Every few months, someone declares that the self-employed don't pay their 'fair share,' usually citing comparisons with employees on the same gross income, writes IR35 and status expert Rebecca Seeley Harris of Re Legal Consulting.
Lighting the self-employed's fuse just before Autumn Budget?
The latest declaration comes from the Resolution Foundation (RF). And it's an untimely declaration for contractors, given it's being sounded to the chancellor and others just before Autumn Budget 2025.
The left-leaning, independent think-tank, "dedicated to lifting living standards in the UK," has shared some commentary accompanying its research with ContractorUK. Its findings have also been covered by the FT here.
'Taxes on typical employees aren't unusually high but the bias against them is'
Entitled "It's personal (taxation)," the foundation's report states that "taxes on typical employees aren't unusually high but the bias against them is".
Framing this as a "bias" is an interesting take, but it again puts the blame on the self-employed for tax policies created by governments.
The problem with the '55% self-employed tax advantage' claim
The Resolution Foundation analysis shows a sizable gap in the total tax take between an employee and a self-employed person doing similar work.
The report, which attributes both employer and employee NICs, argues that:
1. A typical self-employed worker pays roughly 55% less in total labour tax than an employee earning the same gross pay (2025-26 estimate).
2. That's around a tax gap of 11 percentage points of gross income (their own illustration).
Much of the press ate it up. What rarely makes the front page, however, is that employees receive benefits which are funded by their employers and ultimately priced into the cost of labour.
The self-employed, including contractor limited company directors, have to fund these benefits themselves, or they go without.
Once you price that in, the simplistic 'tax parity' story disintegrates.
In fact, if the current government tried to close the RF's argued 'tax gap' while also delivering benefits parity, the benefits bill would far exceed the extra tax revenue received by HM Treasury.
Self-employed pay: the truth
On average (according to the Institute of Fiscal Studies), self-employed workers now earn ~30%[1] less than comparable employees.
That discount is the market's way of paying for volatility, unpaid downtime, business risk and admin time that no payroll ever covers. Calling that a 'loophole' is a nonsense; it's a risk premium going the other way, i.e. against contractors and the self-employed.
The benefits that employees receive might make freelancers balk
A mainstream employee package includes four main pillars:
Paid holidays: at least 5.6 weeks a year in the UK. Financially, that is worth about 12.07% of annual pay (5.6 weeks divided by the number of working weeks in a year).
Employer pension contributions: the common floor is 3-6% of salary, and many employers pay more. A pragmatic central assumption is 5%.
Sick pay and short-term income protection: coverage varies, but across a workforce, sick pay can be sensibly costed at ~2% of payroll.
Insurance and perks: life assurance, Employee Assistance Programmes (EAPs), basic health/dental or cash-plan style benefits, often amount to another ~1%.
Adding up the cost of the four benefit pillars, returns (conservatively) ~20% of salary in value, with a reasonable range of ~16-25%, depending on how generous the employer is.
Therefore, self-employed people must fund that 16-25% themselves, or accept less security and a poorer retirement.
Self-employment and pensions
Oh, and it's widely acknowledged that there is a pensions crisis looming for the self-employed.
The Social Market Foundation, for example, found in August 2025 that just 20% of self-employed workers participate in a pension scheme, compared to 78% of employees. The contributions by the self-employed are also comparatively less frequent and much less. That's the real 'parity gap.'
Four policy gaps the self-employed fall through, or are stung by
On top of the benefits above, other factors that could or should be considered in any financial analysis of self-employment versus employment, which clearly give the self-employed a comparatively raw deal, are:
Paternity leave.
Maternity leave.
The costs of Making Tax Digital (MTD).
The behavioural effects of numerous tax changes.
In addition, Unemployment Insurance (UI) is going to replace existing working-age contributory benefits. And the government is considering extending UI to the self-employed. The government might use this to justify a rise in the tax rate on self-employed workers.
What that looks like on a £40,000 salary
On a £40,000 employee salary, the resulting missing benefits package is worth approximately £8,028 a year (12.07% holidays + 5% pension + 2% sick + 1% perks).
