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Tax incentives for ‘wealthy’ self-employed should be cut, says think-tank

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Written by: Paloma Kubiak
20/02/2017
The government should reduce the tax incentive for people to become self-employed, a think-tank has said.

The Resolution Foundation said the rapid rise in self-employment in recent years has been driven by those in higher-paying, privileged sectors such as advertising and banking, who want to take advantage of tax perks, rather than by those participating in the ‘gig economy’.

It argues the government should reduce the incentive for people to be self-employed “given the risks to the public finances, to productivity and to those that may not want such precarious work”.

Self-employed workers in higher paid sectors have benefitted from considerable tax advantages over employees with the think-tank calculating that a high-earning self-employed worker costing a firm £100,000 enjoys more than a £7,000 tax advantage over a similarly expensive employee.

National Insurance contributions

The Resolution Foundation said that one of the key reasons behind the tax advantages enjoyed by the self-employed is their exemption from employer National Insurance contributions.

It shows that lower National Insurance contributions by and for the self-employed are set to cost the Treasury more than £6bn a year by 2020, a 20% increase on its current cost. Nearly 60% of that tax benefit goes to the ‘privileged’ sectors.

The think tank said the significant revenues raised from narrowing the gap in the tax treatment of employees and the self-employed could be used to target support at lower income households.

Adam Corlett, economic analyst at the Resolution Foundation, said: “Rising self-employment has been the biggest jobs story of the last decade, accounting for almost half of all employment growth since the financial crisis.

“This growth has been controversial at times, with several companies finding themselves in court as workers try to address the insecurity that often comes with self-employment.

“But behind the headlines the real recent growth area for the self-employed has been in lucrative sectors such as advertising and banking. This rise is driven in part by a very favourable tax treatment worth thousands of pounds a year to higher earners – just one element of which is set to cost the Treasury £6bn a year by the end of the parliament.”

Corlett said with the number of self-employed workers approaching five million, the challenges it brings need to be addressed.

“This should include more security for workers at the bottom end of the market, but reforms should also reduce the unfair tax advantages that the wealthy self-employed particularly benefit from,” he said.

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