they are not like state benefit entitlements), but a benefit that the government requires employers to give to their employees. The logic behind this line of argument is incorrect.Įmployment rights are not a benefit given by the government to employees (i.e. Lack of employment rights doesn’t justify lower ratesĪ common – and understandable – misconception is that the self-employed should get lower taxes because they do not get employment rights, such as to the minimum wage, protection against unfair dismissal, and statutory minimum holiday, sick and redundancy pay. But this difference is still significantly less than the tax advantage the self-employed enjoy. The most significant disadvantage now faced by the self-employed in the benefits system comes from universal credit, which treats the self-employed as earning at least a certain amount (after a year’s grace period) – the ‘minimum income floor’ – even if they report earning less than that, and gives them correspondingly less support. For example, employees used to accrue rights to a higher state pension in return for higher NICs payments, but this has not been true since April 2016. The difference in access to contributory benefits was more significant in the past (although still much smaller than the tax differences) but has shrunk as benefits have been extended to the self-employed. That is, the combined main rate for employees is 22.7% differences in benefits would only justify reducing this to around 22% for the self-employed – still more than double the current 9% rate. The value of these reduced entitlements is small: we estimate that they would only justify setting the self-employed NIC rate less than 1 percentage point lower than the combined employer and employee rates. There are just two publicly funded ‘contributory’ benefits that employees can access but the self-employed cannot: contribution-based jobseeker’s allowance and statutory maternity / paternity / adoption / shared parental pay. But in practice, the difference in entitlements is far too small to justify the current tax advantages.

It is commonly argued that lower NICs rates for the self-employed reflect their reduced entitlements to social security benefits.

Self-employed and employees get almost identical state benefits Nor are they well targeted at boosting entrepreneurship.Īrguably the best argument in support of lower tax rates on business owners is that these groups are simply more responsive to tax rates, but that in itself is controversial and fraught with difficulties. But lower headline tax rates are not the best way to stop this. The current tax system discourages risk-taking and some forms of investment. It is sometimes argued that business owners should get lower tax rates because, compared with employees, they are more likely to be investing their own money or taking risks. Levying lower taxes on the self-employed cannot be justified by differences in publicly funded benefits (the differences in benefits are far smaller than the tax advantages) or by differences in employment rights (which make employment more attractive to workers but less attractive to potential employers). As we explain below, none of the common arguments in favour of lower tax rates on business owners holds up.

Preferential treatment of capital gains