You could start to pay more tax from next year if you're self-employed. This comes after the Chancellor Philip Hammond announced in his Budget 2017 speech that the rate for Class 4 National Insurance Contributions (NICS) will rise from April 2018.
There has been some criticism of the move as it breaks a 2015 manifesto pledge by the Government on tax rises. The Chancellor defended this price hike by saying the Government is facing "some new challenges which we have to rise to."
We take you through how this will affect you if you're self-employed.
What is changing?
You currently pay 9% tax on your annual earnings in NICS if you're self-employed. This will rise to 10% in April 2018 and to 11% in April 2019. Employees currently pay 12% in tax.
You'll pay more tax from next year if you earn more than £16,250 a year. For example, if you earn £30,000 a year as a self-employed worker, you'll see your tax bill go up by £418 over the next three years.
But you could actually benefit from the change if you earn less than £16,250 a year as the Government is cutting Class 2 NICS in April 2018. Under Class 2 NICS, self-employed workers pay 2% on earnings between £5,965 and £8,060. This amounts to £2.80 a week – money you'll now save.
After the proposed plans received criticism, Theresa May said that the tax rises would not go before MPs until the autumn – so these plans might come in later than originally thought.
Who will this affect?
You'll start to pay more tax from next year if you earn more than £16,250. It will cost you an average of 60p a week and while this might not seem like much, it could have an impact on your annual budget. For example, a self-employed taxi driver with an average earnings of £17,300 will be £20 worse off.
And as we mentioned above, you could be better off if you earn less than £16,250. According to the think tank the Resolution Foundation, around half of the 4.8 million workers registered as self-employed earn less than £13,000. It predicts a self-employed hairdresser with an average earnings of £12,700 will be £70 better off.
Why is it changing?
Traditionally, you paid lower NICS if you're self-employed than employees as you'll get fewer State Benefits. The Chancellor said that as self-employed workers now have equal access to the new State Pension and other benefits as those in employment, the difference in National Insurance rates is no longer justified.
NICS go into a fund that pays for the State Pension and some other benefits. It also helps to pay for the NHS. Remember though, you still won't receive annual leave or sick pay if you're self-employed.
Thinking about going freelance? Find out how to get your finances in order before you're self-employed.
You can read about what the Budget 2017 means for your money in our blog.