Chancellor right to begin tackling tax advantages for better-off self-employed workers

Published on Public Finances and the Economy

National Insurance reforms benefit low-paid hairdressers but self-employed management consultants face bigger bills

The Chancellor is right to begin tackling the unfair and expensive tax advantages enjoyed by self-employed workers by increasing the rate of National Insurance contributions (NICs) they make, the Resolution Foundation said in response to the Budget announcement today.

This change should be part of a comprehensive package of reform to protect the public finances by reducing the tax incentive to be self-employed while giving the self-employed greater support, including with maternity pay and pension saving.

Resolution Foundation analysis shows that more than half of self-employed workers will be better off in 2019-20 because they save more from the abolition of Class 2 NICs (a flat rate tax of £150) than they lose from the increase in Class 4 NICs from 9 per cent to 11 per cent.

This is due to a heavy concentration of low pay among the self-employed, with around half earning less than £13,000 a year.

The Foundation notes that the losses from raising Class 4 NICs will be concentrated among higher paying self-employed workers. At a household level these reforms to National Insurance are highly progressive with 96 per cent of the tax increase being paid by the top half of households, and the majority of revenue collected from the top ten per cent.

RF analysis shows that:

  • A self-employed hairdresser (with average earnings of £12,700) will be £70 better off in 2019-20 as a result of the combined reforms;
  • A self-employed taxi driver (with average earnings of £17,300) will be £20 worse off; and,
  • A self-employed management consultant (with average earnings of £51,100) will be £620 worse off.

The Foundation says that these reforms will still leave big tax incentives for workers to become self-employed or to incorporate as a small company, which is why the government should also review the even bigger tax advantages enjoyed by firms who use self-employed contractors over employees to avoid paying employer National Insurance.

The Foundation also welcomes the government’s commitment to further reform of the rights and support for the self-employed through the Taylor Review of modern working practices, as well as moves to reduce the allowance for dividend taxation.

Torsten Bell, Director of the Resolution Foundation, said:

“Today’s announcement is a bold and welcome move to ensure the tax system catches up with the modern world of work. There are lots of good reasons for people to be self-employed but unfair and expensive tax advantages shouldn’t be one of them.

“By abolishing Class 2 NICs and staggering the increase in Class 4 NICs, most self-employed workers will actually be better off next year, with higher paid accountants and management consultants taking the biggest hit.

“These tax rises should be part of wider reforms that address remaining incentives to become self-employed while offering greater support with the likes of maternity pay and pension savings that are particularly needed for the millions of workers at the precarious end of self-employment. This will send a firm message that the government really is on the side of ordinary working families.”