Since the pandemic started, rumours that the Chancellor is planning a tax raid on the self-employed have abounded. The Chancellor’s pitch so far has been that as the self-employed and the employed have enjoyed similar levels of state support, it is only right that they should pay similar amounts in tax in the future – that means higher contributions for the self-employed. It has long been the Treasury’s mission to equalise contributions and benefits for people of different employment statuses, and Covid-19 might just make it possible.
At virtually every point in the income distribution, there is a tax penalty on employment, caused by differing National Insurance (NI) rates; indeed, an employee earning £100,000 could expect to pay around £40,000 in tax and NI, whereas a self-employed person earning the same amount would pay just over £30,000.
So bringing the NICs paid by the self-employed into line with those paid by employees would be a sensible step. It would iron out perverse incentives for workers and companies and make the tax base more sustainable in the face of rising self-employment. In any case, the difference in benefit entitlements between the self-employed and employees before Covid-19 struck was not enough to justify the tax advantage for self-employment.
However, it would not be the first time a chancellor has tried to equalise contributions: Sunak may well be spooked by the fate of Philip Hammond, who was forced to back down on increasing NICs for some self-employed workers after a backlash from Conservative backbenchers.
Also, the shortcomings of Covid-related support for the self-employed over the last few months risk reversing progress towards a new settlement based on equalised contributions and benefits, rather than spurring it on.
During the interlude between the first wave and the second wave of Covid, support for employees and the self-employed diverged. The Self-Employed Income Support Scheme (SEISS) was cut to a level that would have given some self-employed workers in devastated sectors such as hospitality or the arts a mere £450 a month – even as the Jobs Support Scheme was strengthened considerably and support to employees in ‘Tier 3’ areas was extended in the form of a generous furlough scheme.
Since the introduction of a new national lockdown, the level of SEISS support has, rightly, been reinstated to 80% of average profits for this month. This headline rate mirrors the new furlough scheme, restoring for the next month parity of support between employees and the self-employed.
However, some design flaws still remain. The Government has not addressed concerns around eligibility, meaning there are still major gaps in the scheme’s coverage; the almost 3 million people who could not access previous SEISS support will not be able to claim this latest tranche of SEISS grants either. Indeed, the Association of Independent Professionals and the Self-Employed has wondered out loud whether the Government is “wilfully ignoring” a third of self-employed workers.
The SEISS remains poorly targeted. As the Resolution Foundation has found, over 400,000 self-employed workers who lost no income during the crisis have cashed in, at a cost of £1.3 billion. Meanwhile, around 500,000 self-employed workers who were without any work at all in September have received no support.
The shortcomings in the Government’s Covid-19 offering to the self-employed threatens to undermine political support for the tax rises that the Chancellor is considering. How can the Chancellor persuade the newly self-employed workers who missed the cut-off point for the SEISS, or freelancers in the hospitality sectors who have seen trade dry up, that the self-employed have received enough state support?
By pulling employee and self-employed Covid benefits in different directions, and failing to address longstanding criticisms of the SEISS, the Government is only making meaningful, sensible NI reform more difficult down the line. Bringing self-employed and employee contributions into line is a laudable aim. But to get self-employed workers to agree to pay in more, first they need to be convinced that they really are getting the support they need during this crisis.
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