UK employment is evolving dramatically with one in seven UK workers now working flexible contracts, a 25% increase over the last two decades. Despite the ongoing pandemic this trend is growing with the latest ONS report revealing a 4% rise in temporary workers despite surging rates of unemployment.
New era new taxation
We have entered a new era of quantum employment, where work is sliced into minutes and traded across many employers. With work broken down into the smallest possible ‘quanta’, workers’ skills are in demand across industries, reducing their reliance on one employer.
Quantum employment also boosts businesses who can harness contractors’ skills to remain agile. However, keeping track of the taxes deductible and owed, when the normal working day is split between several workers, quickly becomes complex. HMRC, employers and workers need to know where they stand on tax.
Income Tax collection harder than ever
Workers holding multiple jobs makes accurately collecting tax difficult for HMRC. For instance, the personal allowance for Income Tax is £12,500. However, when a quantum employee works for multiple employers, each additional job can result in an emergency basic rate tax code being applied (a flat 20% deduction from all earnings).
The application of basic rate emergency tax codes for Income Tax leaves contractors overpaying tax – an issue not easily corrected. Often a tax return at year-end solves overpayments but reduces quantum workers’ income for most of the year. This may encourage another issue, the so-called cash or ‘black’ economy.
A lingering concern in the quantum employment era is the potential for workers operating ‘cash in hand’. A wider variety of employers complicates investigations.
For instance, a quantum employee may start the day on a construction site and finish working at a bar, both traditionally cash-based operations. Cash-based remuneration for temporary workers places the onus on HMRC to chase workers for Income Tax payment after the work is completed.
National Insurance at risk
Traditional income tax is not the only levy in jeopardy. The National Insurance (NI) primary threshold allowance of £183, should only be given once per individual. But quantum employees may receive, in error, a NI allowance for each role they work with a different employer.
Through no fault of their own, quantum workers may unknowingly be liable for additional NI payments leaving a hole in their finances. HMRC once again needs to collect underpayments.
Collecting tax, either NI or Income Tax at the end of the financial year and delivering a lump sum tax bill to quantum employees leaves workers vulnerable. Without reform to the digital systems underlying taxation, quantum employment means both HMRC and quantum workers face significant additional financial and administrative burdens. Hardly a recipe for more disclosure by the quantum employed.
The value of umbrella companies
One popular solution to the taxation issues of temporary workers is umbrella companies. Seemingly everyone wins, quantum workers are paid rapidly, employers enjoy flexible workforces and HMRC has ‘one collection source. The reality is less clear cut.
As quantum employment grows, workers will arrive at umbrella companies and professional employment organisations (PEOs) of varying degrees of efficiency and ethical stances. As a result, both tax authorities and employees may experience errors due to inefficiencies, conspiracies, inadvertent errors and/or a lack of ethics.
Keeping up with tax code quanta
Accurately calculating tax across a wide variety of employment types requires automation to speed up processes and reduce human error. Keeping up with future taxes for the quantum employed will mean accepting a wide range of payroll models. Tax professionals have to offer more than PAYE models. Taking advantage of solutions which integrate with HMRC and can adapt to new jobs and tax codes is essential.
It’s vital quantum workers can access and understand their payslips and expenses to make judgments on other projects they want to take on. Accountants need to ensure they can provide this transparency to clients and share information on finances without long delays. Few are ready to do this today.
Will the future of tax be unified?
Unifying Income Tax and National Insurance, currently separated anachronistically is another potential solution for accurately taxing quantum workers. Initially suggested in 1986, the Office for Tax Simplification was tasked with merging these two taxes in 2011. Though this never came to fruition.
The ICAEW acknowledges there are several benefits for these two taxes being merged, including administrative simplicity and reduced cost over long term. However, ICAEW also states a major disadvantage of merging PAYE and NICs is The Department of Work and Pensions will need to completely overhaul their software. The counter argument is the software currently in place already trails behind the needs of the nascent Quantum Workforce. This chasm will continue to expand if no changes are made.
The real-time quantum employment era
Transparency on taxation is the key change the quantum employment era will bring. HMRC, employers and workers need financial clarity and shouldn’t be left with a tax system designed for a drastically different UK workforce. It’s important the burden of keeping track of Income Tax, National Insurance and state benefits are reduced.
Change is needed on all sides. Key parts of the income taxation system need overhauling so it can be uniformly and transparently applied across a diverse range of quantum employment types. Taxation now needs to operate as close as possible to real-time, meeting the needs of the modern workforce who can accept work with the flick of a thumb.
Byline by John Whelan, CEO of My Digital