A leading think tank’s calls for self-employed people to pay more tax have been dubbed as ‘deeply unfair’
The Institute of Fiscal (IFS) is calling for controversial tax reforms, which could see millions of self-employed workers and businesses facing higher bills.
According to a new report by the IFS, the UK’s tax system “discourages employment, investment and risk-taking” and the parts that “dictate how different forms of income are taxed are not fit for purpose.”
It claims that 1 in 5 of the UK’s workforce is working through their own businesses and this way of working has grown rapidly in the last 20 years because “their incomes are taxed at much lower rates than the incomes of employees doing similar work.”
The report claims that an employee earning £40,000 generates £3,300 more in tax for the Treasury than a self-employed person doing the same work, and £4,300 more than freelancers and contractors working through their own limited company.
‘Preferential tax rates’ should be removed
The IFS argue that this is largely because an employee’s income is also subject to employers’ National Insurance Contributions (NICs), unlike the self-employed. It also states that the difference could be even greater as the tax levy on Capital Gains Tax is much lower than on earned income – something that is said to significantly benefit the wealthiest.
As a result, the think tank is calling for the “preferential tax rates” on Capital Gains Tax, dividends and self-employed income to be removed, but warns that “simply raising taxes” risks stifling economic growth at a time when the UK needs it the most.
IFS’s report has caused concern among industry bodies as it could be seen as a catalyst for a potential tax grab in the March Budget by Chancellor Rishi Sunak.
Jesse Norman, Financial Secretary to the Treasury, has already echoed similar views to MPs at a select committee. He said: “The Treasury’s position is that at the point of tax, if people are doing the same work, they should be taxed in the same or similar way”, signalling a potential tax hike for the self-employed.
Chancellor must stick to Tory manifesto promise
Alasdair Hutchison, Policy Development Manager at IPSE, said: “Almost every economic analysis, including the IFS’s own Deaton Review of Inequalities published just weeks ago, has shown that the self-employed have been one of the hardest hit groups economically in the pandemic.
“Nearly half a million people have fallen out of self-employment since the start of 2020. To suggest that this group, an estimated 1.5 million of whom have also fallen through the gaps in government Coronavirus support, should face yet more financial stress in the form of tax hikes will strike many as deeply unfair.
“IPSE agrees the tax system needs fundamental reform, but we should not fall into the trap of thinking the self-employed don’t pay enough tax. As the IFS report correctly highlights, the main difference between employed and self-employed taxes is employers’ National Insurance.
“In many cases, it’s the companies that pay the self-employed who benefit, not the individuals themselves. We must also remember that the self-employed take on significant personal risk and have to handle everything from pensions to sick leave alone, without the help of an employer.
“At the next Budget, the Chancellor must stick to the Conservative manifesto commitment not to raise taxes and look to support the self-employed, rather than increase their costs.”
This IFS report released on 26th Jan is as sexed up as Blairs Iraq dossier. A post-truth piece of propaganda laying the ground work for targeted tax rises aimed at the chancellors favourite whipping boys.
Where do we start:
1. This “tax penalty” on employment is based a much larger gross payment for the employee, salary (40K) + employer NIC. The Self-employed and Owner-manager calculations are based on a gross payment of just 40K only. Not a fair comparison no wonder there’s more tax it’s a bigger payment for the employee.
2. The employer gets loads of benefits and protections while contractors have to pay for these themselves out of that 40K. For this reason, contractors tend to get paid larger gross sums for the same job meaning a larger tax haul in percentage and overall terms from the contractor.
3. The contractor has weeks, months even a year without paid work while the employee has guaranteed work every week with no overheads to get it.
4. Contractors carry risks and liabilities, employees don’t.
5. This IFS report has chosen the most convenient gross income (40K) they could feasibly work into their report to highlight their premeditated “conclusion”. In reality there are so many business overheads that making enough profit to live at this low turnover would be hard so businesses like this tend not to operate outside of hobby projects subsidised by other means.
5. VAT – Once a contractor makes enough to register for VAT (and most do) then forget any comparison, they will pay much more tax hands down. Convenient that VAT is not even mentioned once in this 41 page report.
6. Even without VAT once you start going above 50K the contractor will be paying more overall tax than employees as the higher rates for dividend and corporation taxes bite.
7. Most contractors pay themselves a wage as well as dividends so at this low 40K turnover there will be little difference in overall taxation if realistic examples were used instead of these concocted extremes.
The IFS should be ashamed to publish such a biased, unnuanced report but not a surprise from a body that persistently recommends tax increases that benefit the wealthiest in society at cost to those who make their living from work and the poorest in society.
At best this is lazy work from Stuart Adam and Helen Miller at the IFS, how about basing it on some realistic and representative figures?
The tax grab is exactly that, quite right with what and how we support ourselves and yes the main benefitee is the Company who employs the self-employed in the short and long term.
Most of us at this time are just getting by with such a suppressed economy which through no fault to anyone and due to the Pandemic. But moving forward this tax grab will suppress any sort of recovery to the point, which has been mentioned elsewhere, of a depression possibly. Once you enter that situation it is a long, long road for the poorest and even not so poor to get some sort of life back. History has shown us this..
There is a misconception that if they (the government and their cronies) manage to shut us nasty small businesses down, we’ll all go and work for the self-important boss-man, making sure he will get any small profit we make rather than taking it for ourselves. This isn’t the case. Many of us will simply give up, retire or work in other countries. The tax loss to HMRC will be huge
Unironically Stuart Adam at IFS’ very next report is titled “Tax reforms needed to encourage employment and investment”. You’re right, their intension to push people out of working for themselves and back into the arms of big business may fail on some, but it’s more about control and ideology than practicality or revenue. A sadly familiar policy of a government that wants to take us back to year zero.
