CentreForum: raise self-employed National Insurance

Friday 14 June 2013

A think-tank has published a controversial report urging the government to increase National Insurance contributions for self-employed professionals.

CentreForum’s latest report argues that ordinary workers could enjoy a tax break of as much as £110 if those who work for themselves are enjoined to pay their “fair share”.

Currently, self-employed workers pay a National Insurance equivalent which stands at around nine per cent. In contrast, employees are liable for a 12 per cent deduction. Employers are also expected to pay a 13.8 per cent contribution on the wages they pay their staff, but workers who are their own employers do not face an equivalent.

As a result, report author Adam Corlett argues that the UK tax system creates a “self-employment tax break” which is worth up to £1.6 billion. Including the single-tier pension system that the government plans to introduce, the report suggests the figure could even rise as high as £2.3 billion.

The report argues that this state of affairs leaves a system ripe for exploitation which could potentially create opportunities for tax avoidance.

“Aside from a small disparity in Jobseeker’s Allowance, there is no compelling reason for the self-employed to pay any less into the system,” the report argues. It goes on to call for the introduction of an additional tax on self-employed workers to mirror employer National Insurance contributions.

Additional State Pension (ASP) eligibility is currently another area where unfairness emerges, the report claims. Because ASP is based on earnings, those who have paid more National Insurance because their earnings are higher will receive a top-up on their pension in accordance with what they have paid in. Self-employed workers do not build up any eligibility for the scheme.

However, the government’s proposed single-tier system will make sure that contractors, freelancers and other self-employed professionals are on an equal footing with employees. CentreForum argue that this will actually broaden the disparity which supposedly privileges the self-employed, in turn weakening the case for offering self-employed workers a more generous rate of National Insurance.

On the other hand, the report does insist that Class 2 National Insurance contributions should be scrapped. Amounting to a “self-employment poll tax”, the levy of £141 per year on self-employment earnings of more than £5,725 brings in relatively little cash for HMRC - a mere £350 million - and unnecessarily complicates an already convoluted tax system. Nevertheless, the report’s proposals give and take away, since this break would be offset by an increase in Class 4 National Insurance contributions. The main rate would reach 20.2 per cent, after which the additional rate would be increased from from nine to 10.5 per cent.

CentreForum claims that if every recommendation within the report was followed through, more tax would be taken from the self-employed as a group. But at the same time, the self-employed workers on the lowest incomes would actually find themselves paying less.

Workers have increasingly turned to self-employment as an alternative to the difficult jobs market throughout the recession. Labour figures from the Office for National Statistics published this week showed that in the three months to April this year, another 21,000 people took the decision to strike out on their own.

By Victoria McDonnell

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