The chancellor hasn’t finished fiddling yet

Philip Hammond © Getty Images
Philip Hammond: he’ll be back

So much for Philip Hammond’s Budget surprise. His small attempt to bring the tax paid by the self employed in line with that paid by the employed (its all about fairness…) has lasted all of a week.

The well-off self employed will be thrilled, of course (see my previous post on this). But I’m not sure they would be wise to relax. Hammond’s efforts, however feeble they might have been, make it clear that Westminster has finally grasped that the narrowing of the tax base thanks to rises in the personal allowance, tax credits and self employment simply isn’t sustainable.

That makes this no more than a stay of execution. The self employed do pay less tax than the employed, despite now getting similar benefits – and that is unlikely to be left to stand.

The cut in the dividend allowance took aim at the same group as the National Insurance (NI) rise (albeit with quite a lot of collateral damage) and the changes to the flat-rate VAT rate have done much the same (more on this in MoneyWeek in a few weeks, but all you need to know for now is that the flat rate system actually allows some of the self employed to make a profit out of paying VAT!).

So, what next? Perhaps some change to business property relief, says NFU Mutual. Perhaps more fiddles with VAT, more clampdowns on expenses claims or perhaps, suggests George Bull of RSM, a new campaign on the “elephant in the room”: tax evasion.

The shadow economy (something it is clearly easier for the self employed than the employed to operate in) costs the government well over £11bn a year. Why not invest more in trying to cut it – start perhaps with some more amnesties for anyone wanting to come clean?

Finally, the self employed might like to prepare for an extension via the tax system of pensions auto-enrolment (that they don’t have the same pension provision as the employed, while not a responsibility of the taxpayer, is clearly a matter of concern for the welfare state). This won’t look like an NI rise – but it will effectively be one.

As I say, best not relax – Hammond might not have found his solution yet but he’s definitely identified his problem.

  • kidmugsy

    I don’t see how extending auto-enrolment increases the tax take. Won’t the government tax relief on the contributions actually reduce the tax take?

    • MM68

      I think it is a synthetic NI increase in that it could increase pension provision by the self employed, thus taking some of the burden that would otherwise be carried by the welfare state.

      • kidmugsy

        It might reduce the burden in thirty years time but no politician is interested in that for the simple reason that the electorate isn’t interested in that.

  • AAJ

    With respect to auto-enrolment and the self employed.There is a huge problem with either being self employed or running small business in that it is very easy *not* to pay into a pension. Even when people do pay into a pension, it’s often at a lower rate than had they been employed. Some employers match contributions up to 10%, so 20% of salary going into a pension. How many self employed people put 20% of their gross income into a pension?

    More people need to pay more money into their pensions, especially the self employed.

    • kidmugsy

      Maybe they do but what’s it got to do with NIC rates?

  • Bobby

    Not often I disagree with MSW but on this one we are polls apart.

    Merryn, you are looking at this all a little too one-dimensionally.

    The self-employed who pay class 4 NICs covers a huge range of different people but are unlikely to be ones you appear to have a problem with; I presume those who work as “disguised” employees on long term interim contracts for large organisations (often in the public sector on crazy day rates). I think you may find most if not all of these won’t be paying class 4 NICs as they will operate through their own limited company. And IR35 should in theory put a stop to any benefit they take this way (so don’t start on about the dividend tax either).

    The ‘true’ self-employed are those who are at a significant disadvantage from not having the employee safety net, and therefore do not merit your (and others of a similar view) wrath.

    If the SE are to be taxed the same as employees, then they should be treated the same in all respects and given equivalent protections with limited downsides. The cost to the taxpayer to do so would be unimaginable. The list is long, and deliberately missing out the few that have been grudgingly reported so far (maternity, paternity, sick and holiday pay, minimum wage) the taxpayer would also need to fund, for example:

    – Ensure that self-employed have the same protections against loss of personal assets as an employee. This goes way beyond just paying for their Professional Indemnity Insurance (which is a given the taxpayer will fund), but also includes bankruptcy protection and anything that might adversely impact their credit rating

    – Mortgages (full stop) at the same rate that employees can get with just 3 wage slips

    – All the equipment, stationery, computers, phones etc..that employees are provided with

    – Guaranteed daily wage for every day they turn up for work, regardless of whether they actually do anything – and/or the marketing costs to get in the business from day 1 (there is a huge loss of earnings in the early years that would need to be recompensed by the taxpayer)

    – The same tax-free redundancy package in the event the business folds
    The list can go on, these are just the ones off the top of my head.
    There are a lot of reasons for the increase in self-employment, but generalised assertions that it is a deliberate ploy to reduce the tax bill is beneath your normal level of spot-on insightful challenge.

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