Featured post

MILLIONS OF SMART METERS MAY HAVE TO BE REPLACED

Six million smart electricity and gas meters installed in homes since 2012 may have to be replaced to make them work with a new communica...

Sunday, 5 March 2017

TAXING A SELFIE

Self-employed people pay up to £1,000 a year less in National Insurance contributions (NICs) than employed people on the same pay. That is because employees pay 12 per cent of their earnings between £8,060 and £43,000 but the self-employed pay only 9 per cent on the same band. For someone on average pay the selfie saving is £568 a year — nearly £11 a week. A selfie earning more than £43,000 will save £1048 this tax year, a gain of £20 a week over their similarly paid employed colleague.

The present system began in 1978. Employees who paid the full rate of NICs were paying into the state earnings related pension scheme (SERPS) which would give them a higher state pension. The self-employed did not pay into SERPS so they paid lower national insurance contributions.

However, those reaching pension age from 6 April 2016 no longer get SERPS (or its successor State Second Pension). Everyone with at least 35 years of national insurance contributions will in future get a flat £155.65 weekly state pension – employees and self-employed alike. So there is no longer any justification for the 3% difference in the national insurance contributions they pay. This concession to the selfies costs nearly £1bn a year.

In fact the loss to the Treasury is even greater. An employee also generates NICs from their employer at the rate of 13.8% on every pound earned over £8060 a year. If selfies also paid employer’s contributions that would bring in another £4 billion a year.

The higher paid also get a big National Insurance concession. Most taxes go up as income rises. But not NICs. Once £43,000 a year is reached the rate of NICs plummets from 12% (or 9%) to just 2%. If everyone earning more than £43,000 paid the full rate of NICs estimates by HMRC indicate the Treasury would gain by more than £9 billion a year.

Because NICs are a tax on earnings they do not apply to unearned income such as interest from savings and dividends. In fact both of those have their own special income tax allowance as well. £1000 of savings interest is normally free of income tax (and it can be up to £6000 in some circumstances). Dividends are taxed at a lower rate than other income and now the first £5000 is tax-free. Those extra allowances are on top of the tax free personal allowance of £11,000. No NICs are due on rental income either. These concessions mean that every £1 of unearned income is worth far more net than a pound of income earned by work. Even pensions – which are often described as deferred pay – are exempt from National Insurance contributions. I have not been able to put a figure on the cost to the Treasury of these various concessions.

But I have found another £1 billion concession given to pensioners. Although more than a million over 65s work they do not pay NICs. Once state pension age is reached (65 for men and about 63y6m for women) NICs stop. That concession began nearly a century ago when almost everyone who reached pension age retired from paid work completely.

I have to declare an interest. I have been self-employed for 30 years. I have earned more than the higher rate threshold for much of that time. And I have now reached the age when I no longer pay NICs. So changing all these things would cost me a lot. But it should be considered.

All figures relate to 2016/17 tax year.

Based on my piece in FT Money 18 February 2017 and my Money Box newsletter of the same week.

vs 1.00
6 March 2017