Government told to hike NI on the self-employed

Imposing higher national insurance rates on self-employed freelancers would raise at least £1.6bn a year and close down a “common” tax avoidance loophole, a think-tank has claimed.

In its new report, the CentreForum says that if the government ensured that self-employed people paid their “fair share” of NI, the extra revenue could give “ordinary workers” a tax break of £110.

Introducing his 12 pages on ‘Ending the self-employment tax break’, report author Adam Corlett points out that, currently, self-employment is taxed at a lower rate than employment.

In particular, the self-employment equivalent of national insurance has a main rate of 9% - compared with 12% for employees – and there is no equivalent of the 13.8% employer charge on staff wages.

Finding fault with these discrepancies, Corlett reflected: “There is no compelling reason for the self-employed to pay any less into the system. The large tax differential leaves the door open to tax avoidance and benefits the richest most.”

In this sense, the forum is backing the Institute of Fiscal Studies’ Paul Johnson who has said that NI liabilities for the self-employed represent a “huge open invitation to tax avoidance because [self-employment NI] is so much lower than you pay as an employee.”

As a result, the forum argues that the self-employed are effectively receiving a “tax break” worth £1.6billion; rising to £2.3bn once the single-tier pension is introduced by the coalition government.

As this new flat-rate system will benefit the self-employed – a demographic that many business bodies say are overdue support and a fairer pension system – the forum thinks the case for hiking their NI contributions is even stronger.

Not dissimilar to the enterprise bodies, the forum thinks the self-employed have a role to play in the UK’s economic recovery – but unlike them it appears to doubt whether they are currently doing enough. In short, it wants the "tax bias towards self-employment" removed.

Corlett expained: “Self-employment income is treated too generously, even after accounting for (ever-diminishing) differences in benefit entitlement. Ending unjustified tax breaks should be near the top of the list of ways to reduce the deficit.”

More positively for hard-working individuals who have chosen to ‘go it alone’ in business, the forum says Class 2 national insurance – “self employment poll tax” - should be scrapped, so the “burden” of £141 a week for freelancers earning over £5,725 can be lifted.

“This brings in just £350 million, while placing an unnecessary administrative burden on the self employed and HMRC,” the report says.

“[And while] £141 may not sound like much…it nonetheless means around 300,000 people with very low self-employment incomes [are] paying more tax than we expect from equally poor employees.”

If adopted by the government in full, the report's recommendations would raise more tax from the self employed as a group, but the forum claims that the bottom 50% of self employed people – as measured by earnings - would pay less tax.

 

12th June 2013

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