From falling between the cracks of the Government’s Coronavirus support to being hit with controversial tax reforms such as IR35, it seems like it has been one blow after another for the self-employed in recent years. To top it off, there are now calls for the alignment of taxes between the employed and the self-employed.
At a Treasury select committee hearing last month, Bill Dodwell, Tax Director at the Office of Tax Simplification (OTS) said the tax burden between the self-employed and employed should be more aligned. He called for this to be considered after the UK emerges from the ongoing pandemic.
Currently, the self-employed pay the same rates of Income Tax as employees. However, their Class 4 National Insurance Contributions (NICs) are at the lower rate of 9%, while employees pay 12%.
Calls for a ‘neutral’ playing field
According to the FT Adviser, Dodwell said:
"Many freelancers provide their services via a company, and work from the Institute of Fiscal Studies and others have demonstrated that people in that sort of category are able to use the company to smooth out their tax rates and essentially, over time they end up with significantly lower rates than everybody else. There is case of evening up the burden of taxation, but you’ll have to find different ways of doing it.”
The OTS’s calls were echoed by Judith Freedman, Professor of Taxation Law and Policy at the University of Oxford, who was also present at the hearing. She added that the purpose of aligning taxes would be to create a neutral playing field where “people could decide, both engagers and the engaged, how to best organise their businesses without having to take tax into account.”
But contractors’ tax burden is high enough
However, industry bodies have argued that the tax system reflects the fact that freelancers and contractors take on more risk, create jobs, fuel growth and work without any employment rights.
In 2017, the then chancellor Philip Hammond tried to raise class 2 NICs (now class 4) in line with employees in the Spring Budget. He abandoned the idea and U-turned following a backlash from Conservative backbenchers who said it went against the Party’s manifesto promise.
While limited company contractors do not have to pay Employer’s NI, they must pay Corporation Tax, Income Tax and dividend tax. Alongside incoming reform to IR35, this has led experts to point out that contractors have just as much of a tax burden as employees, if not more.
Just as important is that independent workers will be vital to the UK’s economic recovery and provide businesses with the skills and flexibility they need to grow. As our CEO Seb Maley has made clear to the media in recent months, contractors need incentives to take on risks and build enterprises that help the UK’s economy and should not be stifled by rising taxes.
Now is not the time to be ‘talking raising taxes’
Considering how little Coronavirus support that as many as 3 million freelancers, contractors and small businesses have received, in response to these calls lobbying body IPSE warned that any tax rises will be “deeply unjust”.
Andy Chamberlain, Director of Policy at IPSE said:
“There have been many rumours recently that the Government is considering sharply raising self-employed taxes to pay for the support rolled out to them during the pandemic. The OTS’s call to equalise employee and self-employed NICs is misguided and does not help the situation."
“Firstly, as we put forcefully to the Treasury Select Committee recently, given the gaps in the Self-Employment Income Support Scheme (SEISS), it would be deeply unjust to make a third of self-employed people pay for support they did not receive."
“Now is not the time to be talking raising taxes on the self-employed. These businesses are in an extremely fragile state. Many of them will be severely impacted by the lockdown. We should be doing all we can to support self-employed businesses, rather than thinking about ways to raise revenue from them.”
With over 25 years’ experience, Qdos provides a range of trusted insurance policies for freelancers, contractors and the self-employed - from IR35 insurance through to professional indemnity insurance.
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