To match that security and time off, a self-employed worker needs to generate about £48,000.
And that is before accounting for unpaid admin days, not forgetting that the self-employed also self-fund their back office, where Accounting, Bookkeeping and Legal must all come out of the self-employed person's pocket.
The associated time-cost parity here is rarely taken into account by politicians and economists.
Additional self-funded costs shouldered by contractors and the self-employed include equipment, insurance (sometimes insurance is required by clients as a condition for undertaking the work), training or professional fees.
What about the self-employed 'tax gap'?
Think-tank type calculations typically come in two varieties.
A 'narrow view' that looks at the difference in Income Tax and employee National Insurance between an employee and a self-employed person on the same gross.
A 'broad view' that adds employer National Insurance, on the logic that most of it is borne by workers through lower pay. Depending on income, the broad gap is often summarised at around 11 percentage points of gross pay. On £40,000, that's about £4,400 extra tax if you forced a self-employed person to pay like an employee and treated employer NI as their cost.
Compare the two: £8,028 of employee-style benefits versus £4,400 of extra tax.
The benefits gap is nearly double.
Now, consider the policy thought experiment that is rarely completed.
Suppose the government decided to raise self-employed taxes to match employees (i.e. the government gets taken in by the 'broad view').
To avoid an obvious fairness problem, the government would simultaneously have to promise equivalent benefits: holiday pay, employer-style pension contribution, sickness cover, and basic perks.
Considering the cost of parity
On the revenue collection side for HM Treasury, the extra tax take from full "equalisation" has been framed by the Resolution Foundation at roughly £9-10 billion.
But when you price benefits parity at ~20% of pay, the benefits cost for the same group is much higher.
Using a conservative earnings base for the self-employed, the arithmetic implies something like £24 billion to deliver true parity (a lean package still pushes towards £20 billion; a more realistic package lands higher).
An £11billion benefits bill
The benefits bill would far outweigh the extra tax by roughly £7-15 billion, with a central estimate of about £11billion. And that's before you even account for administrative overhead, compliance, dispute resolution, and the deadweight cost of trying to graft payroll-style entitlements onto millions of fluid, diverse businesses.
It also ignores behaviour.
Squeeze the self-employed sector and some people will exit, incorporate, or move into unrecorded activity, shrinking the very tax base reformers want to harvest.
So what should fairness look like?
There are three answers to this question that might go a long way to heading off the semi-annual complaint of 'risk-takers aren't paying their fair share to HMRC.'
Recognise that self-employed workers are simply following the rules. They are not tax cheats, they're operating within the frameworks which parliament wrote. If policymakers dislike today's outcomes, that's a design issue, not a compliance one.
Judge taxes against benefits, not in isolation. If the RF or others want the tax numbers to converge, they must either:
(a) accept a modest tax discount for the self-employed as compensation for the missing 16–25% package; or,
(b) design portable, contributory benefits that can be bought at scale, funded by a portion of any extra tax, not all of it, with clear opt-outs for those who prefer flexibility.
Attack arbitrage, not independence. Align tax where the facts show employment (control, personal service, mutuality), regardless of the label. Therefore, an 'inside IR35' contractor would receive basic employment benefits as a 'dependent contractor' (which I have recommended in my 'Employment Status Roadmap' report).
TL;DR: Why the Resolution Foundation has got the self-employed wrong
There's a place for tightening genuine loopholes without penalising millions who simply prefer autonomy and are already paid less on average.
Contractors, freelancers, sole traders, the self-employed, and solopreneurs are essential shock absorbers for the economy, while simultaneously providing much-needed flexibility. They take risk; they scale up and down fast, and they deliver projects that employers' permanent staff teams cannot.
If the political aim is fairness, let's measure it properly: benefits plus taxes. On that measure, the self-employed aren't freeloaders, they're already footing the bill for benefits employees receive by right. And if we insist on bringing taxes into line without recognising that, parity will be a very expensive illusion.
[1] IFS What does the rise of self-employment tell us about the UK labour market?
