A small and sensible National Insurance rise for the self-employed is not the real strivers tax

Here’s proof that a small and sensible National Insurance rise for the self-employed is not the real strivers tax in three charts.

Conservative backbenchers and some newspapers are outraged by the Chancellor’s announcement this week that self-employed National Insurance contributions (NICs) are going up.  Broken manifesto pledges and headlines about men in white vans adds to the political heat for the Treasury.

But the politics shouldn’t get in the way of what is actually (whisper it) a sensible and modest tax change. We should focus our anger elsewhere entirely – on the deep unfairness of much bigger benefit cuts being rolled out in the next few years, and which the Chancellor pressed ahead with this week.

Firstly, the government is right to argue that there is a straightforward fairness question about whether the tax difference between employees and the self-employed is justified. The self-employed pay 9 per cent National Insurance (NICs) on their earnings above £8,060, compared to 12 per cent for employees.

In addition – and this the bigger problem that the Chancellor has said he will return to – employers don’t have to pay NICs when they hire a self-employed person saving them billions and encouraging firms to use self-employed labour for jobs previously done by employees.

This tax gap is expensive, and if the current trend of the growth in self-employment being driven by higher paying individuals continues, it will get more expensive still. For example, as this first chart shows, the taxman gets £7,000 less tax if a high earner that costs £100,000 for a firm to hire is self-employed rather than an employee. This is mainly about lower National Insurance bills and is set to cost the Treasury £6 billion in total by 2020.

Secondly, the tax “raid” coming into force over the next two years is actually a tax cut for the majority of the self-employed.

The lowest earners will be unaffected as they will continue to pay no NI and most low earners will be better off overall. That’s because they gain from the scrapping the Class 2 charge (a flat rate charge on almost all of the self-employed) and are largely protected from rate increases because their earnings are not too far above the point at which the Class 4 rate change comes in.

As the second chart shows, the greatest losers would be anyone earning above £47,000 – who would pay a little over £600 more tax each year. Given the way it’s been reported, it might be worth repeating: most of the self-employed, and all of those on low earnings, will be better off at the end of this decade as result of these NI changes. If it’s a tax hike it’s not a very good one.

We can also look at these changes on a household level, which gets us closer to the overall impact on family living standards.  As this third chart shows, the majority of revenue raised will be from the richest tenth of households, while almost none comes from the bottom half.  Of course no-one likes paying more tax, but the facts speak for themselves – this is not some kind of huge tax rise on low paid Britain. To the contrary, the impact is felt hardest by better off families.

The truth is that this is a relatively small tax rise to deal with a long standing problem: we can’t continue to charge employees much higher taxes than we ask the self-employed to pay. So this isn’t a strivers tax. If you want one of them to be angry about,  focus on the truly disgraceful cuts that are being made to low and middle income working families benefits in the coming years, bringing much worse news for many more ordinary working families than the changes to self-employed tax. Our numbers suggest that the poorest half of households will lose an average of £410 a year in 2020 as a result of cuts to Universal Credit, freezes to working-age benefits and other changes. With a 15 year wage squeeze now on the cards, it’s these policies – not the modest and sensible tax change announced yesterday – that are in need of a swift U-turn.

This post originally appeared in i news