Self-employment rise led by tax advantages for workers in high-paying ‘privileged’ sectors rather than the gig economy

The recent rise in self-employment is being led by workers in relatively ‘privileged’ high-skilled, higher-paying sectors such as advertising and banking. Their considerable tax advantages over employees, rather than new technology and the gig economy, are central to the rapid growth in self-employment, according to new analysis published today (Monday) by the Resolution Foundation.

Self-employed workers in the larger but slower growing ‘precarious’ sectors that have dominated the recent public debate, enjoy a much lower tax advantages over employees but still miss out on important pay and employment rights.

The analysis shows that 60 per cent of the growth in self-employment since 2009 has been in ‘privileged’ sectors, despite them making up just 40 per cent of the self-employed. The fastest growing sectors have been advertising (100 per cent growth), public administration (90 per cent), and banking (60 per cent).

The remaining 40 per cent of the growth in self-employment has come in more ‘precarious’ sectors, such as construction and cleaning. The Foundation notes that despite the focus on Uber in recent years, the sector that includes taxis is actually only up 7 per cent since 2009, a third of the 22 per cent growth in self-employment up as a whole.

These slow growing precarious sectors still make up the majority (60 per cent) of the self employed workforce, which is why their typical weekly earnings remain well below that of employees at around £240 a week.

The Foundation says that the sharp rise in high-paying ‘privileged’ sectors is due in large part to the big tax advantages now associated with self-employment. It notes a high-earning self-employed worker costing a firm £100,000 enjoys more than a £7,000 tax advantage over a similarly expensive employee.

In contrast, a self-employed worker in a precarious sector costing a firm £10,000 enjoys a minimal tax advantage of just £200 but still misses out on important rights, from the National Living Wage to statutory maternity and sick pay and protection against unfair dismissal.

The analysis finds that a key reason behind the tax advantages enjoyed by the self-employed is their exemption from employer National Insurance contributions. It shows that lower National Insurance contributions by and for the self employed are set to cost the Treasury more than £6bn a year by 2020, a 20 percent increase on its current cost. Nearly 60 per cent of that tax benefit goes to the ‘privileged’ sectors.

The Foundation says that alongside looking at the rights of the self-employed, as the Taylor Review of Modern Employment is set to do, it is time to look again at the tax regime for self-employment. It argues that government should reduce the incentive for people to be self-employed given the risks to the public finances, to productivity and to those that may not want such precarious work.

It adds that the significant revenues raised from narrowing the gap in the tax treatment of employees and the self-employed could be used to target support at lower income households.

Adam Corlett, Economic Analyst at the Resolution Foundation, said:

“Rising self-employment has been the biggest jobs story of the last decade, accounting for almost half of all employment growth since the financial crisis.

“This growth has been controversial at times, with several companies finding themselves in court as workers try to address the insecurity that often comes with self-employment.

“But behind the headlines the real recent growth area for the self-employed has been in lucrative sectors such as advertising and banking. This rise is driven in part by a very favourable tax treatment worth thousands of pounds a year to higher earners – just one element of which is set to cost the Treasury £6bn a year by the end of the parliament.

“With the number of self-employed workers approaching five million, we need to start addressing some of the challenges it brings. This should include more security for workers at the bottom end of the market, but reforms should also reduce the unfair tax advantages that the wealthy self-employed particularly benefit from.”