Tax system needs reform to encourage investment

The parts of the UK tax system that dictate how different forms of income are taxed are not fit for purpose. Employees’ salaries attract thousands of pounds more in tax each year than the incomes of people who are self-employed or working through their own company. This is unfair and pushes people towards working through their own business rather than as employees. At the same time the tax system discourages investing in a company and taking risks.

These problems can be solved. Fixing them completely would require radical large-scale reform. But short of that there are plenty of steps that could be taken towards a better tax system.

The problem

There are now about five million people obtaining income from self-employment and about two million company owner-managers. That is one in five of the UK’s workforce working through their own business. Their numbers have been...