Individual taxation and fairness

18 April 2017

While perhaps now a distant memory, the theme of the Chancellor's Budget on 8 March certainly seemed to be focused on fairness: Philip Hammond used the word ‘fair’ 19 times in a relatively short speech. As part of that theme, he announced that Class 4 National Insurance contributions (NIC), paid by the self-employed, would increase from 9 per cent to 10 per cent in 2018, and to 11 per cent in 2019. This proposal was made on the basis that the rates of NIC for the self-employed are lower than those for an employee on equivalent income: as shown below in the rates for 2017/18.

  Employed  Self-employed
Earnings/profits up to £8,164 pa
 0%  0%
Earnings/profits between to £8,164 to £45,000 pa
 12%  9%
Earnings/profits over £45,000 pa
 2%  2%

As we know, the Chancellor was forced into an embarrassing U-turn only a week later on the basis that the 2015 Conservative Party election manifesto had promised no increase in NIC (or VAT or income tax) rates: it is perhaps strange that no advisers pointed this out to Mr Hammond before he made his Budget speech.

What is fair?

It has rightly been pointed out since that the self-employed take greater risks and have less financial security than the employed (for example, no minimum wage, no holiday pay, no parental pay, no redundancy pay etc), even if they do now have the same state pension entitlement as employees. However, everyone uses the same services that NIC helps fund and the self-employed are not only plumbers, electricians, hairdressers etc, but also high earners such as partners in law firms, hedge funds and accountancy practices. Indeed, some firms structure themselves as partnerships in the knowledge that key workers will be subject to the lower rates of NIC paid by the self-employed (and the fact there is no employer NIC to pay either on partner remuneration). Many employees may regard that as unfair.

But much of the UK tax system is unfair: is it fair that companies pay corporation tax at only 19 per cent (or less in some circumstances) regardless of the level of their profits, while individuals pay income tax at up to 45 per cent (or even higher effective rates, such as 60 per cent in one particular income band)? Is it fair that dividend income is taxed at a lower rate than earned income? Is it fair that reliefs and exemptions only apply to certain types of income or assets? The list could go on and on. A few weeks ago, my colleague George Bull asked in another RSM publication for views on how much income tax readers thought top earners should pay: the responses were varied, but most thought that higher taxes should be paid by other people and not by themselves. 

Whatever the case might be for who pays, public services have to be paid for somehow and the Chancellor will now have to find another way of plugging the estimated £2.1bn gap in tax receipts which the Class 4 NIC increase would apparently have raised over the next five years.

For more information please get in touch with Karen Clark or your usual RSM contact.