Ross Clark Ross Clark

The self-employed shouldn’t pay more tax. Here’s why

Last Wednesday, Philip Hammond made a joke at Norman Lamont’s expense by reminding the world of how John Major’s first chancellor was sacked after a negative public reaction to his budget in 1993. Hammond, one suspects, is already beginning to regret his gag as Lamont today became the latest Conservative to damn his plans to raise National Insurance contributions on the self-employed.

What has been so damaging is not so much the staged 2 per cent rise in contributions as the strong hint that he is considering going far further and equalising, as he sees it, the NI contributions of employed and the self-employed in the name of ‘fairness’. Employees currently pay 12 per cent of their income between £155 per week and £827 per week, while their employers chip in a further 13.8 per cent. The self-employed, by comparison, pay 9 per cent on income between £155 per week and £827 per week. Both groups pay 2 per cent on any income above that level. Hammond said last Wednesday:

‘An employee earning £32,000 will incur between him and his employer £6,170 of national insurance contributions. A self-employed person earning the equivalent amount will pay just £2,300 – significantly less than half as much.’

Yet this is a false comparison because £3,120 of the £6,170 is National Insurance paid by the employer – it isn’t paid out of the employee’s £32,000 salary. To make a fairer comparison you would have to compare the tax bills of an employee of £32,000 with a self-employed person on £35,120 – the higher figure being what it costs to employ someone on £32,000 a year. The £3,120 is a tax-deductible business expense for the company – it reduces the company’s tax bill. A self-employed person on £35,120, however, would be liable for income tax on their full earnings — they couldn’t deduct their NI bill from their taxable income.

The self-employed person would, therefore, be paying an extra £624 in income tax (20 per cent x £3,210) compared with the employee.

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