Lessons learned from Canada: Will Sunak incentivise self-employment, or discourage it?
Canada’s rate of self-employment is sliding and that’s bad news for the Canadian economy. We see a similar trend happening in the UK. Will the UK’s Conservative Party do anything to make an impact?
The UK and Canada both have highly developed and industrialised economies, with a large services sector. Both countries are facing similar economic challenges, such as rising inflation and supply chain disruptions. But what of their governments’ support for self-employment?
In recent years, there has been a decline in self-employment in Canada. The number of self-employed Canadians fell by 10% between 2016 and 2021, a rate that is significantly faster than the decline in the overall workforce.
The decline in self-employment has had negative consequences on the Canadian economy. Self-employed Canadians are more likely to be innovators and entrepreneurs, and they play a vital role in creating jobs and driving economic growth for the companies they work for. Shop closures are becoming a common occurrence and that means people are having to be let go.
Who has the stronger freelancer economy: the UK or Canada?
According to a 2023 report by Upwork, Canada has the fourth-largest freelancer economy in the world, behind the United States, India, and the United Kingdom. The report also found that Canadian freelancers earned an average of $50.32 per hour in 2022, which is higher than British freelancers who earned an average of $42.77 per hour in 2022.
While the UK also has a strong economy and a high level of education like Canada, there are a few factors that are holding back the freelancer economy. One factor is the high cost of living in the UK. This can make it difficult for freelancers to start and maintain their businesses.
Why is UK self-employment decreasing?
The number of self-employed people in the UK has also gone down in recent years. In 2016, self-employed people made up 15.3% of the workforce, but by 2022, that number had fallen to 13.0%. This decline is concerning, as self-employment figures are usually a reflection of an economy’s health.
Here’s what’s contributing to the drop in UK self-employed workers.
- Rising costs and interest rates: The rising cost of living has been rising steadily in recent years, making it more difficult for self-employed people to make ends meet.
- Increased competition: The UK economy especially has become increasingly competitive in recent years, making it more difficult for self-employed people to compete against larger businesses.
- Lack of government support: The UK and Canadian governments do not do enough to support self-employed people. For example, self-employed people who work through umbrella companies do not always have access to the same social benefits as employed people, such as sick and holiday pay and pension contributions. Every month there is a list of non-compliant umbrella companies that the government publishes publicly, yet it is the freelancers working through these umbrella companies that end up with fines for non-compliance from HMRC.
- VAT threshold is too low. The current VAT threshold incentivises people to earn less not more. This then impacts family household income and spending power in the larger economy. Arguably, businesses with improved cash flow could invest in their growth, leading to more jobs and opportunities in the UK economy.
How to incentivise people to start businesses instead of closing them
The UK’s Conservative Party has a long history of supporting small businesses and self-employment. However, in recent years, the party has been criticised for not doing enough to support self-employed workers. Government support could include providing tax breaks, access to affordable childcare, and other forms of financial assistance. Abolishing IR35 could also help. See our IR35 archive here.
The UK education system could also benefit from more readily available practical courses such as personal finance and business studies at GCSE and A-level, rather than a focus on simply more Maths.
Boost thresholds for tax and VAT
There has been chatter of Conservative leaders considering cutting the higher rate of income tax for the first time in six years, in a move that would benefit the 5.6 million people who currently pay the higher rate of tax, which is levied on earnings over £50,271.
However, the move would also be a significant U-turn, as Rishi Sunak froze income tax thresholds in 2021 for six years. The Institute for Fiscal Studies (IFS) has predicted that this will cost taxpayers an extra £52 billion a year by 2027.
If the Prime Minister does go ahead with the plan to raise the higher rate threshold, it would be a clear sign that he is willing to change course in order to try to win back voters.
- Cut taxes for self-employed workers. The Conservative Party could reduce the National Insurance contributions that self-employed workers have to pay. This would free up more money for self-employed workers to invest in their businesses or save for retirement.
- Increase access to affordable childcare. The government could provide more funding for childcare subsidies, making it easier for self-employed parents to afford childcare past school hours (including secondary). This would make it easier for self-employed parents to start and run businesses.
- Make self-employed status tax less complicated. The UK has a complex tax system, which can be difficult for freelancers to understand and comply with. Places to start include IR35.
- Provide training and support for entrepreneurs. Teaching secondary students about the possibilities of self-employment could mean developing personal finance and business startup skills to start and run successful businesses.
If the Conservative Party or any party for that matter wants the self-employed vote, it will have to send a clear message that it is committed to supporting small businesses and that self-employment is a viable career choice.
The Conservative Party has an opportunity to reverse the decline in self-employment in the UK. By taking the steps outlined above, the party can create a more supportive environment for small businesses and self-employment, and encourage more people to start businesses instead of closing them.
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