Tax experts from Wolters Kluwer suggest that changes to NIC rates may drive more small business owners to set up companies in order to offset the higher NIC levels for self-employed people, contrary to the wishes of Chancellor Philip Hammond.

Although the tax-free allowance for dividends paid to company directors is being reduced from £5,000 to £2,000, Wolters Kluwer tax experts say that many owners may be better off running their businesses through a company than staying as sole traders.

In his speech Mr Hammond said: ‘We must ensure that our corporate tax regime does not encourage people to form companies simply to reduce tax liabilities.’ But Stephen Relf, senior tax analyst at Wolters Kluwer said: ‘Although there is to be further consultation on the taxation of the self-employed and limited companies, in the short term the changes announced today are likely to drive some sole-traders to incorporate.’

The Chancellor announced that Class 2 NICs, which are currently paid by many self employed people, would be abolished as planned from April 2018. From that date the self employed will pay Class 4 NICs, which will rise from 9% this year to 10% in April 2018 and to 11% in April 2019.

Employed people, who Hammond said make up 88% of the UK working population, pay NICs at the rate of 12% of earnings above £672 per month and their employers pay an additional 13.8% of an employee’s salary above £676 per month as employers NICs.

Wolters Kluwer tax analyst Meg Wilson said: ‘The government had gone a long way, including drafting legislation to withdraw the NIC Employment Allowance in these circumstances, so it is quite a concession to back track on this and it will help smaller businesses.’

According to the Treasury, the move will bring in an extra £970m in just two years, with more revenue hikes expected after 2020/21.

Further reading

Additional information on the self-employed NICs 4 increase is available here.