Merryn's Blog

How to fix the fuss over National Insurance contributions

The solution to all the fuss over National Insurance contributions for the self-employed is simple, says Merryn Somerset Webb. We all pay the same tax regardless of how we work.

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The fuss about National Insurance (NI) is getting silly. In his last spring Budget, Philip Hammond announced the beginning of an attempt to equalise the tax treatment of the employed and the self-employed with a rise in National Insurance contributions for the latter.

It isn't going to be that big a deal for the low paid (about £20 a year for someone on £17,000) but it will be something of a hit for those on higher rates (£620 for someone earning over £51,000). And that rather than going for the low paid is the point of the whole thing.

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The huge rise in the number of the self-employed to 4.8 million people (the definition includes sole traders, anyone in a limited liability partnership and owner managers of small companies) is partly about a huge rise in the number of self-employed part time workers (mainly women) but also, says the Office for National Statistics, about those from higher skilled occupational groups in finance and business services and in London and the Southeast. Think "IT professionals, accountants, consultants, lawyers and of course celebrities and TV presenters" as well as skilled tradesmen (roofers, for example).

A new smaller category,. They get a degree of flexibility and less tax to pay earn £40,000 as an owner manager of a personal services company and you'll net £32,294. Do it as an employee and you'll take home £27,733. Four and half grand. That's real money.

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At the same time, those who hire them get to save on employer's NI and benefits. Win win. Except for the fact that the system cuts the tax take (a major problem given that there appears to be no political appetite at all in the UK for really cutting state spending); it makes things unfair (the self-employed get pretty much the same state pension and welfare* as the employed, yet pay less tax); and it may well have a perverse effect on employer behaviour.

Perhaps, says the Times, it has even encouraged employers to boost profits not via technology, training and productivity improvements but by shifting the terms of employment. Look at the rise in these terms (a paltry attempt to make sure that people doing the same jobs for the same compensation pay similar rates of tax)and it is hard to see the grounds on which the self-employed are able to argue against it. Why should they get similar benefits from the state but pay less in tax in exchange for them?

The answer from the self-employed is that they get no health insurance, no holiday allowance and the like. Their existence, they say, is more financially precarious as a result and the state should compensate them for this difference.

But isn't this a matter for them and their clients/employers? Freelancers have always been paid much higher day-rates than employees specifically to compensate them for these risks: their price for doing the work in the first place includes the assumption that they finance their own benefits. It is not the state (other taxpayers) who should be paying them for their work it is their employers/clients. If they aren't paying enough we have a different problem but not necessarily one other taxpayers should be paying for.

It seems to me that the answer to all this is simple: how about we all pay the same tax regardless of how we work? How about we roll NI into income tax** admit, along the way, that dividends and interest are income as well and make them all subject to the same (in an ideal world, quite low) rates as earned income. Job done. People keep telling me that going for major simplification like this will be complicated (making things simple is complicated) and take a long time. They may be right. But imagine if we'd started simplifying things ten years ago we'd be done by now.

* Think tax credits which the OBR has suggested in the past are one of the incentives for people to move from unemployment to self-employment

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** Yes, I know that this would drive pensioners (who currently don't pay NI) into a frenzy of righteous fury. But we could easily deal with this (if we found that we wanted retirees to pay less on their income that workers) by giving them a higher personal allowance than everyone else.

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