Earlier this month the Chancellor announced Class 4 National Insurance Contributions (NICs) would increase from 9% to 10% in April 2018, and to 11% in 2019, to bring it closer to the 12% currently paid by employees.
The changes would have seen millions of self-employed workers pay an average of £240 a year more. There was much debate about the fairness of the issue, the relatively small sum of money this would raise and the not insignificant issue as to whether or not this broke a manifesto pledge to leave income tax, NICs and VAT at their current levels.
Whilst political arguments about breaking manifesto commitments were never matters with which AAT concerned itself, the issue was of concern to many of our members from a tax perspective.
As a result, late last week we lobbied Conservative MPs to encourage them to push for these plans to be modified or abandoned. We also wrote individually to the 18 Conservative ‘rebels’ who had publicly objected to the proposals.
Earlier today the Chancellor wrote to all Conservative MPs confirming that he was indeed abandoning the increases.
Whilst there is no doubt that the legal commitment made related only to class one NICs, as the Chancellor acknowledged today, “…it is clear that compliance with the “legislative” test of the Manifesto commitment is not adequate.” He went on to state, “It is very important both to me and to the Prime Minister that we are compliant not just with the letter, but also the spirit, of the commitments that were made.”
However, it is very telling that arguments relating to fairness and taxation held little sway in the Chancellor’s decision making process. He was very clear that the justifications for increased employee NICs remain.
So, if the current differences in benefit entitlement no longer justify the scale of difference in the level of total NICs paid, then inevitably this is an issue to which Government will return.
When policymakers do revisit this topic, AAT will argue that any steps taken to address the apparent imbalance should be revenue neutral to avoid the suggestion that it’s about revenue raising rather than fairness.
Secondly, if this is genuinely about moving towards a level playing field, then at the same time as increasing NICs for the self-employed it might be sensible to look at reducing NICs for the employed to further narrow or even eliminate the discrepancy between the employed and self-employed.
Of course, wider forces are at work here. The recent explosion in self-employment is eroding the tax base and the advent of the gig economy is increasingly making our tax system look outdated. There are significant implications for employees, employers and the wider economy.
AAT put forward a number of recommendations to address these issues in our January 2017 response to the Office for Tax Simplification (OTS) paper on the Gig Economy. Rather than focusing on the NICs of the self-employed, we suggested employers NICs and ‘gig allowances’ should be the focus.
‘Gig allowances’ should be increased to simplify tax matters and help those who are just about managing – JAMs as the political classes call them. Given the difficult nature of dealing with those who have multiple income streams and that many of these incomes are relatively small, a bigger ‘gig allowance’ would make sense.
Employer NICs are one of the most influential drivers of employer’s behaviour in this area, so scrapping employers NICs would seem like an obvious starting point. Employer NICs are widely seen as a tax on employment and policy levers are pulled to try and alleviate this for areas deemed important, such as the exemptions for all under 21 years of age and for apprentices under the age of 25.
However, scrapping NICs for all employers would result in tens of billions of pounds worth of lost revenue and would therefore only be considered if it could realistically be recouped easily elsewhere. As a result, rather than scrapping employer NICs, simplification and reform are in order.
One such reform, already considered by the OTS would be for hirers to be required to pay a modest levy when hiring the self-employed. This may increase administration costs and would not meet requirements for simplification but it would reduce the cost differential and provide certainty around categories of workers.
Irrespective of political arguments, these issues must be addressed if the tax base is to be maintained, if a sense of fairness in business is to be restored and if our tax system is to keep its reputation as one of the best in the world.
Phil Hall is AAT's Head of Public Affairs and Public Policy.