Taxation rates seen as unfairly slanted towards the self-employed and company managers by the Institute for Fiscal Studies

Tracey Boles
Taxing times (Source: Getty)

DIFFERENCES in the way the tax system treats the self-employed, owner-managers and employees are “costly, inefficient and unfair” according to the Institute for Fiscal Studies.

It found that the tax system is much less favourable to the 85 per cent in employment than it is the 15 per cent who work for themselves.

The self-employed get a tax advantage equal to an average of £1,240 per person per year relative to employees as a result of lower National Insurance contributions.

The tax differences are small at lower earnings levels but substantial for higher earners. At £15,000, tax on employees is £631 a year higher than if the income was earned by a self employed person and £818 higher than if earned by a company owner manager. At £100,000 the differences are £7,365 and £8,035 respectively.

“There's a lot of very woolly thinking about how we should tax the self-employed and company owner managers relative to employees,” said Helen Miller, an associate director at the IFS and a co-author of the report. The differences in entitlement to state benefits are now far too small to justify the lower rates given to the self-employed. And lower rates are not a good way to incentivise entrepreneurship.”

Levelling the playing field requires a two-part solution according to the IFS: Firstly, the money invested in a business should be deductible from taxable income to ensure that investment is not discouraged. Secondly, each additional pound of income should then be taxed at overall rates.

Miller said: “Changes in working patterns, including those related to the gig economy, make tackling current differences all the more important both to protect the public purse and to avoid giving incentives for big companies to treat people as self employed rather than as employees.”

Although employees still make up 85 per cent of the workforce, over the last 8 years 39 per cent of the growth in the workforce has come from the self employed and company owner-managers.