The Office of Tax Simplification (OTS) has called for an alignment between the taxes paid by the self-employed and the employed after the country emerges from the coronavirus crisis.

The OTS said there should be more of an alignment in terms of tax burden between the self-employed and employed but said it would not be easy to work out the best way to achieve this.

Under current rules, the employed and self-employed pay the same rates of income tax but self-employed workers pay national insurance contributions at a lower rate.

% Comparison

The rate of Class 4 NICs that the self-employed pay is 9% compared with the 12% paid by employed individuals. The self-employed also face no equivalent to employer NICs, which are charged at 13.8%.

They also mentioned that the self-employed often paid lower taxes when operating via a company saying: “Many freelancers provide their services via a company and work from the Institute of Fiscal Studies and others have demonstrated that people in that sort of category are able to use the company to smooth out their tax rates and essentially over time they end up with significantly lower rates than everybody else.

There is case of evening up the burden of taxation, but you’ll have to find different ways of doing it.”

Government Action

The government tried to raise Class 4 NICs in the 2017 Spring Budget in order to align the self-employed with employed workers. However, this was abandoned following a backlash from the Conservative benches as it broke the party’s manifesto promise.

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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future.

It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.