Taxes for self-employed likely to rise in Hammond’s budget

Loopholes that allow many self-employed workers to pay less tax may be closed in the budget – but their rights should improve
Philip Hammond is likely to close loopholes in Wednesday’s budget that mean many self-employed workers pay less tax than their salaried counterparts – but he will come under pressure to ensure they receive better rights in return.

The Treasury is concerned that the growing prevalence of self-employment is not just driven by entrepreneurialism in the “gig economy”, but by tax avoidance, which will progressively undermine Britain’s tax base.

The self-employed pay 9% national insurance contributions (NICs) on their earnings above £8,060, compared with 12% for employees.

Torsten Bell, director of the Resolution thinktank, said: “There is a straightforward fairness question about whether that difference is justified.”

The abolition of class 2 NICs, which are paid only by self-employed people, from April next year – a simplification measure announced by the former chancellor, George Osborne – will also lift the burden on the self-employed.

Almost half – 45% – of the growth in jobs as Britain’s economy has bounced back since 2008 has been in self-employment. Much of that has been in traditionally high-paid sectors such as advertising and banking, rather than the low-paid taxi drivers and couriers whose cases have caught public attention.

Hammond could choose to align NICs for self-employed workers and employees, perhaps above a certain earnings threshold, to protect the lowest-paid.

There is growing political pressure to underpin the rights of self-employed workers. Matthew Taylor, who was an adviser to Tony Blair when he was prime minister, is carrying out a review of “employment practices in the modern economy”, which is expected to look at how to improve the safety net for self-employed workers.

But the chancellor believes that as a quid pro quo, the self-employed should be prepared to pay more tax. Hammond is keen to examine how the public finances will be affected by long-term trends in the economy and the labour market.

Simon McVicker, director of policy at IPSE, the trade body for self-employed workers, said: “If the increase goes ahead, the government should commit to righting some of the unfairness in the tax system for the self-employed. Currently, many mothers who work for themselves can only claim a small maternity allowance, while employees are granted enhanced maternity pay for the first six weeks of leave.”

He added: “Any big changes to tax policy should be preceded by a proper consultation.”

With two budgets due this year, as the Treasury switches the biggest day in the chancellor’s calendar from the spring to the autumn, Hammond could announce a review of the issue, to report at his second big outing at the dispatch box.

He is expected to defer firm decisions on a range of subjects, to allow the Treasury to take stock of the state of the economy after the government triggers article 50, the formal process for quitting the EU, later this month.