The abolition of Class 2 NICs. A new Lifetime ISA. Face-to-face support through the Jobcentre Plus. Last week's Budget turned out to be a quiet victory for the self-employed.
Let's look at each announcement in turn...
Abolition of Class 2 NICs
The self-employed currently pay two types of National Insurance contributions: Class 2 and Class 4. The problem with the first is that it is levelled at a flat rate, regardless of how much people earn. Removing this levy will save the self-employed £134 a year - nothing major but certainly meaningful for those on the lowest incomes.
The test for the Chancellor and the Treasury is whether they can also overhaul Class 4 NICs in a way that is fair and where the greatest burden falls on the highest earners. Our report from last year sets out one potential model that would leave 38 percent of the lowest earners better off while raising millions more for the Treasury to spend on extra welfare coverage.
A new Lifetime ISA
The new Lifetime ISA is designed to help people save for their first home and for retirement, and will be open to anyone between the ages of 18 and 40. Savers will be allowed to deposit £4,000 every year and the government will add a generous bonus of 25 percent on top. Legal & General estimate that if a 25 year old took out a Lifetime ISA and paid in the full amount every year, they would end up with £416,000 by the time they reach 60.
The Lifetime ISA is a big win for the self-employed who have few options for retirement savings. Our research found that people who work for themselves are half as likely as employees to be contributing to a pension, and typically have a pension pot that is half the size at the point of retirement. The problem with pensions is that the money is locked away until old age, which isn’t ideal for self-employed people who need access to their cash during volatile periods.
There is a catch with Lifetime ISAs: the bonus is forfeited if the saver chooses to dip into their pot before retirement or purchasing a first home. However, the perks are only lost on the amount taken out, and the government is considering whether bonuses can be kept if the money is re-deposited in a short period.
Business support for the low-income self-employed
The Chancellor also announced two measures on business support. First, the government will trial face-to-face support from Jobcentre Plus advisers for self-employed Working Tax Credit claimants, with a view to rolling this out nationwide if successful. Second, the mentoring that fledgling business owners receive through the New Enterprise Allowance scheme will be opened up to self-employed people moving onto Universal Credit.
Although far from perfect, the reason these initiatives are important is that they help the self-employed respond to the conditionality that is creeping into welfare. Universal Credit will not top up the wages of the low-income self-employed as generously as under the current ‘legacy’ system, meaning there will be an urgency for them to raise their incomes in a short space of time. Effective business support is therefore a must.
Needless to say, not everything we hoped for was included in the Budget. The extension of Statutory Maternity Pay - something recommended in the recent Deane Review - was a glaring ommission. Yet self-employed workers have much to be satisfied with. Osborne may be losing friends in government, but the Chancellor has 4.5 million people on his side... for now.
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