Looking through some of the predictions for Budget 2013, I see a few people mentioning the prospect of self-employed businesses being subject to an increase in National Insurance Contributions.
I understand the rationale for this being related to the introduction of the flat-rate pension. This means that the self-employed receive a greater benefit compared to their input. But I see this as a very poor idea in terms of a revenue raiser.
In terms of tax, it is almost always better to run your business through a company. Profits earned by a self-employed individual predominantly result in a higher tax charge than the those earned by a company paying them out as dividends.
[NB The dividends are normally distributed after paying out a salary that does not result in any NIC charge, but still counts as contributions for the year. So the pension entitlement is also maintained.]
Pushing up NICs on self-employed individuals will make this tax differential between self-employed and incorporated businesses harder for even the smallest businesses to ignore.
I think you’d see the potential revenue being raised severely undermined by the behavioural shift.
Now, the obvious answer to this is to introduce a corresponding increase in the tax burden on an incorporated business. This could be an increase in the rate of tax just on dividends in some way, but this starts to have further impacts elsewhere. So I can’t see this being done without more thought.
Also how does this sit with the attempt to introduce a simpler basis of taxation for smaller businesses from this April? The new simplified cash basis, fixed rate deductions and the disincorporation relief all promote the benefits of operating through an unincorporated entity.
But, let’s face it, they’re not exactly amazing reasons to not run through a company. You’d see these snubbed in favour of the cash saving option, I’ll wager.
So I’m broadly against the idea of such an increase. But, then again, the resulting rise in administration would be good for accountants…