Richer self-employed face bigger bills after budget tax shake‑up
Philip Hammond is likely to announce plans to overhaul the tax system for the self‑employed in next week’s budget.
The Treasury believes there is a strong case to tackle the growing disparity between workers who pay tax using PAYE, the self-employed and those who operate personal service companies.
The chancellor is expected to say that there will be changes to self-employed taxation in the autumn budget and is likely to announce a consultation.
Mr Hammond could also reveal some immediate changes to self-employment rules, although Whitehall sources said that this issue had not been settled.
There are almost 5 million self‑employed people in Britain, up from just over 3 million in 2000. Research by the Resolution Foundation found that the self‑employed include some of the highest and lowest earners, with IT, consultancy and law firms among those that rely on the self-employed.
The government wants to collect more tax from richer self-employed people, and those that receive salary payments into service companies, while avoiding hitting those on the lowest wages who are also self-employed.
The “tax gap” between the well-off self-employed and full-time employees is growing. The number of self- employed people in advertising has doubled since 2009, risen 90 per cent in public administration and 60 per cent in banking. Experts said that some hedge funds only employ administrative staff full-time.
In the autumn statement in November, Mr Hammond made clear that a consultation was coming on the tax treatment of different individuals.
He said: “Technological progress is changing the way people live, and the way they work; the tax system needs to keep pace. For example, the OBR [Office of Budget Responsibility] has today highlighted the growing cost to the Exchequer of incorporation. So the government will consider how we can ensure that the taxation of different ways of working is fair between different individuals, and sustains the tax-base as the economy undergoes rapid change. We will consult in due course on any proposed changes.”
Taxation rules for employees, self‑employed and those who run their own companies differ, giving favourable tax treatment to the self-employed.
Both employees and the self- employed pay income tax but employees also pay 12 per cent “employee” national insurance contributions (NIC) while the self-employed pay 9 per cent. There is no “employer NICs” for the self‑employed. Those with personal companies do not pay income tax but pay 20 per cent on the company profits after income taken as earnings, plus a dividend tax and capital gains tax where appropriate.
One study found that on an income of £100,000, employees and their employers together pay approximately £40,000, the self-employed pay about £35,000 and those in companies pay £33,000.
One option could be to raise the NIC rate for the self-employed from 9 per cent to 12 per cent, which would raise £1 billion. They would have to find compensation for the low-income self-employed, however, and it could encourage people to form their own companies to avoid this tax structure.
Theresa May has commissioned Matthew Taylor, a former adviser to Tony Blair, to look at the evolving labour market and his report is expected over the summer.