What price a Budget day NIC hike to contractors?
National Insurance is the likeliest target for tax increases on Budget day, most likely by raising both the contributions rate and the ceiling. The consequences for contractors could well be an intensification of the difference between being inside or out of IR35, according to experts in the field.
Most tax rises announced in the Budget will be implemented next April to coincide with the start of the three-year spending round which will raise annual NHS spending by more than seven per cent above inflation.
Increasing employees' national insurance over a period of time has attractions to the Government, as the system is simple to administer and familiar to both employers and employees. The burden of bureaucracy to businesses would also be minimal, according to the Government.
The 2002/3 employee and employer NI rates have already been announced, but these could be changed as an emergency measure. Alternatively, a 10 per cent a-year increase in the employees' top NIC threshold for each of the next five years is also possible.
Changes in National Insurance contributions' rates from 6 April 2002 have also been announced and the upper earnings limit for employees has risen from £575 to £585, an increase in the threshold of 1.74 per cent.
Anne Redston, tax guru and author of the book 'IR35: Personal Service Companies,' said: "The consequences of Employers' and Employees' NICs going up on Wednesday would have an impact on both those inside and out of IR35.
"For those paying themselves within IR35, whether they pay themselves a salary or go the deemed income route, they will be hit by a rise in either employer or employee NICs. Thus these changes could add to their costs significantly.
"Conversely, an increase in employer and/ or employee NICs would make it even more beneficial to be outside IR35.
"It is also possible that the Chancellor will raise NIC payments made by the self-employed. If there is such a change, it will have no impact on those with personal service companies. Although contractors have to ask: 'Would I be an employee or self-employed if I did not have a limited company?' in order to decide if they are caught by IR35. This is a hypothetical question. In the real world, the limited company exists, and if they are not caught by IR35 they are not self-employed, but are Directors and employees of their limited companies. So an increase in NICs for the self-employed will not affect them."
Simon Dolan, Managing Partner at SJD Accountancy, said: "There is widespread speculation that the Chancellor, if not totally in this Budget, will introduce measures which eventually remove the ceiling on employees NI. Currently this stands at £30,420 p.a. So any salary (or deemed salary) above this amount attracts no further NI at present. If this ceiling is removed, contractors and others affected by IR35, will be subject to a marginal rate of tax of c. 60 per cent, a level not seen in over 20 years during the bad old days of Labour.
"Such a rise in tax of course is unlikely to affect the demand for contractors. Companies using contractors are unlikely to offer permanent jobs just because the individual has to pay more tax. What is more likely is that there will be less individuals willing to contract under IR35 with such a punitive rate of tax. This would have one of two consequences, either rates would go up to compensate for a lack of supply, or more likely agencies and clients will be far more willing to offer positions on a basis which would pass IR35. This would then leave contractors in a better position than before a possible NI increase."