The Chancellor, Jeremy Hunt, has announced a National Insurance cut for the self employed from April 2024. The rate of Class 4 NICs will drop by 1%, and Class 2 contributions will be scrapped altogether.
But how much will small business owners benefit, in reality?
Class 2 to be scrapped, Class 4 to be cut by 1% in 2024.
In his Autumn Statement, the Chancellor confirmed that both employees and the self employed would benefit from cuts to NI rates.
For employees, the rate of Class 1 NI will be cut from 12% to 10% from January 6th 2024. Employees pay NI on wages above £12,570 per year and at 2% above £50,270.
The self employed (sole traders and partnerships) currently pay £3.45 per week in Class 2 contributions. They also pay Class 4 contributions at 9% on profits between £12,570 per year and 2% above £50,270.
Class 2 contributions will be scrapped, and the Class 4 rate will drop to 8% from 6th April 2024.
How much will sole traders be better off – in reality?
Although the NI cut will make good headlines, it is actually possible that the self employed will be no better off as a result, as a result of frozen tax thresholds plus the effects of inflation.
Significantly, the NI thresholds themselves remain frozen. Usually, the personal allowance plus income and NI thresholds increase each April (in line with the consumer price index the previous Autumn), but they’re not due to do so next year.
With CPI at over 6%, this means that – for many – they will be paying more tax overall next year in real terms.
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Chris Etherington from RSM UK said:
It’s clear that many would have been better off if the chancellor simply unfroze these tax thresholds and allowances. For some, this could be described as a tax cut that actually isn’t one.
Have the self employed got a worse deal than employees?
It would also seem that traditional employees have been handed a more significant tax cut than the self employed.
While sole traders will receive an 11.11% cut in the amount of NICs they pay (1/9 x 100), this isn’t as good as the 16.66% NI cut given to employees (2/12 x 100).
In addition, the self employed have to wait until April 6th before their change is implemented, while employees start to benefit sooner – from 6th January 2024.
This point was not lost on Richard Maitland, Partner at MHA, who commented:
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It is also puzzling that for the entrepreneurial self-employed, the NI rate was only cut by 1% not by 2% as it was for employees. The self-employed have been handed an extra tax cut in that Class 2 NI has been abolished but that only gives them back £3.45 a week.
We all remember how the self employed were not treated as favourably as employees when it came to government support during the pandemic. Is this further evidence that those who work for themselves still come out second best when it comes to tax?
Andy Chamberlain, Director of Policy at IPSE, made exactly this point earlier:
Whilst it’s a welcome relief to feel there is some support on offer from government, the self-employed sector is still reeling from gaping gaps in support during the pandemic and the implementation of the off-payroll working rules, which have had a devastating impact on hundreds of thousands.
You can read our guide to National Insurance for small business owners here.
Read the full details of today’s Autumn Statement on the HM Treasury site here.