Can your business compete with the pull of self-employment?

Many businesses are finding hiring is getting harder and retaining staff is equally challenging.

One of the factors behind this that a lot of businesses overlook is tax, as the effective fiscal advantage enjoyed by the self-employed is substantial right now and it is encouraging skilled people to trade up for the perceived financial upside.

You cannot rewrite tax rules yourself, but you can make employed roles more appealing.

Why does self-employment look so tax-efficient?

Rising employment costs have bitten into margins for many businesses as increases in the National Living Wage (NLW), National Minimum Wage (NMW) and employer National Insurance Contributions (NICs) have pushed up the cost of taking staff on.

At the same time, fewer vacancies and a softer labour market have made recruitment less attractive.

Against that backdrop, the tax gap for the self-employed is a powerful pull.

Forecasts for 2025–26 point to an effective tax rate of about 17 per cent for the self-employed, compared with roughly 27 per cent for employees.

This means that employees can end up paying as much as 55 per cent more tax than an equivalent self-employed peer.

Much of that divergence stems from last year’s Budget changes, where employer NICs rose, a cost that affects employees indirectly, while the self-employed avoided the same increase.

Employees also face marginally higher NICs in many cases, widening the difference further.

How can employers respond to the tax gap?

The good news is that traditional employment still carries advantages that contracting usually does not.

Regular pay, statutory sick pay, holiday entitlement and employer pension contributions are clear benefits that are not easily replicated by the self-employed.

For many people, the security provided by a steady income, employer pension contributions and family-friendly leave offsets some of the immediate tax advantage of going freelance.

Alongside the conventional appeal of traditional employment, there are some changes you can make to close the attractiveness gap without harming your bottom line.

Consider boosting workplace pension contributions, improving paid-leave policies or introducing modest perks that can improve the well-being of your team, such as flexible hours, training budgets or better career progression.

It is also worth noting that policy can change, which would shift the appeal back towards traditional work.

The Chancellor could move to equalise treatment between employed and self-employed workers either by adjusting employee NICs or bringing more self-employed income into the NIC/tax net.

If that happens, the current advantage of contracting would shrink and the inherent strengths of employment would become more obvious.

We can help you understand your current financial position so that you are better equipped to provide a more rewarding environment for members of your team.

The inherent benefits of traditional employment are not going away, so focusing on highlighting these can be a way to tackle any ongoing recruitment and retention challenges you may face.

Speak to our team today to ensure that your team feels the full financial benefits of working with you!