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.
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.
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.”