What did Budget 2024 do for the self-employed?

It’s been a long time since a Budget felt quite so pivotal for a political party. The Conservatives are currently tracking around 27 points behind Labour in the polls. This week’s Budget statement could have been the moment for the Conservative government to swing the balance back in their favour with a dazzling pre-election giveaway to voters.

While there were some giveaways at this week’s Budget, there’s a sense that government has its eyes on one more roll of the dice on tax before an election later this year. In the meantime, we explore what the Budget statement means for the self-employed in 2024.

Why did the Chancellor increase the VAT threshold?

The classic problem with any tax threshold is that people generally prefer to avoid crossing them – the same can be said for VAT registration.

Currently, any business (including sole proprietorships) must register for VAT with HMRC if their turnover reaches £85,000 or more – but from 1 April 2024, this will be raised to £90,000.

Registering for VAT is something that small businesses can be reluctant to do, depending on their circumstances. It carries an administrative burden as these businesses will be required to keep more records and submit regular VAT returns to HMRC. But more importantly for businesses selling directly to consumers, it means adding 20% to the effective price of your goods and services, which could see them undercut by non-VAT registered competitors.

The data (articulated brilliantly here by the Tax Policy Associates think tank) shows that small companies are deliberately holding back their turnover to avoid charging VAT. This isn’t just a problem for the individuals who feel compelled to cap their earnings and turn down work; it’s also a barrier to economic growth. High levels of inflation, coupled with the VAT threshold being frozen since 2017, means that more businesses are reaching this VAT cliff edge.

Ahead of the Budget, IPSE and other small business groups lobbied the Chancellor for this cliff edge to be nudged to £100,000, to give small businesses more breathing room after a bruising inflationary period. But the resultant increase of £5,000, whilst welcome, falls short of what the self-employed really needed.

In the long term, it seems likely that a new approach will be needed; after all, raising the threshold every so often doesn’t fix the problem – it just moves the point that freelancers run into it.

The end of National Insurance?

The Chancellor also announced a further cut to the classes of National Insurance paid by employees and the self-employed – that’s Class 1 and Class 4 respectively – of 2p. This comes not long after these taxes were cut by 1p at the Autumn Statement in November 2023, a cut which itself is yet to take effect for the self-employed, as well as the abolition of mandatory Class 3 contributions.

This is good news for sole traders, who will benefit from a simplified National Insurance system and pay a Class 4 rate of 6% from the start of the next tax year, down from the current 9%.

Announcing the cut, Jeremy Hunt said “if you get your income from having a job, you pay two types of tax – National Insurance Contributions and Income Tax. If you get it from other sources you only pay one. This double taxation of work is unfair.” Downing Street later entertained the suggestion that National Insurance for workers could one day be abolished entirely.

This dim view of the tax is consistent with one of the Chancellor’s recurring objectives at major fiscal events, which is to create more incentives for people to work. A post-pandemic rise in economic inactivity – where an individual below retirement age is neither in work nor looking for it – is credited with exacerbating labour shortages and slowing economic growth.

Despite making initial progress in reversing the trend, recent figures show that the number of inactive individuals increased by as much as 700,000, raising the question of whether government is doing enough to tackle the problem.

With the self-employed population still far below its pre-pandemic high, could the answer be staring government right in the face?

The missing piece of Hunt’s ‘back to work’ agenda

The Chancellor’s ambition to get more people in work has, understandably, focused on getting them into paid employment; but this has wrongly come at the expense of also finding ways to encourage people to take on self-employment. Unfortunately, the types of measures we saw at this week’s Budget are unlikely to do this.

Cutting National Insurance and raising the VAT threshold may make work more rewarding for those already doing it. But these measures won’t motivate those not in work and with no interest in returning to rigid corporate employment to instead launch a self-employed venture.

What would make a difference is addressing the flaws in the IR35 and off-payroll working rules, which MPs recently slammed for deterring “legitimate economic activity”. We know from our own research that the 2021 rule changes convinced many contractors to close their businesses and retire early – an own goal for a ‘back to work’ government.

At the other end of the scale, the Chancellor could explore how to make the most of the UK’s burgeoning interest in casual self-employment. Raising the Trading Allowance, currently set at a tiny £1,000 (equivalent to earning £20 per week) could embolden more people to turn an unofficial hobby business into something more significant.

If the Chancellor is serious about using Budgets to boost the number of people in work, these ideas and more could and should, in IPSE’s view, form a key part of it. With an election not far away, there could be votes to be won in these measures, too.