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Budget 2017: Reduced “tax advantages” of opting out of full employment

Treasury’s growing concern over the revenue being lost by the growth in self-employment, much of which has been attributed to gig economy workers, or companies encouraging staff to become self-employed.


According to , most self-employed individuals will pay increased national insurance contributions (NICs), it was announced in today’s budget, as chancellor Philip Hammond aims to reduce the “tax advantages” of opting out of full employment.

The budget confirmed that the national living wage would rise from £7.20 to £7.50 from April 2017, and that the income tax personal allowance would increase to £11,500, with the higher-rate threshold rising to £45,000. Hammond reiterated the government’s commitment to raising the personal allowance to £12,500 and the higher rate to £50,000 by the end of this parliament.

Class 4 NIC rates for the self-employed will rise from the current 9 per cent to 10 per cent in April 2018 and 11 per cent in April 2019.

The change will affect all self-employed individuals earning more than £8,060. At the same time, class 2 NICs paid by those who earn more than £5,965 are being abolished; the net effect is that all those earning more than £16,250 from self-employment will pay more tax.

Around half of the self-employed currently earn £13,000 or less, according to figures from the Resolution Foundation. The government said the shift would “better reflect the small differences that remain” between the self-employed and employees following the introduction of the new state pension in April 2016.

The widely anticipated move also reflected the Treasury’s growing concern over the revenue being lost by the growth in self-employment, much of which has been attributed to gig economy workers, or companies encouraging staff to become self-employed.

Ian Brinkley, acting chief economist at the CIPD, said it highlighted the challenges associated with a population that was working in “increasingly diverse ways”. He said: “With more people likely to become self-employed or involved in other forms of atypical employment in the future, the tax issues highlighted by the chancellor will only become more problematic.”

Further reform is likely in this area, with the government suggesting it will consult on changes to parental benefits for the self-employed this summer, as well as reviewing pension reforms. The self-employed are currently excluded from auto-enrolment unless they opt to make their own arrangements.

The chancellor also pledged £5m to increase the number of ‘returnships’ in the public and private sectors to help people return to employment following a career break.

And he confirmed the introduction of a new regime of so-called T-levels, the flagship measure in an overhaul of post-16 education he said would put technical skills on a par with academic qualifications, and make sure students were “genuinely work-ready”.

Under the reforms, vocational courses will last up to 50 per cent longer, the equivalent of an extra 900 hours of teaching a year. The 13,000 current qualifications will be replaced by 15 standalone vocational courses, or T-levels, all of which will be backed by work placements.

Lizzie Crowley, skills adviser at the CIPD, said: “It’s great to see recognition that tackling the UK’s skills challenges is a top priority. With a significant slowdown in workers coming from the EU, upskilling the existing workforce and the next generation is more vital than ever. “Technical education has been a longstanding weakness in the UK skills system. Additional investment to help equip the next generation of workers with technical skills is therefore very welcome as we head towards post-Brexit Britain.”

Hammond also pledged £3m towards funding support for Britain’s “brightest and best research talent” through 1,000 PHDs and fellowships in science, technology, engineering and mathematics, and confirmed a £40m commitment to promoting lifelong learning.

Crowley said the CIPD was looking forward to hearing more about how “the government is going to improve lifelong learning, to ensure employees are able to perform to their full potential at work, keep their skills up to date and feel challenged and motivated in their role”.

Hammond said the government would be actively monitoring national insurance employment allowance, following reports that some companies had been using schemes to avoid paying the correct national insurance contributions. 

Originally announced in last year’s Autumn Statement, this will include expenses that are not reimbursed by the employer. Mark Groom, tax partner at Deloitte, said: “The announcement hints that HMRC may be concerned by expenses that are not reimbursed by employers. It’s early days, but if there is a concern with expense claims, with the advent of tax digitalisation, this could be tackled by requiring employees to upload evidence through their personal tax account to substantiate claims for tax relief.”

IR35 tax changes ‘already having huge impact on public sector’

The public sector is already facing a struggle to attract temporary staff, according to recruiters, as contractors turn their backs on work or demand 20% pay increases in the wake of controversial changes to IR35 legislation, acording to Andrew James, managing director of Michael Page Facilities Management, Property and Construction.

“For some organisations, this price hike has been too much,” said James. “Indeed, we have also seen niche skillsets moving out of the public and into the private sector, a trend that will undoubtedly increase as time goes by. In line with this, many public sector organisations don’t have the budget to recruit permanently and they’ve been left in a ‘catch 22’ situation without anyone filling the role.”

There are reports of IT contractors in particular choosing to boycott the public sector. Nurses, engineers and social workers may also be affected, according to a report in the Financial Times.

Colin Morley, director of recruitment firm Harvey Nash, told the FT that one in three candidates were now turning down jobs in the public sector. “It’s been a real mess… we are not able to meet the demand coming through,” he said.

Chris Hopson, chief executive of NHS Providers, which represents hospitals, said a number of his members had reported that “some contractors are seeking to put pressure on them to pay more or interpret the rules more generously than they should be”.

Under the reforms, public sector employers have to deduct tax and national insurance contributions from contractors’ pay at source, rather than allowing them to defer and claim expenses. It has been suggested that those working regularly in the public sector could lose 30 per cent of their take-home pay, while last week research from a firm of tax specialists revealed that four-fifths of contractors said they would leave the sector if they were affected.

Most organisations in the sector were being extremely cautious in their approach

Some are operating on a case-by-case basis, others had issued a ban on employing anyone who used a personal service company.

There have been reports that even contractors who have a clear case to be classified as genuine self-employed freelance workers are being forced onto payroll.