The Chancellor, Philip Hammond, has today announced a hotly anticipated new measure to seek to address the perceived imbalance in the tax system between the employed and the self-employed.
What has been announced?
From April next year, the main rate of national insurance contributions for the self-employed will be increased from 9% to 10%. It will increase again to 11% in 2019. This, together with some other changes, is expected to raise £145m extra a year.
Mr Hammond has also announced a reduction from next year in the tax-free dividend allowance for those who, rather than being employed, set up their own personal service companies.
Today’s budget comes a year on from the government’s commitment to abolish Class 2 national insurance contributions for the self-employed, which had widened the gap between the levels of tax paid by the employed and self-employed.
We haven’t touched on it further in this article, but Mr Hammond also said that the government will consider whether there is a case for greater parity in parental benefits between the employed and self-employed. We’ve had no further detail, but this might include introducing statutory maternity and paternity benefits (funded, presumably, out of the increase in national insurance contribution rates).
Why is this important?
The tax and national insurance rates vary depending on whether an individual is employed, self-employed or engaged through a personal service company.
Although the differences in tax treatment are myriad and complex, the fundamental point is that HMRC generally receives lower revenues in respect of the self-employed than the employed (the ‘employee’ NICs rates are lower (9 %, rather than 12 %) and there are no employer NICs to pay at all).
Estimates vary, but around 3.4 million people in the UK are now self-employed. Many of these people will be genuinely self-employed, but in recent months there have been some significant legal developments on the employment status of workers in the gig economy: see our blog on the most recent Pimlico Plumbers case.
The case law on whether an individual is an employee or self-employed is slightly different as between tax law and employment law (which doesn’t help matters), but there is likely to be continued scrutiny of the employment arrangements put in place by businesses in the gig economy.
Will this announcement lead to more people being designated as employees by the gig economy? It seems unlikely, at least in the short-term: the increased national insurance rates are still slightly lower than for employees. Further, although the tax cost of employing people is a relevant consideration for businesses, the current employment arrangements have other key advantages, such as:
- the flexibility to upsize and downsize the workforce to suit customer demand; and (as a result)
- lower fixed costs (salaries, benefits, maternity/paternity pay etc.).
The most recent cases have found the individuals in the gig economy to be “workers”, rather than employees. But there is no concept of “worker” in tax law and so, even following this announcement, it is perfectly possible for the gig economy to continue to seek to engage individuals without giving them traditional employment rights.
This announcement will not come as a huge surprise to many. The figures vary slightly, but it is estimated that the public purse would miss out multiple billions of pounds in revenues if things didn’t change.
However, it is interesting that Mr Hammond has gone ahead before the findings of the Taylor review are complete. Coupled with the fact that the Office of Tax Simplification released a long report in March 2015, in which it assessed the current taxation regime for the self-employed and pointed out all the ways in which the current system was confusing and did not reflect new ways of working, it suggests this may only be the first of more significant changes.
The OTS report put forward a range of other proposals and there are many discussions elsewhere in the market about how the law may be developed. We might expect some further changes to be introduced over time. The sort of changes could include:
- Default assumptions in the tax rules that people who work for a particular period of time with one business are employees – both for tax purposes and employment rights. Or a de minimis level below which an individual would never be regarded as an employee.
- Introducing a new statutory employment test that would apply for both tax and employment rights. Some have mooted the idea of introducing a new category of employee specifically for the gig economy – it remains to be seen how this would interact with the tax rules.
- Tax deductions at source for individuals where the employment status is in doubt. There could be a minimum level of deduction or something that is pegged to earnings.
- Further improvements to HMRC’s employment status indicator tools – and changes to their legal status.
- Changing or abolishing employer’s NICs.