New tax recommendations could cost self-employed workers

New tax recommendations could cost self-employed workers

15 March 2016

A new report has recommended that income tax and national insurance contributions (NICs) should be brought closer together in order to make a tax system that is fit for the future.

However, some fear that the exercise in simplification could lead to a system of winners and losers, with some paying more in taxes and others paying less.

One of the biggest losers under the new system is likely to be some self-employed people, who benefit under the current system of NICs.

The report from the Office of Tax Simplification (OTS) lays out a seven-stage programme for bringing national insurance more in line with income tax.

The headline recommendation is for NICs to be paid on an annual, cumulative and aggregate basis, instead of the current system where NI is calculated weekly or monthly.

The OTS Tax Director, John Whiting, said that while there was near-universal support for NI reform, the impact of any changes would undoubtedly be significant.

“Millions of people would pay more in NICs but millions would also pay less,” he said.

The OTS also recommended that the government base employers’ NICs on whole payroll costs and rename the charge. Significantly for self-employed workers, they also suggested aligning the self-employed NICs more closely with employees’ NICs.

These changes are important, the OTS suggests, because of changing patterns of work in the UK economy.

OTS Chair Angela Knight said: “People don’t know what the National Insurance Contributions they pay gives them in benefits, with the system giving different outcomes for the employee, the self-employed and those with more than one job. And employers - who are the collectors of income tax and national insurance - find the current system for NICs complex.

“As the structure of the UK economy moves rapidly towards scenarios often referred to as ‘uberisation’, the ‘sharing economy’ or the ‘gig economy’, these different ways of working are with us, are expected to accelerate and so the current system is simply out of date.”

Ms Knight continued by warning of difficulties on the road to reform.

“The OTS intends this review to trigger a full and informed debate about the impacts, how the changes could be made, how the challenges can be addressed and the timetables required, to make change as seamless as possible and to provide a system that is fit for the future.”

Jon Biddle, Group Chief of Operations at Umbrella.co.uk said: “I think many people will support reforming the current system of taxation, particularly if it makes it easier to understand. But in applying these recommendations, the government needs to make sure that it is as fair and even handed as possible. What starts as an exercise in simplifying the tax system should not become an exercise in raising taxes for self-employed people.

“I agree that we need a full and frank discussion on this issue and I hope that the government doesn’t try to rush anything through before the Chancellor’s budget speech later this month.”

An executive summary to the report lays out the seven steps to closer alignment in full. These are:

  1. moving to an annual, cumulative and aggregate basis for NICs
  2. basing employers NICs on whole payroll costs and renaming the charge
  3. aligning the self-employed NICs more closely with the employees’ NICs – and benefits
  4. improving transparency for NICs and the contributory principle
  5. aligning the definition of both earnings and expenses for income tax and NICs
  6. bringing taxable benefits in kind into Class 1 NICs
  7. having a joined up approach for income tax and NICs laws and practice

If you would like any additional information on the proposed changes and how they might affect you, please speak to a member of the Umbrella.co.uk team. Call: 0800 121 6513.