The Prime Minister, Andy Burnham, has been urged to increase the basic income tax rate to 30 per cent for workers earning under £50,270. The proposal comes from the Bright Blue think tank, a right-leaning organisation, which argues that the move would help fund enhanced benefits for the self-employed, including sick pay and parental leave.
Think Tank's Proposal to Reform Tax
Bright Blue, in a recent report, recommends that the Government reform the tax system to narrow the fiscal gap between self-employed workers and employees. One suggested approach is to increase the basic rate of Income Tax by 10.3 percentage points, bringing it to 30 per cent for those earning below the £50,270 threshold. This would apply to the majority of workers in the UK.
The think tank also advocates for equalising National Insurance contribution (NIC) rates for the self-employed with those of employees, including accounting for employers' NICs. This would mean self-employed individuals would pay similar levels of National Insurance as their employed counterparts, helping to fund additional protections.
Public Support for Equalising NI Rates
According to Bright Blue's polling, equalising NI rates between the self-employed and employees is the most popular financing option among the public, chosen by 29% of respondents. In contrast, simply increasing Income Tax on everyone, including employees, was favoured by only 19% of respondents. This indicates a preference for targeted tax changes over broad-based increases.
Potential Financial Impact
Bright Blue's report suggests that these policy recommendations could be a net fiscal positive for the government. Under a revenue-raising model, the extra tax raised would more than offset the cost of the added protections, generating a net total of approximately £7.9 billion annually for the government. Alternatively, in a revenue-neutral model, the policy recommendations would put billions of pounds back into the pockets of taxpaying employees.
Addressing Gaps in the Safety Net
The report highlights that the changes would address the main gaps in the safety net that the self-employed currently face, including under- or unemployment, illness or injury, becoming a parent, and retirement. By extending benefits like sick pay and parental leave to the self-employed, the government would provide a more comprehensive social security system.
However, the think tank notes that the changes would not completely eliminate the fiscal imbalance. The self-employed would still receive larger state subsidies on their retirement savings compared to employees, meaning the fiscal balance would remain slightly in their favour. Additionally, self-employed individuals who establish companies and employ people can typically pay themselves in dividends, which attracts a lower rate of taxation than salaries of their employees.
Conclusion
In its conclusion, Bright Blue states: “The changes recommended in this report would go a long way to narrowing the fiscal gap between the self-employed and employees. Worth noting, however, is that they would not go all the way: primarily since the self-employed would eventually be receiving much larger state subsidies on their retirement savings than employees, the fiscal balance would still be slightly in favour of the self-employed.”
The report adds: “These policy recommendations could be a net fiscal positive for the government. Under a revenue-raising model, the extra tax raised would more than offset the cost of the added protections, raising a net total of approximately £7.9 billion annually for the government. Or, alternatively, in a revenue-neutral model, the policy recommendations would put billions of pounds back in the pockets of taxpaying employees.”
