In setting out the Budget and their manifestos, political parties should take account of the recent rise in self-employment and consider how cheap and sensible National Insurance cuts could help this low income group.
For better or worse, the number of self-employed workers has shot up. 1 in 7 earners is now self-employed – a greater proportion than ever before – while yet more will be self-employed on the side or live with someone who is self-employed.
The self-employed are also on average a low income group. Half earn £12,000 a year or less – below the full-time minimum wage.
The coalition’s tax policy has concentrated on raising the threshold for income tax, ‘taking people out of tax’. But there are big question marks as to whether future cuts can do much to help low income individuals – including the self-employed – who may now already pay no income tax. It is also a phenomenally expensive policy.
Instead, one of the priorities in making the tax system fairer should be to reform the National Insurance that the low earning self-employed pay.
This comes in two forms. First is a ‘poll tax’; a fee of £143 for all self-employed earners above a very miserly threshold. If the current chancellor doesn’t get there first, scrapping this should be a tax priority for the next government. This tax raises just £250 million – only 0.2 per cent of National Insurance revenue.
Given the money spent administering the tax, the economic benefits of scrapping it, and the possibility of withdrawing the tax cut from higher earners, the cost would be almost negligible for the Treasury. Some reform would be needed to protect people’s benefit entitlements, but abolishing this entire class of National Insurance would nonetheless be easy.
In addition the self-employed, like employees, pay a proportional National Insurance tax. This kicks in at around £8,000, affecting more self-employed workers than income tax, and has no impact on any benefits.
The government should raise this threshold to match the income tax Personal Allowance (which is about to hit £10,000). With a tapering away of the tax cut for middle and higher earners, the cost to the Treasury would be under £170 million.
These two tax changes would give self-employed workers up to £330 a year, a welcome income boost for someone on £10,000, and at very low cost.
The government says it “strongly supports enterprise and those who choose to work for themselves, and believes that the tax system should continue to recognise the additional risk someone who is genuinely self-employed takes on.”
But perversely, while the highest earning self-employed get a large tax break relative to equivalent employees, the poorest self-employed actually pay more than employees. Does the government only support “those who choose to work for themselves” if they are rich?
Fixing this inequity would also simplify the tax system. The self-employed start paying one tax at under £6,000, another at under £8,000 and another at £10,000. This should not be the way we introduce small businesses to the UK tax system!
With these changes, people filing tax returns would know that all of their National Insurance and income tax begins at the same point and that they are only liable if their profits are above that threshold. The government has recognised that having to pay two entirely separate forms of National Insurance is a confusion for self-employed workers.
Simplifying the tax system, helping a low income group, and fixing an inequity. That’s not bad for a cheap pair of changes that could be funded by ending any one of a large number of pro-rich tax breaks. The popular ‘Flip Chart Fairy Tales’ blog speculates that the votes of the self-employed may be up for grabs like never before.
Ending their poll tax and not taxing incomes under £10,000 would be a good place to start.