Philip Hammond prepares to give his 2017 Budget. Photo by Photo by Jack Taylor/Getty Images.
#Budget2017: Self-employment tax changes
Increases in taxation of self-employment may raise more money for the exchequer but will do little to clamp down on bad employers who force staff into bogus self-employment to lower their tax bill
Today’s standout Budget measure was the increase in the tax paid by the self-employed, with the rate of the Class 4 National Insurance contributions set to rise by three percentage points by 2019.
It’s the Chancellor’s response to one of two stand out labour market trends since the financial crisis that have seen government expectations on income tax consistently fall short.
The first of these is the unprecedented fall in real wages, still set to be well below their pre-crisis peak in 2020.
The OBR’s Economic and Fiscal Outlook published alongside the budget today sets out how they and government have consistently had to downgrade their forecasts for both wages and income tax collected.
The second, which the Chancellor chose to respond to today, has been the sharp increase insecure work. Self-employment has been at the forefront of this, accounting for 43 per cent of the overall increase in employment since 2008. At the same time, the gap between employee and self-employed pay has widened. As we set out before the budget, this has had a big impact on the exchequer, with the increase in the share of low-paid self-employment since 2006 leading to a £2bn fiscal hole.
Philip Hammond responded to that tax fall in dramatic fashion today, raising the level of Class 4 National Insurance contributions paid by the self-employed from 9 to 10 per cent in 2018, and 11 per cent in 2019 – still just below the 12 per cent contribution from regular employees.
This may present the minority with the luxury of deciding whether to register as self-employed or employees with an interesting choice. Similarly, the reduction in the dividends allowance – from £5,000 to £2,000 could reduce the number of those who choose to incorporate their business and pay tax on dividends rather than employment income.
But it’s notable that the OBR expect the numbers of self-employed people to keep rising, and that this will carry on having a significant impact on tax:
“we have assumed that the share of self-employed continues to rise over the forecast period instead of holding the share flat as we had in previous forecasts. This boosts SA receipts but is more than offset by the effect on PAYE receipts from slower growth in employee numbers. By 2021-22, the effect is to reduce overall income tax and NICs receipts by around £1 billion. This reflects the lower effective tax rate on the self-employed about employees, in particular, due to the fact that employer NICs is only paid in respect of employees.” [page 111].
And as the OBR make clear it’s the fact that there’s been no change to the employer side of the tax system that will continue to leave the exchequer missing out from the rise in self-employment.
It’s also why today’s tax change will do little to help those forced into self-employment by employers looking to evade their responsibilities. Think of the delivery drivers, hairdressers and construction workers who are forced into self-employed by their employers for tax purposes, meaning they miss out on the Minimum Wage, holiday pay, job security and family-friendly rights. They’ll see their tax bills rise under the Chancellor’s plan (though it’s worth noting that due to the abolition of Class 2 NICS, the very worst off self-employed may see a slight reduction in their tax).
But there remains a huge tax advantage for the employer to claim that these workers are self-employed. That’s because the Chancellor has done nothing about the disparity in the tax bill for employers depending on whether they take someone on as an employee, paying 13.8 per cent employer national insurance, or contract them as self-employed, paying precisely zero.
So until we see the Chancellor get serious about tackling bogus self-employment, these changes may provide some help for the Exchequer but do very little to improve working people’s lives.
And until we tackle Britain’s terrible wage performance, the Chancellor is likely to see further Budgets continuing to disappoint both for working people, and for the government’s bottom line.