Zero hours abolition may drive false self-employment tax avoidance

As the Employment Rights Bill has passed into the reporting phase, a parliamentary committee has heard that the proposed abolition of zero hours contracts could encourage evasion of the rules by employers and ‘false self-employment’. 

But what is ‘false self-employment’ and why does it matter? Well in the context of the zero hours contracts ban, the chief executive of the Recruitment and Employment Confederation Neil Carberry highlighted that in an attempt to circumvent the rules we could see some employers “using platform sites to engage people who are patently workers as self-employed”. So ‘false self-employment’ is broadly when an employer takes on a worker as self-employed, perhaps even encouraging this, and avoids their responsibility to assess whether they should actually be employees. 

In the year ahead, the potential risk of ‘false self-employment’ is likely to be even higher due to the changes that have been made to National Insurance contributions (NICs) by the current and previous governments and it could cost the Treasury significant amounts if it isn’t tackled head on. 

The cuts to NICs by Jeremy Hunt in his last couple of budget announcements, resulted in the main rate of Class 4 NICs for self-employed workers being cut by a third from 9% to 6%. That may be incentive enough for some people as the Employee’s Class 1 NICs main rate is 8% by comparison and it could potentially result in a higher amount of take-home pay. 

However, the motivation for employers to also turn a blind eye to their workers’ self-employment status may also be about to increase as a result of the NICs changes from Rachel Reeves’ first budget. Where an employer takes on a worker who is genuinely self-employed, they will not have to account for any employers’ NICs at all. 

Putting some numbers on this, if an employee who is under state pension age and resident in England is on a salary of £50,000 then, from 6 April 2025, the NICs cost to the employer will be up to £6,750.00 and the take-home pay of the worker will be £39,519.60. By comparison, there would be no NICs cost to the employer for a self-employed worker charging £50,000 for their services and the take-home pay of the self-employed worker would be £40,268.20. The temptation for potential tax avoidance is plain to see.

The recent Public Accounts Committee report on HMRC noted it had been given extra funding for additional staff by the Treasury. It is expected that there will be a focus on small businesses as a result, including on the self-employed, as non-compliance among small businesses accounted for 60% of the tax gap in the 2022/23 tax year. As a result, employers and self-employed workers need to take care that the working relationship between them is not in fact one of employment. They could find themselves the subject of detailed scrutiny from HMRC as it looks to drive down tax avoidance.