Set up a company to beat self-employed tax raid, say experts

SELF-employed people earning any more than the average income would be better off turning themselves into a company, accountants have warned following Philip Hammond’s shock Budget tax raid.

The Chancellor prompted outrage last week by hiking National Insurance contributions for the self-employed and accountants now suggest any sole trader earning more than £25,000 a year could be better off becoming a limited business.

Accountant Russell Smith said: ‘Pre-Budget I would have said to anyone: “If you earn £30,000 in your business, you should be a limited company.” Post-Budget, I’m probably looking at £25,000.’

The national average wage is currently about £26,000 a year.

Smith added: ‘Ultimately lots of self-employed clients will be looking at going to limited company, not just because of the increase in National Insurance Class 4, but also because the corporation tax rate is going down in April from 20 to 19 per cent, and to 17 per cent in 2020. So there is a bigger gap than before between the two.

‘Let’s say you earn £30,000, the tax saving will be roughly £1,400 a year. It can go up as high as £2,500 to £3,000 if you earn £50,000. So the more money you earn, the more tax you save.’

Jason Kitcat, head of policy and public affairs at Crunch Accounting, an accounts specialist for self-employed and freelancers, said: ‘The Chancellor is planning to raise tax from the selfemployed and small businesses without any consultation. What’s more, he’s doing this before the Taylor Review [into the growth of self-employment] has even completed its work.

‘But promising to consult on increased parental support for the self-employed is welcome.

‘Now is the right time to be reconsidering tax and welfare in light of the changing world of work, but it needs to be done collaboratively.’

Jo Bateson, private client partner at accountancy giant KPMG, said: ‘The Chancellor has announced that the annual dividend allowance will be reduced to £2,000 from £5,000, as part of measures aimed at reducing the disparity between those working via a personal service company and those in self-employment, against everyday employees. We will have to wait to see if the Chancellor seeks to reduce this disparity further. However, he has made his intentions clear.’

Chris Blundell, employment tax partner at accountancy firm MHA MacIntyre Hudson, said: ‘The Chancellor’s mission to make tax fairer and claw back some of the £5billion a year tax losses from self-employed workers has misfired badly and will catch a lot of innocents.’

Chris Bryce, chief executive of IPSE, the self-employed and freelancer association, said: ‘Many self-employed people will have voted for the Conservatives on the basis of their commitment not to increase National Insurance, and we question the advice that led them to abandon a key Manifesto pledge. We are urgently seeking meetings with the Prime Minister and Chancellor to discuss the detrimental impact this week’s Budget will have on the self-employed.

‘A delay in the vote will hopefully give the Government more time to reconsider.’

Following a backlash to the changes, including from Tory MPs, Theresa May said: ‘What we will do this summer is publish a paper which will explain the full effects of the changes. The Chancellor will be speaking, as will his Ministers, to MPs, business people and others to listen to the concerns.’