CIPD Voice: Issue 9
The reversal of announced rises in the rate of class 4 National Insurance Contributions (NICs) for the self-employed was, at least, quick. Governments make mistakes in Budgets (remember the pasty tax?) but it’s not surprising when governments make decisions on tax in secret and don’t road-test them first with the public or their backbenchers before announcing. Raising the rate on NICs for the self-employed seemed a reasonable rebalancing of incentives – it might still be – but officials perhaps didn’t give much weight to the political circumstances facing the Government – a small Commons majority and no direct mandate – but some baggage from the 2015 Manifesto. It’s arguably not the job of officials to take account of such constraints, though in practice ministers sometimes rely on officials to protect them from breaking their own promises.
The reason why the Government proposed raising NICs was, ostensibly, to balance the demands government makes on the self-employed versus the employed. Compared to those employed, the self-employed receive less legal protection and entitlements. Exactly how much less depends on whether the person employed is an “employee” or a “worker”, but it includes things like eligibility for the relevant minimum wage, sick pay, holiday pay, support for training (not a legal right – but many employers provide it), pension contributions and redundancy pay (after all, redundancy for the self-employment is bankruptcy). A government survey of those self-employed in 2014 found that arranging cover for when they were sick or wanted to take time off (and covering the loss of income) were the most widely cited “big problems” with self-employment. To compensate, the self-employed manage their own tax affairs (no PAYE), which includes offsets and allowances not available via PAYE, and pay a lower rate of class 4 NICs (9 per cent versus 12 per cent). In addition, some self-employed had the option to incorporate and pay themselves a dividend subject to a much lower Corporation Tax rate than the Income Tax rates charged to those employed (loopholes the Chancellor tightened and has not reversed). But if the deal was “pay less, get less”, the terms were thought to have moved. Changes to state pensions mean the self-employed get more than they used to (relative to someone in employment), and policy-makers are thinking of ways to give the self-employed access to maternity pay and the like. And the benefits an employed person gets from their higher NIC rate – access to contributory welfare benefits – isn’t so great with benefits not rising in line with inflation. Narrowing the gap in contributions is justified by this narrowing of the gap in terms of what the NICs pay for.
But this analysis assumes self-employment is an entirely voluntary choice; we need to consider those providing the work. If work is carried out by someone in employment – a worker or employee – then employers’ NICs are charged (currently 13.8 per cent), whereas none are charged if the labour is carried out by the self-employed (freelancers, sub-contractors, “independent contractors”, “partners”, whatever the label). Nothing changes here: employers still have an incentive to manage work in ways that are (or look like) the work is being done by people who work for themselves. This can involve collusion between employer and worker as there may be tax advantages for both in sticking to the self-employment script. Or work providers may melt into the background: with no obvious employer, those doing the work become self-employed by default. Thus, even if the NICs increases had stuck, we shouldn’t assume this on its own would stop self-employment from growing.
Not that the Government is hostile to the self-employed. An increasing percentage of the adult population self-employed and outside the reach of PAYE may be part of the explanation why tax revenues have in the last few years disappointed. Hence, a desire to increase the effective tax rate on this bit of the tax base and reduce the “distortions” making it larger.
The proportion of income paid in tax has disappointed this decade, which may, in part, be due to structural changes in the labour market such as more self-employed. The Office for Budget Responsibility 9OBR) have shown in their Budget documentation that optimistic forecasts of tax revenues are also due to weak productivity growth and – as a result – disappointing growth in the wages and salaries that the Government was looking to tax. If productivity growth had been higher, tax receipts from employment would be higher.
It’s probably a good idea to look afresh at the tax base, to ensure the digital economy can enable governments to raise the money necessary for public services. It will be far easier to accomplish if the economy is growing than contracting.