These thinktanks no longer bother with the appearance of objectivity which is a statement of power in itself.
They probably could have gotten away with publishing it in crayon.
The easy way to fix this is to abolish NI, clearly a tax on jobs.
What a great way of promoting entrepreneurship; discourage people from working for themselves and totally skew the risk/reward trade off.
Even better why not have people working on contracts with zero employment rights but then tax them as if they are employees. Oh you already plan to do that. In that case why not stick everyone on those contracts, no need to pay for holiday or sickness for anyone. Should anyone fall by the wayside we could open up some kind of house for them where they could perform work as little more than slaves. Welcome back to 18th century Britain.
Good god these people are cynical. Labour = useless. Tories = Nasty and useless. Guy Fawkes was onto something. The only nice part about working in London was the money. Emigration is the best way out. Take your skills and let them grovel.
The only problem is they took back control of our passports along with our right to live and work elsewhere.
In oil and gas employers want contractors not staffies as most work is project driven so people are laid off when project is finished. There is also the problem of the oil price which when it goes down they lay of many people. Employing high cost, to them, staffies is not an option. The move to employing people who work remotely from low cost centers is rapidly increasing with lockdown. The government should be making the UK more competitive in a worldwide employment race not less.
That all assumes the government is actually elected for the benefit of the voters which off course it is not.
Good grief – let’s have a race to the bottom in a slanging match. Agreed our tax system is a mess.
Within that we need to compare like with like. If the IFS haven’t done that then that’s indefensible.
On the other hand saying that Contractors pay more because of VAT is simplistic. The same VAT is due regardless of if the 1 man Co is VAT registered, being VAT registered just means the 1 man Co handles the payment to HMRC instead of the Big company who is paying 1 man Co.
@AndrewHarrison – This is the problem; the true tax rake is hidden in the tax systems complexity. And yes, the politically motivated use simplistic arguments to twist the truth like the IFS did here.
The bottom line (on just one of the many points) is that contractors work rakes in an extra 20% VAT for the treasury. Employees work doesn’t. The issue is too complex to do justice here but it should have at least been a factor in the IFS dodgy dossier… As well as all those other issues.
But they DO pay equivalent amounts of tax when you factor in the freelancer premium. So all this kvetching about “losses” is mostly just window dressing. If there is a loss – and there isn’t – it’d be employer’s NI. But there isn’t one. So they’re full of shit.
What HMT refuses to acknowledge is a contractor on £50k would NOT be paid a £50k salary. It is business fee revenue. Employees at an equivalent salary level are paid LESS. And they incur fewer risks by and large, and no business costs. So the analysis is flawed from the outset. The dividend tax closed any minor gap there once was. Dave Chaplin of ContractorCalculator did some great pieces debunking their dodgy arguments on this front.
So the £4K less tax is probably just based on direct taxation, but then with more disposable income there is a greater yield of VAT due to more spending, and from such things as stamp duty, on those mini-mansions us contractors all aspire to. When will these people start living in the real world.
The extra 4K is a misleading headline, even taking the IFS’ hand-picked 40K example and (wrongly) assuming the Ltd company owner draws no wages, by the IFS’ own manipulated figures the overall tax take (on just the 40K) is pretty similar for all three:
Employee: £7,900
Self-employed: £8,300
Owner manager: £7,400
However, pensioners on the same 40K income pay only £5,500 in overall tax. Why are they not getting looked at? They have few outgoings and take the most in welfare and health care.
You forgot about the 25% tax free lump sum allowance.
Only £3,500 tax due on £40k of income for a pensioner.
Another non story
You cannot tax what people do not have
I know more out of contract people than I do in contract people
Those in contract are doing additional hours for free to keep the lights on
Rates are back at early 90’s
Costs are at 2021 prices
It really is not worth it
Clueless communists idiots
So glad I don’t live there anymore.
Just one more reason why I’m shutting down my company this spring.
Like many have said here, the basis of comparison on both sides of the equation is weak / incomplete.
For example, the cost of an employee is not limited to their salary. Back in the day, a broad budgeting benchmark would be that whatever the payroll costs are, you would put the same value in the budget again for the rest of it. If that person is ‘back office’ then there is no additional revenue to offset. This would reduce the amount of CT payable.
Hence the rather poxy middle ground solution of insisting Contractors get taxed as if they were employees ‘for fairness’ but not getting any of the benefits or protections.
Part of me also thinks that is one step towards the overall reduction of protection afforded by Employment Laws now we are outside of the EU.
Really depressing – so glad I moved to Europe which I can wholeheartedly recommend.
Regards the EU I dont understand you thinking the grass is greener there, I have worked all over it even lived there the taxes there are penal and in some countries the return you get for those taxes is not a very good welfare system or even infrastructure its med countries I am talking about there in particular.
By all means live in the EU but dont say the grass is greener from experience its not.
I have worked with Ltd one man contractors.
It is without doubt a very tax efficient way to work.
They had very long contracts going into periods of over 10 years.
The extra pay rates they got more than made up for any lost employment benefits.
The country needs everyone to pay their fair share of tax.
That’s bollocks, how could you know what percentage tax they pay, did you do their accounts? If you had you wouldn’t have just made that story up tax man.
The fundamental is that taxes are simply too high across the board – paye + NI.
How many people pay cash to builders / plumbers / electricians etc
How big is this black economy which is not taxed at all.
As usual Contractors are easy targets because everything is accounted for.
Simplify and Reduce the tax rate and they will probably see a higher tax income overall.