How will the National Insurance increase affect contractors?

However, we will concern ourselves with the implications for the contractor marketplace – and these changes will make a considerable impact, as from October 2023 people with assets:

• less than £20,000 will have their care costs fully covered by the State;
• between £20,000 and £100,000 will still need to contribute, although with state support.

Whilst one shouldn’t generalise and no-one knows what the future holds, you might suspect that most contractors – particularly those with a long track record as freelancers – will not qualify to be fully covered and many might also find themselves at the end of their careers with assets in excess of £100K.

More specifically, working adults – including those over state pension age – will pay an additional 1.25% from April 2022, which will add around £130 per year to someone earning £20,000; someone on £60,000 will pay a further £630; and those earning £100K will be £1,130 worse off.

All contractors will be hit, but some more than others.

In the past, limited company (PSC) contractors would have been somewhat protected by such a change, but the realities of the off-payroll working rule changes implemented this April are that many contractors have been forced to take employed roles directly with end clients and as employees will feel the full impact.

Nevertheless, even those on ‘outside IR35’ engagements whose company is being paid gross and who can therefore remunerate themselves on the basis of a lower salary but higher dividend element, will also be affected. In addition to the 1.25% additional NI contributions their company will make as an employer and the 1.25% they will pay in employee NICs, the 1.25% increase will also apply to the tax on dividends.

However, spare a thought for those contractors who from April 2022 find themselves working through their PSC on an ‘inside’ engagement taxed at source by the fee payer or operating through Umbrella companies. These contractors are likely to experience greater consequences of this. If day rates aren’t increased to allow for the 1.25% NIC increase that employers will also be paying, you can be sure that this increased employers NI cost will effectively be passed on and contractors will see a further reduction in their take home pay.

The self-employed will not be able to avoid this either and it is expected that class 4 contributions currently payable on profits at 9% up to £50,270 and 2% thereafter will increase to 10.25% and 3.25% retrospectively. This will add the same additional challenges faced by employees.

Everyone appreciates that there is a huge problem with funding the cost of social care in the UK, an issue which has been exacerbated by the pandemic. Indeed, if we are being honest with ourselves, we all know that we are going to have to start paying more tax generally because of the effects that Covid-19 has had on the economy.

It is not the purpose to argue about the fairness in the tax system and no tax rise is ever going to have an equal effect on taxpayers. Yet contractors who might have genuinely been outside IR35 previously, but because of the risk averse nature of their end clients, can no longer engage through their PSCs and are paying much more tax than they were. The Government winning Wednesday’s vote is not only going to add to their concerns.

About the author

Paul Mason is the Head of Tax Partnerships at Markel Tax. Paul joined the Markel Tax team in 1997 and has ben closely involved with IR35 since 2001, providing advice on the subject to contractors, end clients and fee-payers.

Paul is a regular speaker on IR35 and works closely with Markel Tax’s investigations specialists to ensure freelancers get the best defence in an IR35 enquiry.

Sources

https://www.which.co.uk/news/2021/09/national-insurance-tax-to-be-hiked-by-1-25-to-fund-social-care-crisis-how-much-more-will-you-pay/

https://news.sky.com/story/pm-announces-1-25-national-insurance-hike-to-pay-for-social-care-in-england-12401278

https://www.ftadviser.com/pensions/2021/09/07/pm-announces-1-25-levy-and-dividend-tax-to-fix-social-care/

https://www.theguardian.com/society/2021/sep/08/boris-johnson-wins-commons-vote-on-national-insurance-hike