1.16 The other remaining difference is contribution-based Jobseeker’s Allowance (JSA). JSA is
designed to support those looking for a job, rather than self-employed individuals who may be
temporarily experiencing a shortage of work. In common with other individuals who do not
satisfy the conditions of contribution-based JSA, the self-employed may be entitled to
appropriate income-related support (dependent on their household income level and savings).
1.17 While the NICs system specifically relates to contributory benefits, there are also differences
in employment rights between different groups in the labour market. This includes rights
provided by employers to their employees, such as statutory sick pay and holiday pay. The Prime
Minister has asked Matthew Taylor, Chief Executive of the Royal Society for the Arts, to lead an
independent review into employment practices to consider issues such as these.
Fiscal impact of rising self-employment
1.18 While the difference between self-employed and employed individuals’ access to
contributory benefits has diminished significantly with the introduction of the new State
Pension, the abolition of Class 2 NICs from 2018 means that the difference in NICs paid was due
to widen. At the same time, the proportion of the workforce who are self-employed has risen
considerably since the late 1970s, with recent growth continuing a steady upwards trend that
began in the early 2000s.
1.19 This poses significant fiscal challenges. The foregone NICs from lower rates paid by the self-
employed compared with employees is estimated to cost the public finances £5.1 billion in
2016-17.
And the Office for Budget Responsibility have revised their self-employment forecast
at Spring Budget 2017 to reflect the changing make-up of the labour market, which reduces
projected tax receipts by around £1 billion a year by 2020-21.
Reforms to Class 2 and Class 4 NICs
1.20 Budget 2016 announced that Class 2 NICs would be abolished from April 2018. The
rationale for abolishing Class 2 is twofold. First, the government wants to simplify the NICs
system for the self-employed, responding to a recommendation from the Office of Tax
Simplification.
After this change, self-employed individuals will pay only one class of NICs,
rather than two separate amounts calculated via different methods. Secondly, the changes make
the system more progressive. Because Class 2 is a fixed cash amount, it is a regressive charge.
1.21 Currently, Class 2 determines entitlement to benefits for the self-employed. From April
2018, Class 4 will become the replacement for determining entitlement to benefits.
1.22 Budget 2017 announces that to reflect the significant improvement in access for the self-
employed to the new State Pension, and alongside these changes to Class 2, the rate of Class 4
NICs will be brought closer to the rate of employee NICs. The current self-employed NICs system
of a flat rate of £2.80 a week plus 9% of profits at the main rate will be replaced by a single
charge of 10% in 2018, which will rise to 11% in 2019.
1.23 In the short term, the combined impact of these changes will be to raise less revenue for the
public finances, but by 2019-20 the reforms will increase revenue, as set out in the table below.
https://beis.dialogue-app.com/matthew-taylor-review/home?sort_order=most_comments
This represents the NICs that would be paid if the self-employed were subject to Class 1 (employee and employer) NICs. See:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/579720/Dec_16_Main_Reliefs_Final.pdf
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/199183/05_ots_small_business_interim_report.pdf
The vast majority of those paying Class 4 will see only minimal changes to the way they access contributory benefits.