‘Gig economy’ workers get a £1,240 tax advantage that’s ‘costly, inefficient and unfair’

Deliveroo Root Men ridersDeliveroo drivers, just one example of ‘gig economy’ workers.Deliveroo

LONDON — A leading think tank is calling for an overhaul to the tax system to reflect the growth of self-employed workers and company owners, saying the current system is “costly, inefficient and unfair.”

The Institute for Fiscal Studies (IFS) says that the self-employed enjoy a £1,240 tax benefit over full-time employees due to lower National Insurance contributions. This is to reflect that fact that, unlike employees, the self-employed do not benefit from legal rights such as minimum wages, sick pay, and holiday pay. But the IFS argues: “This cannot be justified by what are now only very slight differences in benefit entitlements.”

Importantly, the IFS argues that the tax system needs an overhaul now because the employment market is changing rapidly. 39% of the growth in the UK workforce has come from the self-employed and company owner-managers over the last eight year thanks to trends such as the “gig economy” — self-employment marketplaces such as Uber, Airbnb, and Deliveroo — and instability in the job market caused by the financial crisis. In London, the gig economy has exploded by 72% since 2010.

There are 4 million self-employed people in Britain today, according to the IFS, and the number of company owner-managers has doubled since 2008 to 580,000. Company owner-managers enjoy an even better tax advantage than the self-employed by drawing income as dividends, which are taxed at a lower rate to income.

The IFS concludes that the current tax system is “unfair because two people earning the same amount for doing similar work can pay different amounts of tax.”

It calls for two major changes to tax: first, money invested in a business should be deductible from taxable income so as not to discouraged investment. Second, “each additional pound of income should then be taxed at overall rates that are the same for an employee, self-employed person, or company owner-manager and regardless of whether it comes in the form of wages, dividends or capital gains.”

Helen Miller, an associate director at the IFS and a co-author of the report, says in a statement: “There’s a lot of very woolly thinking about how we should tax the self-employed and company owner managers relative to employees. The differences in entitlement to state benefits are now far too small to justify the lower rates given to the self-employed. And lower rates are not a good way to incentivise entrepreneurship.

“Changes in working patterns, including those related to the gig economy, make tackling current differences all the more important both to protect the public purse and to avoid giving incentives for big companies to treat people as self-employed rather than as employees.”

The Office for Budget Responsibility estimates that the proliferation of small companies will cost the Treasury £3.5 billion in lost tax income by 2021-22 and the IFS says that if self-employed people were taxed the same as employees they would pay £8 billion a year in National Insurance, compared to £3 billion now.

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