People Who Followed Richard Murphy’s Advice Are Gonna Get Screwed – Cool, Eh?

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Back in the day Richard Murphy used to write a little column for The Observer. In at least one of which he suggested that people who were self-employed, really little independent businesses, should incorporate. The point being that by doing so they could pay themselves a minimal wage, thereby gaining the stamp that eventually qualifies for the state pension, then take the rest of the dosh as dividends.

Oh, sure, you had to pay corporation tax on the profits, then whatever income tax was then due on the dividends, but by design those two rates added up are not far off income tax rates. The benefit is that no national insurance (both employers’ and employees’, so near a cumulative 25%) is payable on the dividends.

It is a reasonable and sensible structure to make the most of the tax system. Which is why Murphy himself used it in at least one of his vehicles – no harm in the adviser taking their own advice, obviously. Eyebrows might be raised at how, once the adviser had stopped using the scheme, such a scheme became tax abuse but perhaps that had something to do with the TUC offering a fat fee to produce a report on how such things were that tax abuse. Who knows, eh?

All such attempts at end runs around the system – any system – have their catches of course. A useful definition of employment income is that which NI is paid upon. A useful definition – not wholly and entirely accurate but useful – of income not stemming from employment is income which NI is not paid upon.

Which brings us to here. We’re not, in this lovely time of the coronavirus, spending tax cash to replace nor support profits. We’re trying to keep businesses going, sure, but the capitalist incomes can go hang in this time of worry. We are trying to support employment incomes though. Therefore:

Contractors and those who are paid in dividends have been left out of Rishi Sunak’s long-awaited package of support for the self-employed.

All of which seems entirely fair. National insurance is, as the name suggests, what is paid as the fee for being covered by the social insurance system. Incomes which do not pay NI are therefore unlikely to be included in an extension of the social insurance system. Those who paid themselves in dividends are shot out of luck.

Boo, Hoo, Eh?

And this principle stands for the self employed more generally too:

No, the self-employed do not deserve the same support as everyone else. For the self-employed have not been paying in to the system of social insurance in the same manner, or to the same amount, as everyone else.

National insurance really is what it says on the tin, a national system of insurance against the vicissitudes of life. Against happenstance, economic cycles and all that may ail employment prospects. The self-employed pay into this system at different and markedly lower rates than the employed. As a result they have fewer rights to payments from that national insurance scheme.

This is as it should be, you get what you pay for. The statement that people should – as McDonnell suggests – gain what they have not paid for strikes us as being wrong, simply and purely incorrect.

You get what you paid for. And those who paid attention to Murphy’s tax advice are now getting screwed. Ho Hum.

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Jim
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Jim

“the self-employed do not deserve the same support as everyone else. For the self-employed have not been paying in to the system of social insurance in the same manner, or to the same amount, as everyone else.” Thats weird because we are constantly told that employers NI contributions aren’t a tax on employees, and their marginal tax rate isn’t really over 40% at all. But now we’re told that the employed pay lots more NI than the self employed. So which is it to be? Are employees actually being stiffed by massive stealth NI taxes via their employers, or are… Read more »

Spike
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Spike

Enterprises combine labor, capital, management, and customers. It is good politics to back rescue money for labor, but otherwise there’s no good reason to back this one ingredient. Labor will scatter if not kept in place through this “crisis,” but so too the other ingredients. So what is happening is vote-buying. Murphy’s double standard in engaging in a practice he sometimes calls tax evasion is treachery. His outrage at not getting his share of bail-out welfare is silly. Doesn’t he realize that, in an era of big government he is all for, the real currency is popularity and connections? He… Read more »

Phoenix44
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Phoenix44

How many self-employed people have never paid any NI? I am now self-employed and don’t, but for years I worked in the City and paid very large amounts of NI. Now I’m not getting anything back for that? Pretty sure I’ve paid an awful lot more NI over the years than most. The difference between £100k and £25k in terms of NI is £5,000/year. So twenty years is worth £100k difference. That doesn’t count now?

john77
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john77

No, because the insurance cover ceases when you stop paying the premiums.
There always was a substantial element of redistribution in the National insurance Scheme with those in secure jobs subsidising those in what was later called the gig economy, and bachelors subsidising women; later that was expanded to the well-paid subsidising the low paid.

Phoenix44
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Phoenix44

But that’s my issue. If it’s an insurance premium, it’s right that when I stop paying my premium I’m not covered. But then it should have been a flat premium (if the payouts are the same). But it wasn’t. Neither was it the well-paid paying the premia of the low paid. It was just a tax. Pretending now it’s a premium is just a lie.