MNI: Self-Employed Taxes Close Tenth UK Fiscal Gap-Think Tanks
The UK government could potentially close up to a tenth of its fiscal gap in the coming year by raising national insurance contributions on the self-employed closer to those paid by contracted employees, leading policy think tanks told MNI.
Increasing NICs so that an additional rate taxpayer would see a marginal effective rate increase of 6.9 percentage points would raise GBP1.9 billion from April 2026, CenTax Director Andy Summers told MNI. (See MNI BRIEF: UK Needs GBP50 Billion Fiscal Consolidation - NIESR)
"If, as recommended in our report, the reform was implemented as a top-up to the income tax paid by partners on their profits, it should be possible to implement with effect from April 2026," Summers said in an email. "Since there are limited opportunities to forestall by bringing forwards partnership profits, revenue should approach steady state levels from year one of the reform."
Chancellor of the Exchequer Rachel Reeves has signalled she could break campaign promises not to raise certain taxes, including NICs, in order to fill an estimated GBP20-30 billion hole in the public finances in the Nov 26 budget. Leading figures in think tanks, including the Resolution Foundation and CenTax, have proposed "rationalising" the tax system by rolling NICs into income tax. (See MNI: Keeping UK Manifesto Promises Tough, Not Impossible - IFS)
However, equalising NICs for the self-employed and employees in one go might be impractical given that the marginal tax rate for basic rate employees, including employer NICs, is 37%, while for the self-employed it is 26%.
"To try and go from one to the other in one go seems like a bit of a stretch, but a phased approach feels more feasible," Resolution Foundation Principal Economist Adam Corlett told MNI.
"The tax gap between a typical employee and an equivalent self-employed worker has grown to record levels, partly due to the last budget's increase in employer NICs,” he said.
TAX BIAS
"Unless you completely equalise the tax treatment of all self-employment and employment income, there will be a tax bias at some boundary. In some proposals for reform, that's between LLPs and other self-employment, or between partnerships and sole traders, but those may be necessary trade-offs.”
CenTax calculates that 98% of revenue resulting from its proposed NICs increase would come from individuals in the top decile of total income, and Corlett noted that it could be in some way compensated if the government follows through with plans to include the self-employed in a new unemployment insurance scheme.
Tax advantages provided for self employment are not targeted at people doing genuinely entrepreneurial work, Institute for Fiscal Studies economist Isaac Delestre told MNI.
"There's a much better case for focusing [tax relief] around the kind of people that you think are likely to generate positive spillovers for the rest of the economy," Delestre said.
SELF-EMPLOYMENT GROWTH
An IFS report published on Wednesday found that self-employment spiked in the UK after the global financial crash, whereas official data had shown only a gradual increase since the 2000s.
"What these numbers seem to suggest is that actually growth in self-employment was pretty muted prior to the financial crisis, and then in the years after financial crisis we see this acceleration in growth of self-employment," Delestre said.
"That's a similar time to when we started seeing a slowdown in overall productivity in the UK economy.”
Corlett said "it's definitely possible that the increase in self-employment over the past 20 years is partly due to tax biases," while Delestre raised the emergence of the gig economy and layoffs during the crash as possible factors.
The labour market loosening after the financial crash cannot explain the persistence in elevated self-employment, Delestre noted. "We don't have a lot of unemployment at the moment. There seem to be people choosing self-employment rather than having been pushed into it."
