The Treasury is finalising plans to overhaul tax rules which allow those that are self-employed to avoid paying national insurance contributions, with the move targeted at those who set themselves up as private companies to take on work.

The Treasury believes that a third of people claiming self-employed status as a “personal service company” are in actual fact full employees and should therefore pay more tax. It stated that, without reform, high levels of non-compliance with tax rules could cost HM Revenue & Customs (HMRC) £1.2bn per year by 2023.

It is now looking at demanding that firms which use personal service company contractors take legal responsibility for ensuring “off-payroll” contractors stick to the tax rules known as IR35.

A similar move in the public sector on “synthetic” self-employed has raised an additional £410m since 2016, according to HMRC estimates.

Currently, full employees pay higher levels of national insurance compared to those that are self-employed.

However, Chancellor Philip Hammond is under pressure to raise taxes at the Budget following Theresa May’s pledge of £20bn worth of extra spending on the NHS by 2023.

Personal income tax allowances cold be frozen, despite the Tory party’s pledge during the 2017 election that they would rise to £12,500 for low rate tax payers and £50,000 for higher rate tax payers by 2020.

Freezing income tax allowances could raise up to £2bn a year. Reform of the IR35 rules would not raise as much, but may be less politically controversial.

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