NI tax subsidies for self employed could end

Friday 26 September 2014

The hidden tax subsidies for self employed professionals could potentially come to an end as one law professor calls for this change.

Speaking to the Financial Times, Judith Freedman of Oxford University said that the Treasury's estimate of the cost of reduced contributions for self employed people was "staggering".

During the financial year 2011-12, the cost of "reduced contributions for self-employed not attributable to reduced benefit eligibility" was measured at £1.7 billion. However, this has risen to £2.9 billion.

Self employed professionals pay less national insurance contributions than other workers as they are not eligible for as many benefits. However, the single-tier pension has meant that self employed professionals have the same entitlements as other workers in this respect. In terms of the benefits available, self employed professionals are still not entitled to as much jobseekers' allowance.

According to a report released last year by the think tank CentreForum, the large differential between self employed professionals and other works makes tax avoidance more likely and means the richest could benefit more than others.

It also suggested that it would be useful for the poorest half of self employed people if the tax break was removed if the money gain was then put back into the starting point for these contributions.

In contrast, a blog on Morningstar suggested that many self employed professionals are set to face poverty in retirement in spite of the introduction of auto-enrollment.

Its figures show that 4.5 million have not been able to benefit from this plan because they are self employed.

At present, the way that self employed people can protect their future is through a personal pension or SIPP. However, there are differences between SIPPs and pensions available in the workplace. For example, while SIPPs get basic tax relief, high rate taxpayers will need to claim this themselves by filing a tax return. Yet many do not realise this.

What's more, self employed professionals pay national insurance contributions on their pension savings. Meanwhile, in the workplace, there are schemes available for people to make sacrifices in their salaries to contribute to this, before income tax and national insurance contributions. This is not an option for SIPP contributions.

There may be changes to this when auto-enrollment goes up for review in 2017, that is if the date is not brought forward as certain groups have been calling for.

The Treasury has said that it does not intend to increase the level of national insurance contributions from those in self employment. Part of the reason for this is that adding tax burdens to the self employed could have political ramifications, particularly as the portion of people working in this way has rising considerable since the economic downturn.

In fact, the Office for National Statistics says it is now at its highest level seen for the last 40 years. Close to five million people are currently self employed, which represents 15 per cent of the workforce.

By Victoria McDonnell

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