Taxation & the new economy – Rise in self-employment

The new economy is known as the driving force of economic growth, and its characteristics are technology driven which are penetrated in the consumer and business marketplace. The technological change made it easier to work from home and therefore made it easier to start your own business. In the UK, the number of self-employed increased from 3.8 million in 2008 to 4.6 million in 2015. Conversely, it is widely believed that self-employed can more easily evade taxation regarding their individual income taxes compared to wage earners.

For now we will focus on the UK, where the tax policy system experienced some drastic changes since 2008. Their corporate tax rate declined with 10% and their personal income tax increased with 5% since 2007.

But how did this tax policy change affect the revenue of taxes?

Tax revenuePicture1

The UK tax revenue as a percentage of GDP drastically changed since 2007. Both individual income and corporate tax revenue declined, but especially the corporate tax revenue declined sharply. A reasonable motive behind lowering these corporate taxes was to create favourable investment conditions again after the UK was struck by the financial crisis. And indeed a rise in business investments is shown from 2010 onwards. In 2014 the investments were even higher than before the recession in 2008. By the end of 2014 even 14% of the UK was self employed, which is why the UK has become the so called “self-employment capital of Western Europe”. So we see that creating favourable investment conditions has positively influenced the number of self-employed.

Growth in self-employment

A distinguishment can be made between part-time and full-time self-employment. Part-time self-employment increased by 88% and full-time self-employment increased by 25%. The figure on the right clearly shows that different factors are influencing the growth in self-employment and especially the change in self-employment propensity largely contributed to the growth rate. Over the past couple of years the amount of people becoming self-employed has increased quite constantly. However, the amount of people that stopped being self-employed has decreased drastically. This has led to the percentage of self-employed being approximately 14% nowadays. Screen Shot 2017-03-14 at 21.54.40Being self-employed tends to be quite appealing to a lot of people which can explain the increase in the amount of self-employed. First of all it allows you to make your own decisions instead of having to listen to your awful boss and colleagues. You can decide what kind of products or services you want to offer, how you want to offer them, how much they will cost, and most importantly at what time you start and stop working. Being self-employed will allow you to avoid those deprecatory looks you will get from your colleagues when you come in late to the office AGAIN. Also, when it’s a sunny day, you don’t need to call in sick seen as you can just go to the beach without the fear of being caught by someone from your office. As good as this all sounds, is your life really that easy and enjoyable when you’re self-employed? Perhaps for some people, but definitely not for everyone.

Risks of being self-employed
Seen as you are entirely dependent on how good your company is performing, there is a reasonable chance that you will have to work very hard in order to pay your bills each month. You will not get a constant salary, regardless of the firm’s performance, which you likely would if you were working for someone. This brings us to one of the biggest risks of being self-employed namely; continuity. When your company is not performing as it should and you have been making losses for a while, you can get into serious financial problems which leads to not being able to pay bills or even to bankruptcy.

But even when your company is doing good and is able to survive, being self-employed can cause some problems. First of all, a well known problem of self-employed people is their pension. According to the British multinational Prudential, who offers life insurance and other financial services, almost half of all self-employed have no pension savings at all which can support them when they retire. Besides, self-employed miss out on up to £91,500 during their working life, which employees receive from employer contributions through a workplace pension scheme. A lot of the self-employed plan on living entirely from the state pension which they will receive once they retire. However, this will often not suffice to live the comfortable live they are used to. This could mean that they will have to work even after the retirement age in order to be able to provide for their needs.

When it comes to taxes there are also some disadvantages for the self-employed. Seen as you manage your own tax, things can go wrong and get crooked. In the UK you have to notify HMRC regarding your taxes and in doing so you might struggle in having them put you on the correct tax code. Self-employed also only have to make tax payments once or twice a year which makes it more likely to result in having to pay larger amounts during those times. Lastly, self-employed are not eligible for the £30,000 tax exemption on termination payments.

Other disadvantages for self-employed are the lack of employee benefits such as private health care and dental health care, and not being paid while on sick leave, holiday, or maternity.

So although being self-employed might seem nice at first sight, it definitely should not be underestimated. We would like to see some further research regarding self-employed and taxes to see whether the current system should be slightly changed in favor of them. This will help further increase the amount of self-employed and will decrease the dependency of the UK on (foreign) multinationals. And in the end that is what the British were after; to be dependent on their own country again.

 

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