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National Insurance cuts take effect but contractors left in the cold 

Changes announced during Autumn Statement effective from start of tax year – but contractors unlikely to benefit

Following the start of the new tax year on 6th April, National Insurance reforms have come into effect, in a move which offers some sections of the self-employed a tax cut – but leaves others, like limited company contractors, excluded.

The reforms were announced at the Autumn Statement, and are preceded by other cuts to National Insurance Contributions (NICs) which took effect in January this year.

According to government estimates, more than two million self-employed will benefit from the cut, “saving an average self-employed person on £28,000 over £650 a year”. 

In addition, 27m permanent employees – including umbrella workers – are expected to save around £900 per year. The government has launched a tool to help people calculate how much they could save.

Sole traders and umbrella workers, then, as well as permanent employees, are those best placed to realise the savings as a result of the tax cut.

However, depending on how contractors pay themselves from their limited companies, the change means little to this segment of the independent workforce. 


NI represents ‘double taxation of work’, says PM

Quoted in the government’s press release which confirmed the cut, Prime Minister Rish Sunak said the change “marks the next step in our plan to end the unfairness of double taxation of work by abolishing National Insurance in the long term”.

NICs have been cut twice under this government in the last 12 months. First, the Chancellor used the Autumn Statement to announce the first round of changes, some of which took effect in January this year

First, Class 1 NICs fell from 12% to 10%. Class 1 NICs are paid via PAYE, and the change therefore primarily benefitted umbrella workers. At the Spring Budget, Class 1 was further cut, from 10% to 8%, effective 6th April.

This coincided with the planned changes to Class 2 and Class 4 NICs – paid by the self-employed – which were announced in the Autumn Statement and effective from the same date. Together, these are “the largest cut to NICs in history”, according to the government. 


Government ‘sapping strength’ from the contracting sector

While the measures have been welcomed, choosing to cut NICs means that contractors – who have faced an increasingly aggressive tax landscape in recent years – are unlikely to benefit.

Andy Chamberlain, Policy Director at IPSE, said that “the National Insurance cut is good news for those operating as sole traders”, but “hundreds of thousands of contractors with limited companies will be wondering if the government has forgotten about them altogether”.

Chamberlain noted that, in addition to being excluded from the NICs reforms, contractors are also facing a squeeze in other areas.

“Whilst the government has chipped away at the dividend allowance, fiscal drag will see more contractors paying even higher rates of tax on their dividend income”, he said. 

“Reforms to IR35 rules are also sapping the sector’s strength, with one in 10 respondents to our survey of 1,300 contractors reporting that they were out of work due to the impact of the reforms”, he added, referencing the findings of a recently published IPSE report.

“Contractors already make an enormous contribution to the economy – instead of ignoring the sector, government should be supporting these individuals to achieve more for themselves and their clients”, Chamberlain concluded.

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