Press release: National Living Wage plans risk fuelling growth of false self-employment, say tax campaigners
Today’s announcement that the National Living Wage (NLW) could eventually increase to over £10.50 and extend to workers aged 21 and over by 2024 is welcome, but LITRG are concerned about the risk of increased ‘false self-employment’1 that could result from these changes.
The NLW is due to increase from £8.21 to £8.72 from April 2020 for those aged 25 and over. Provided economic conditions allow, it could eventually reach over £10.50 and be extended to younger workers by 2024, as announced in today's Budget.2
However, care needs to be taken with the future trajectory of the NLW, given there is already some emerging evidence3 that employers facing higher labour costs as a result of the NLW may be compensating by reducing jobs, hours or perks, to help them protect their profitability.
Victoria Todd, Head of LITRG says:
“We welcome the government’s bold ambitions for the minimum wage but we are concerned about the extent to which low-income workers might be impacted as a result of any changes in behaviour by their employers.
“Increases in the minimum wage obviously mean that extra costs are borne by the employer – not just the prima facie rate rise – but also increases in employer’s NIC, holiday pay and pension contributions that are all based on the higher NLW rates.
“In addition to ‘trade-offs’ and simply underpaying the NLW, we sadly suspect that some of the cases of ‘false self-employment’ we hear of, are being driven by the avoidance of the minimum wage – as well as the PAYE system, employment rights more generally and, of course, employer’s NIC.
“Some employers will struggle to absorb further cost increases – particularly where they are facing difficult trading conditions. And others, who can afford it, may be unscrupulous. As such, we are concerned we will see more ‘false self-employment’ in coming years, the effects of which can be detrimental and far reaching.
“In terms of future NLW movements, it is important – and widely accepted - that consideration is given to both worker need AND the affordability for employers. And the level decided upon, needs to be enforced effectively as well as enacted. The key point is that policy in this area should be based on research, evidence and careful analysis of such, so that any other impacts are fully understood, and the price of the policy understood and accepted as worth paying.
“HMRC’s NMW enforcement team will also need to have clear protocols in place for dealing with workers presenting in false self-employment.
“We recognise that these types of cases are time-consuming and difficult to investigate – particularly as there will not usually be any official ‘employer’ data to scrutinise as a starting point. But HMRC will need to make sure that they have a plan of action and sufficient resources in place to deal with such cases, otherwise the overall objective of improving outcomes for the lowest paid could be seriously undermined.”
- Treating a worker as self-employed when the true nature of his/her engagement is that of employment. Self employed people are not entitled to the minimum wage.
- As confirmed in para 2.5 of Budget document https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/871799/Budget_2020_Web_Accessible_Complete.pdf 'Publishing the Low Pay Commission’s 2020 Remit – Alongside the Budget, the government has published its remit to the Low Pay Commission (LPC) for 2020. Confirming the government’s ambitious target, the remit asks the LPC to make recommendations with the view of reaching a National Living Wage (NLW) of two-thirds of median earnings by 2024, provided economic conditions allow. Following recommendations made by the LPC, the NLW will apply to workers aged 23 and over in April 2021, with a target for it to apply to workers aged 21 and over by 2024.'
- As discussed in LITRG's response to the LPC on the April 2020 rates: https://www.litrg.org.uk/sites/default/files/190606-LITRG-response-LPC-NLW-FINAL.pdf
Low Incomes Tax Reform Group
The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.