What could the Budget mean for the self-employed?

There’s much more to working for yourself than being your own boss, setting your own hours, and reaping the rewards of your hard work. There’s the income insecurity and less protections than salaried employees too.

So, rumours about potential Budget blows will be worrying for self-employed people.

With the Chancellor needing to find cash to plug a blackhole around £20bn, there’s certainly options available that could affect the self-employed.

This article isn’t personal advice. ISA, pension and tax rules can change, and their benefits depend on your circumstances. If you’re not sure what’s right for you, ask for financial advice.

Lower financial resilience

The self-employed are already struggling with lower financial resilience than their employed counterparts.

Findings from the HL Savings and Resilience Barometer show they’re on lower average incomes, and have less money to spare. Households headed by a self-employed person have an average of £89 left over at the end of the month, compared to employed households with £244.

Their income can be lumpier too, with good months and bad months, so there will be times when it’s even harder to make ends meet, let alone save for the future. It’s one reason why self-employed people save an average of 2.3% of their income at the end of the month, compared to employees who save 5.6%.

It means Budget rumours can be worrying, and there are plenty of them.

Proposed income tax changes

Much of the speculation came as the result of a Resolution Foundation report, which called for changes to tax and National Insurance that would hit self-employed people. It suggested taking 2p off National Insurance and adding it to income tax, which it said could raise £6bn, without affecting people receiving income from employment under state pension age – and therefore technically avoiding hitting ‘working people’.

However, it would hit self-employed people, who pay income tax, but not employee National Insurance. They do pay NI, but a different class at a different rate, so they pay 6% on profits over £12,570 up to £50,270 and 2% on profits over £50,270. By only cutting NI for employed people, the system would put more of a burden on the self-employed.

But over the weekend it became clear that the government would not be picking up these suggested changes. Instead, it’s looking elsewhere to prop up the country’s finances, including potentially extending the freeze on income tax thresholds. Further worrying those expecting a pay rise or tackling rising costs as small business owners.

The think tank did however suggest a rise in the basic rate of dividend tax – yet another blow for people who own their own business and take some of their income in dividends. It would also hit investors with portfolios outside ISAs and pensions who make more than the annual allowance of £500 a year. This has yet to be ruled out so could still play a part in next week’s Budget.

What can people do?

It’s worth taking steps to make your finances as tax efficient as possible, using ISAs and Pensions to minimise your tax bills.

If you pay yourself at least in part through dividends, it could mean considering the timing of dividend payments. If you’re investing and are worried about dividend or capital gains tax rises, a Stocks and Shares ISA protects against both from UK income and capital gains taxes.

There are also things you can do to cut your tax bill. Making payments into a pension such as a Self-Invested Personal Pension (SIPP) is one of the most tax efficient ways to save for retirement – which could be even more rewarding if the tax rate rises. Meanwhile, a Cash ISA will shelter you from tax on your savings interest.

Overall, the self-employed don’t use pensions as widely as employees.

This is partly because they don’t get an employer contribution. However, there’s also the issue of money being tied up in a pension until at least the age of 55 (57 from 2028). If you have a lumpy income, you might want to be able to access your money in times of need.

Given this concern, the Lifetime ISA potentially has a role to play.

The 25% government bonus on contributions up to £4,000 acts like basic rate tax relief on a personal pension contribution. There’s also tax-free income when you come to draw down from this pot after the age of 60. Although it’s worth saying that if you pay tax at a higher rate then you’re likely better off with a pension due to the higher tax relief on offer.

Remember that a pension has higher annual allowances than a Lifetime ISA. And, if you’re a limited company owner, you could make tax efficient pension contributions directly from the company too.

You can access the money in a Lifetime ISA early if needed, but remember that this is subject to a 25% exit penalty which takes a chunk of your hard-earned saving along with the bonus that you’ve built up. You can also only open a Lifetime ISA up until the age of 40 but can contribute until age 50.