The chart shows an example of the tax penalty on employment relative to someone doing the same work and generating the same overall income (£40,000) through self-employment or as the owner-manager of their own company. The bars show the overall tax paid on the income. For employees, we include employer NICs, which are a tax paid by the employer to employ the individual to do the job. Employees are charged income tax on income excluding employer NICs (this is why income tax is slightly higher for the self-employed than for employees – the self-employed receive more of the £40,000 as taxable income). Company owner-managers are assumed to pay themselves a small salary and to take the rest of their income in the form of dividends (which is the tax-efficient way to take income out of a company in a given year). Excludes trading allowance and employment allowance where applicable.
Lower headline tax rates on self-employment than on employment aren’t justified by differences in benefits or employment rights, and are poorly targeted at improving investment incentives.