Umbrella company contractors, freelancers and other self employed workers might not be too happy when they read the recommendations of an influential think-tank regarding Britain’s taxation system.
Carried out for the Institute for Fiscal Studies, and chaired by Sir James Mirrlees, the review says that the tax system is ripe for reform and it has put forward its suggestions to improve the economy and increase people’s welfare.
Two of these recommendations could be of particular interest to contractors. Firstly, the review recommends simplifying the income tax rate structure and merging tax and national insurance contributions. Secondly, the review suggests aligning the tax treatment of corporate-source income, employment and self-employment.
The report points out that having two separate taxes on earnings makes the system unnecessarily complex. It also highlights the bizarre structure of the income tax bands. Currently rates go up from 40% to 60% on earnings between £100,000 and £112,950 they then drop back to 40% before increasing to 50%.
The system is further complicated by applying different rates depending on the source of the income. The think-tank suggests streamlining the system by applying the same rate of tax to all income including that from regular earnings, self-employment, property, capital gains tax and dividends.
Richard Baron from the IoD has said he is concerned that these recommendations could have a detrimental impact on SMEs. Taxing people with their own small business in the same way as employees and corporations could lead to higher NICs for contractors.
Treating people’s income derived from self employment, salaried employment and small business ownership as equal would effectively eradicate IR35 but it would also dramatically increase limited company contractors’ tax bills.
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