The self-employed and small business owners should pay as much in taxes as the busy, influential think tank the Institute for Fiscal Studies argues.
The current tax system doesn't really work for anyone, the IFS says in its report released today. The self-employed pay lower social security and income taxes than their employees – often when they do the same job for companies.
The government is losing £ 15 billion in tax revenue annually as the self-employed pay less tax, the IFS said.
> See also: You should submit your tax return by January 31st despite the HMRC extension
"There is a large, unjustified and problematic bias towards employment and earned income and in favor of corporate ownership," the report said. "The different tax rates lead to inefficiency, injustice, complexity and loss of income."
According to the IFS report, a full-time employee could pay up to £ 4,300 more in taxes for a job with an income of £ 40,000 than if someone had their own business doing the same job.
And if you're a self-employed partner in the financial services industry with an average salary of £ 308,000, you pay £ 20,000 less in taxes each year than someone doing the same job as a full-time employee.
Tax policy shouldn't encourage people to become self-employed – or employers to use self-employed entrepreneurs, according to the IFS.
The rapid growth in the number of small businesses is often hailed as a success, the report said, "although the UK has a longer stock of low-productivity businesses than other countries".
And the number of accountants and HMRC officials whose time is devoted to overseeing those blurry lines between self-employment and employment is putting a strain on the system, the report said.
> See also: MPs give the tax officer six weeks to settle the Covid payments for freelancers
At the same time, the IFS stated that there were not enough tax incentives for entrepreneurs and business investments. The way the tax system works discourages risk-taking and penalizes equity investments, the report said. 100 percent corporate investment tax write-offs have been proposed.
The IFS report agrees with the thought reported by Chancellor Rishi Sunak that the self-employed will have to pay more taxes in the upcoming household on March 3rd.
According to IFS, the current tax system is under pressure mainly due to the boom in the number of people who have started their own businesses. Owner managers have been the fastest growing sector of the job market since the early 2000s. From the tax officer's point of view, this blurs the lines between employment, self-employment and limited liability companies.
In response to the IFS report, Professor Len Shackleton, a research fellow at the Institute of Economic Affairs, told the Telegraph: “This is completely the wrong time to propose significant tax increases, especially for the self-employed.
"For our recovery later, many people will need to create work for themselves rather than relying on big corporations or the government to create new jobs for employees."
Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, told the newspaper, “The self-employed were one of the most economically affected groups in the pandemic. To argue that this group should face even more financial burdens in the form of tax hikes will find many to be deeply unfair.
"IPSE agrees that the tax system needs fundamental reforms, but we shouldn't fall into the trap of the self-employed not paying enough taxes."
Further reading on the self-employed tax
You should submit your tax return by January 31st despite the HMRC extension