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.