Empowering the Freelance Economy

Why is it becoming so taxing to be self-employed?

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Millions of self-employed will be affected by the tax-free dividend allowance cut made this month and what could be yet another year of job insecurity and unnecessary economic risk posed by IR35 and an unregulated umbrella industry

From the start of the new tax year (6th April) the tax-free dividend allowance will be nearly cut in its entirety. Dividend payments are how a company distributes profits to its shareholders, meaning millions of small business owners in the UK – including freelancers and contractors – are set to be impacted starting this month.

Since 2017/18 the allowance has been slashed by 90%. Such a move by the Conservatives is giving independent shareholders and small businesses mixed messages. On the one hand, politicians such as our Prime Minister Rishi Sunak claim they want to “support small businesses”, make the economy stronger, incentivise small businesses to reinvest, hire apprentices, get more people working and for longer, save for their pensions and on top of all that afford their bills in a cost-of-living crisis

 The allowance cuts have been staggered over several years, making them easy to have “flown under the radar,” says one expert.

Tax yearsTax-free dividend allowance
2018/19 – 2022/23£2000
Source: Gov/Qdos

“The way these cuts have been structured means they’ve flown under the radar a little – so it’s important that people understand what impact the latest change is going to have on them,” says  Seb Maley of Qdos – a tax compliance expert.

“Ultimately, they’re allowed a maximum of £500 tax-free income from dividend payments, whether from their own limited company, or one they have an interest in. Anything over that will be subject to tax.

Maley describes the move as a “double whammy,” since the rate of tax you pay on dividends is linked to your tax band.

“With inflation dragging people into higher tax brackets, there’s every chance they’ll end up paying even more tax on the dividends they receive,” he says, continuing, “that’s in addition to other tax hikes and freezes that have made it harder for the self-employed and small businesses in recent years.”

Watch out for the sneaky tax hike

Normally, every April, the income levels at which you start paying different amounts of tax go up a bit to keep up with prices. But here’s the catch: since 2021, the government decided to freeze these thresholds. And guess what? They plan to keep it frozen until 2028.

What does this mean for you? Well, it means more of your money goes to taxes, and more people end up paying higher tax rates than they should.

Now, about those National Insurance (NI) cuts you might have heard about. Sure, they might sound nice, giving a bit of money back to workers like you. But here’s the kicker: the Institute for Fiscal Studies (IFS) says that for every pound you get back from NI cuts, you end up losing £1.30 because of these threshold changes between 2021 and 2024. And by 2027, it could even go up to losing £1.90.

So, even though you might think you’re getting a break with those NI cuts, you’re actually losing out because of these sneaky threshold freezes.

National insurance cuts a “deception” say Lib Dems

Liberal Democrat Treasury spokesperson, Sarah Olney MP, says changes to National Insurance (NI) and freezing of income tax thresholds coming into force tomorrow is not exactly something to celebrate.

“The Prime Minister is still peddling this deception and voters will see straight through it,” says Olney. “Hammering the public with unfair stealth taxes and then claiming people will be taking home more in their pay packets is frankly offensive.

She continues, “This is an out of touch Prime Minister leading a directionless Conservative government with his party more interested in clinging on to power than ensuring people are better off. They do not deserve to be in power for a moment longer.”

Your income matters

Let’s break it down further. If you’re earning around £35,000, you might feel like you’re coming out on top because of the NI cuts. But don’t forget, the big earners are getting hit with higher taxes due to these changes.

And here’s another thing: if you’re self-employed or working on minimum wage, you’re not off the hook either. Thanks to something called fiscal drag, you’re now paying taxes on more now paying tax on almost £8,300 of your earnings. Last year, it was only £6,400.

And it’s not just you. Even pensioners are getting dragged into paying taxes they didn’t expect to pay by 2027-28.

Risky business: IR35 and unregulated umbrella companies

Freelancers and fixed-term contractors in the UK are bracing for another year of heightened job insecurity and economic risk, largely due to the continued impact of IR35 regulations and the persisting lack of regulation within the umbrella industry.

IR35, aimed at tackling tax avoidance by workers supplying their services to clients via an intermediary, has already disrupted the contracting landscape, according to IPSE, leading to confusion and concern among contractors regarding their tax status and potential liabilities.

Additionally, the unregulated umbrella industry, which has seen a surge in popularity as a workaround for IR35, presents its own set of challenges. With a lack of oversight and transparency, contractors working via umbrella companies are exposed to potential exploitation, financial risks, and legal uncertainties. Some umbrella companies might not be honest or upfront about fees, and you could end up worse off.

Addressing these challenges will require a concerted effort from policymakers to provide clarity, support, and regulation that safeguards the interests of self-employed individuals. In doing so the UK could have a more conducive environment for entrepreneurship and economic growth.

We get it, the government is looking for ways to claw back tax money dispersed during the pandemic, but wouldn’t it make more sense to cull government misspending first?  

See our special report, PAC chair warns of “cycle of broken promises and wasted cash in perpetuity”

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