Taxing time ahead for 5m as Sunak’s quid pro quo will alter status quo
Britain’s 5m self-employed were grateful for the help: work was drying up, and Rishi Sunak offered a serious aid package putting them on a par with employees who face losing their jobs. But there was a serious sting in the tail. “If we all want to benefit equally from state support, we must all pay in equally in future,” the Chancellor warned. This suggests that the long-coveted tax treatment for the self-employed is facing the chop.
“I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses,” Sunak said. “We’re treating everyone the same at a very, very significant cost.”
He later insisted the warning was “just an observation”, but sources close to the rescue talks say it is his clear intention to come back to the issue after the coronavirus crisis.
What are the taxes now?
The self-employed typically pay £3 a week in class 2 national insurance contributions, plus class 4 contributions at 9pc of their profits between £8,632 and £50,000 and 2pc on earnings above that.
This counts towards their state pension, but they do not qualify for the same unemployment benefits as employees. By contrast employees pay class 1 NICS of 12pc on most incomes and 2pc on earnings above the £962 per week threshold. Their employers also chip in with up to another 12pc.
What’s the problem?
The Treasury has long wanted to charge the self-employed more. George Osborne mulled over radical reform, while Philip Hammond tried hiking rates in 2017 but both had to make U-turns. The traditional argument for lower taxes on the self-employed is that they do not receive benefits like holiday pay or sick pay. Andy Chamberlain at the Association of Independent Professionals and the Self-employed (IPSE) says there are both historic and good reasons for the differences.
The higher risk the self-employed take on is “rewarded by a marginally advantageous tax rate”, he explains. “If you compare the direct taxation of individual employees and the selfemployed, it really isn’t that different. Equal taxes between them will therefore require fundamental changes to the tax system.”
But they also get the flexibility of being their own boss, and could choose to be employees elsewhere if they wished. With more than 5m self-employed – a record number and more than 15pc of all workers – there are fears this undermines the tax base. Now they are getting a bailout just like salaried employees.
What will reform look like?
This is where it gets complicated. George Bull, senior tax partner at RSM, says key questions include how national insurance will be made suitable for people who do not know their taxable incomes until after year end; what rate they will pay; what benefits the self-employed will get in exchange for more tax; and what happens to the class 2 and class 4 bands after any reforms.
Unstable income a key issue
“If you are an employee and you lose your job, you can apply for support. If you are self-employed but you have just had a bad run of contracts which leaves you without work for a few weeks, even as you continue to look for clients, how does that work?” says Bull. “Work and incomes go up and down and that is very difficult to deal with in the benefits system.”
Setting the level of tax in a reformed system will also be difficult, as it may be unfair for the self-employed to pay both the employee and employer NI on their income.
Bull sees the politics as trickier still: “Timing is everything and memories are short. If the virus has passed by the time of the Autumn Statement and the Chancellor proposes reforms then, he may face an uphill struggle. But if there are still high levels of patients and of the self-employed getting support, he may find the idea gets more widespread acceptance.”