The National Insurance Contributions (NICs) for the self employed which the chancellor of the exchequer Philip Hammond called the “lifeblood of our economy”, are set to rise while the tax-free allowance for dividend payments from their private companies is to be slashed by more than half.
Hammond’s “aggressive” cuts to the tax-free dividend allowance came as an unwelcome surprise, with the previous level only having been in place for less than a year.
From April 2018, director/shareholders of companies and private investors with more than £50,000 held outside an Isa wrapper will see their tax-free limit cut from £5,000 to £2,000.
Hammond said it was an “extremely generous tax break for investors with substantial share portfolios” and he was therefore addressing it for reasons of fairness.
“The dividend allowance has increased the tax advantage of incorporation,” he said.
“I have decided, therefore, to address the unfairness around director/shareholders’ tax advantage, and at the same time raise some much needed revenue.”
He said about half the people affected would be director/shareholders of private companies and the remaining half were investors in shares with holdings worth, typically, over £50,000 outside Isas.
Jason Hollands, managing director at Tilney, said while the motivation behind the move was clear in terms of equalising the remuneration structures for the self-employed, it places even more emphasis on the importance of using tax-efficient vehicles and arrangements such as “Bed and Isa”. This arrangement allows existing shares to be disposed of and the proceeds reinvested into an Isa wrapper without the additional dealing charges.
Hollands said the “aggressive” cut was clearly aimed at employees and directors of small businesses who might remunerate themselves partly or wholly through dividends rather than salary.
But he added: “This cut will also hurt investors with dividend generating shares and funds held outside of Isas and pensions and is therefore de facto another raid on the middle classes.”
Fidelity said the cuts were expected to net the Treasury £930m by 2021/22.
Ed Monk, associate director for personal investing at the group, said: “The Chancellor’s moves to make the tax treatment of employed, self-employed and incorporated workers fairer will catch a few of the wealthiest investors in stocks and bonds as well.
“On balance, it’s bad news for the wealthiest shareholders, but good news for those able to make the most of their tax-free allowances.”
NIC hike
Business owners and the self-employed – 15.1% of the UK population – received a further blow as Hammond tried to close the gap between the amount of NICs paid by employees and those working for themselves.
While historically different levels of NICs were designed to reflect differences in state pensions and contributory welfare benefits, he said alongside the new state pension, these differences were no longer relevant.
Building on George Osborne’s scrapping of the class 2 NICs from next April, class 4 NICs for the self-employed will rise from 9% to 10% from April 2018, and rise further to 11% in April 2019.
