrella companies.”

'Dividend-dependent contractors won't be stung twice'

Run by Ms Seeley Harris, law firm ReLegal Consulting spelt out why limited company contractors will be less squeezed than their umbrella counterparts from April.

“Limited company contractors will also be paying both employer and employee NICs on any salary.

“Yet that is likely to be only minimal,” she said, “ because of the way that limited company payments are structured. So, if the majority of your income comes from dividends, you will not be paying both.”

The author of CEST Explained, Ms Seeley Harris said that while she wants ministers to “rethink” the NI rate rise, she was advising contractors ‘not to hold their breath.’

Undeterred, the Institute of Directors has launched a petition against the planned rise in National Insurance Contributions which, at the time of writing, has attracted more than 66,500 signatures.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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