The army of 4.8m self-employed will fight to preserve its privileged tax status

Lucy Hazell faced a dilemma. As she prepared to go on maternity leave, she had to decide whether to give up her high- flying, globe-trotting career as a management consultant or resign herself to spending most of her time away from her young family. After weeks of agonising, she decided she could have the best of both worlds by going freelance.

“It allowed me to pick and choose,” said the 48-year-old, who lives in Wimbledon, southwest London. “I could do interesting work but between projects I’m answerable to nobody. If I wanted to spend the whole day with my son, no one could tell me not to.” Fifteen years later, she hasn’t looked back.

An engineer by training, Hazell began her working life at ICI overseeing the dismantling of large chemical plants for maintenance work. Now she advises manufacturing companies on acquisition targets, or whether to build a new production line — usually on contracts lasting only a few months.

Hazell embodies a significant shift in the British workforce over the past 15 years — the rise of the self-employed white-collar worker, a group responsible for a big chunk of the increase in self-employment over that period. The growing armies of consultants offer many reasons for choosing to go it alone, from better work-life balance to extending their careers into their seventies or running a start-up on the side.

However, a more controversial attraction is the lower level of tax paid by the self-employed — and it is set to cost the taxman billions as their ranks swell.

Matthew Taylor, appointed by the prime minister last November to lead a review into changes in the ways we work, is set to publish his findings in the coming weeks. The head of the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) is focusing primarily on workers’ rights in the burgeoning “gig economy” — where companies, such as cab-hailing app Uber, have been accused of shirking their responsibilities to their workers.

However, Taylor has also indicated that he will draw attention to a tax system that has encouraged more people to work for themselves. If the government listens, chancellor Philip Hammond’s aborted national insurance increase on the self- employed in the March budget could turn out to be the opening skirmish in a crackdown on the white-collar army. For a Conservative government already under fire for its “anti-business” leanings, it could be a tough battle.

Hammond may have bungled his national insurance reform, but the problem he was seeking to address is real. The ranks of the self-employed have swollen by 50% since 2001 to more than 4.7m.

Because they pay lower employee national insurance contributions, and no employer contributions, they have left the Treasury facing a growing revenue black hole — forecast by Helen Miller of the Institute for Fiscal Studies (IFS) to reach about £16bn by 2022.

According to the IFS, an employee earning £40,000 a year will generate a total of £12,146 in income tax and national insurance. A self-employed person on the same income pays just £8,713 — more than £3,000 less.

Company owner-managers can pay even less by taking the money out of their business as dividends — which attract a lower tax rate than wages. For them, the £40,000 job will attract tax of only £7,358, a rate that is set to fall as corporate tax rates decline.

For the relatively well-paid freelancers at the heart of the self-employed boom, the gulf is even larger. “The incentives created by the tax system certainly play a role in individuals’ choices,” said Miller.

Even the most cynical observer would admit that tax is not the only motivation to become self-employed.

After a stint working for Deutsche Bank and consultancy firm LEK Consulting, Jitin Mitra abandoned the City to move back in with his parents in High Wycombe, Buckinghamshire. He is overseeing the construction of three houses on land belonging to the family, which already owns a handful of shops and homes in the area.

To keep the money coming in — and gain experience of the corporate world — the 30-year-old has been working as a freelance management consultant. He spent six months helping ecommerce start-up Farfetch design a new budgeting strategy, and travelled to Bilbao to oversee a Spanish utility company’s drive to install smart meters.

“I always knew I wanted to do something entrepreneurial,” said Mitra. “This is a way to achieve it. I can keep some money coming in, and I can build up my own credibility.”

Research by recruitment firm Odgers Connect found that 74% of consultants went into self-employment to “take control of their professional lives” — far more than cited the financial incentives.

In his foray into property development, Mitra has employed his own team of independent contractors, including builders, a surveyor and an architect.

His entrepreneurial spirit would be grist to the mill for critics of Hammond’s failed tax rise.

“The self-employed community is an increasingly critical driver of economic growth in the UK,” Mike Cherry, chairman of the Federation of Small Businesses, said last week. “As the self- employed battle spiralling inflation and a new wave of political uncertainty, the last thing they need is for the government to revisit failed plans for a national insurance hike.”

Justin Slawson agrees. The 55-year-old entrepreneur sold the Cheese Cellar Company — a £25m turnover business he co-founded — in 2007, and now advises other firms in the food industry as an independent consultant.

“I think the self-employed take risk all the time. The early years are tremendously hard,” he said. “They are a driver of innovation and business within the country, so there should be some sort of incentive for them.”

Slawson, who “reluctantly” voted Conservative in this month’s general election, worries the party is turning its back on business. He commutes two days a week to advise on strategy at Mevalco, a Bristol-based importer of Spanish foods, where he has taken a stake.

If the Tories follow through on their pledge to cut immigration significantly, Slawson thinks the industry that Mevalco serves will struggle.

“My trade is based around cafes and hotels and you hardly find a Brit working in any of them,” he said. “Without immigration, how is it going to survive?”

While raising the taxes of the self-employed would risk their ire, does it make sense for the government to, in effect, continue to subsidise them?

Adam Corlett of the Resolution Foundation argues that levelling the tax playing field would not really amount to an attack on entrepreneurs.

According to Corlett’s research, the proportion of the self-employed who have taken on employees has plunged even as the sector has boomed, halving to 11% between 2003 and 2015.

“If you look at a lot of these self- employed consultants, they seem a lot more like employees than job creators,” he said.

Some argue that the lack of perks such as sick pay and maternity pay for the self-employed justifies granting them a tax advantage. However, Miller of the IFS points out that the vast majority of such benefits are provided by employers, not by the state.

“The lack of employee benefits is generally reflected in better rates of pay,” she said. “It doesn’t make sense to compensate people using the tax system.

Gwen Barry, an HR consultant from Putney, southwest London, thinks turning to self-employment nine years ago boosted her earnings substantially. Barry, 32, makes about £145,000 a year selling her services via her own company — about £40,000 more than she would doing similar work as an employee, she estimates.

“If you work for yourself, your level of pay is not determined by your gender, or waiting around for someone else to leave before you can move up,” she said, adding that the rewards are also compensation for the risk of finding yourself without work for a while once a contract comes to an end.

A self-described “swing voter” who opted for Labour this time round, Barry said she is happy to pay more tax as long as it is spent “wisely”, such as on the NHS.

Even so, she thinks Hammond’s tax-raising plans were aimed at the wrong target. “They should be hitting the bigger businesses that can afford better tax advice — the Ubers and the Apples.”

This lingering sense that hitting the self-employed is beating up the little guy could make the chancellor think twice before attempting to revive March’s national insurance rise.

Even so, Taylor’s long-awaited report could provide Hammond with some air cover. Earlier in the year, the RSA chief appeared to endorse a tax overhaul.

“I think there are lots of ways to support entrepreneurship — the tax allowances that people get for investing in their equipment, ways that we treat the profits that people generate,” he said. “I’m not sure that a differential tax system is the most effective way to encourage self- employment.”

For Hazell, even a sharp rise in her tax bill would not tempt her to give up the freelance life.

To begin with, self-employment left her with space to spend quality time with her children — she now has three, aged 15, 13 and 11.

These days, she also devotes part of the gaps between jobs to her hobbies: training for half marathons and learning Japanese. “Wild horses couldn’t drag me back,” she said.