Own your business? Why you might pay more self-employed tax in 2021

8th February 2021

If you’re self-employed, or you own your own business, the chances are that you are taxed less heavily than employed people, despite increases to Dividend Tax in recent years.

The argument for paying less self-employed tax is that there is a difference between wealth creators and employees. Business owners bear the risk of running an enterprise, and don’t have the stability of knowing they will always have work the next day, and a pay cheque on the same date every month.

As Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE) says: “They take on the risk and instability for businesses — and pay a little less tax as a result.”

However, in recent months the government have indicated that they are considering aligning the tax treatment of employed and self-employed workers. So, if you’re self-employed, could you be set to pay more tax in 2021?

Government scrapped plans to increase National Insurance for self-employed workers in 2017

The idea of equalising the tax for employees and the self-employed is not a new one. Back in 2017, the then chancellor, Philip Hammond, announced that Class 4 National Insurance contributions – the rate paid by self-employed people – would rise from 9% to 10% in April 2018, and to 11% in 2019.

However, after opposition from fellow Conservative MPs, the chancellor was forced into a U-turn just a week after announcing the measures.

“The government continues to believe that addressing this unfairness is the right approach,” he said.

“However, since the Budget, parliamentary colleagues and others have questioned whether the increase in Class 4 contributions is compatible with the tax lock commitments made in our 2015 manifesto.”

Chancellor signalled an aligning of tax rates back in 2020

Three years after Hammond’s failed reforms, the current chancellor, Rishi Sunak, revealed that he also has plans to change the tax treatment of self-employed workers.

During the Downing Street press conference when he announced the government’s Self-Employed Income Support Scheme (SEISS), the Chancellor went out of his way to highlight that the support for self-employed individuals was comparable to that for employed workers.

The Chancellor said: “If we all want to benefit equally from state support, we must all pay in equally in future. It is just an observation that there is currently an inconsistency in the tax treatment of the employed and self-employed”.

Treasury minister reaffirms commitment to equalising taxes

Despite no further announcements on the issue of aligning tax rates for the employed and self-employed, recent comments from a government minister confirm the plans are very much still on the agenda.

Speaking to MPs on the Treasury select committee, the financial secretary to the Treasury, Jesse Norman, was recently asked whether it is fair that those who are self-employed or trading as a limited company may pay less tax than those who are employed.

“The Treasury’s position is that at the point of tax, if people are doing the same work they should be taxed in the same or similar way,” Norman said. His comments signal that these plans remain on the table and could be announced as early as the next Budget, this March.

Responding to the minister’s statement, the Association of Independent Professionals and the Self-Employed (IPSE), warned the government that tax rises could harm the economy.

Andy Chamberlain from IPSE said: “In a recession, we would normally expect a jump not a slump in the number of self-employed, as businesses look to the flexible expertise they offer. However, recent ONS stats showed that the number of self-employed fell by a record 238,000 in the second quarter of 2020.

“Rumoured tax hikes will do little to encourage people to strike out on their own and drive the growth that is needed. Businesses left in a fragile state by the recession – particularly the ones that received little or no support – may well fold under renewed tax pressure from the Exchequer.”

Get in touch

If you have any questions about self-employed tax, and how you can structure your finances tax-efficiently, please get in touch. Email info@depledgeswm.com or call (0161) 8080200.

Please note

The Financial Conduct Authority does not regulate estate and tax planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.