Chancellor Philip Hammond has performed the biggest about-turn of this current Conservative government by announcing the scrapping of changes to Class 4 National Insurance laid out in last week’s Budget.
In a letter to the Treasury Committee published today Hammond confirmed that in light of “what has emerged as a clear view among colleagues and a significant section of the public”, the government will not proceed with the increases in taxation for the self employed.
Flurry of criticism
The proposals would have seen the rate for Class 4 NICs increase by 1% to 10% in April 2018, with a further 1% increase to 11% in 2019, and were initially justified by the Chancellor as a way to narrow the difference in taxation between the employed and self-employed.
However, the measures were met with a flurry of criticism from the self employed, business lobby groups and even MPs from Hammond’s own party, who charged him with breaking a Conservative Party general election manifesto commitment not to put up National Insurance, income tax or VAT – the so-called ‘tax lock’.
With pressure growing on the Chancellor throughout the week it was first declared that the increases would be delayed until Autumn 2018, then the government followed this up today with the announcement that there will be no increases in National Insurance rates in this Parliament.
The Chancellor also confirmed that the government will continue with the abolition of Class 2 NICs due in 2018.
The increase was due to raise about £2bn over the course of the current parliament, and in his letter Hammond confirmed that this gap would be met by measures to be announced in the Autumn Budget.
Speaking to the 1922 back-bench committee last week, Hammond reassured Conservative MPs that they could defend the NICs increase confident in the knowledge government wouldn’t u-turn.
This is a spectacular climbdown for a Chancellor who appeared relaxed during his Budget speech, taking time to crack jokes at opposition leader Jeremy Corbyn’s expense.
Commenting on the announcement Matthew Taylor, the former Labour adviser currently reviewing modern employment practices for the government, and whose preliminary conclusions encouraged Hammond to increase NICs for the self-employed, said: “Let's hope big political learning from the NICs episode is the danger of making blanket manifesto tax pledges to try to embarrass opponents”
However, Torsten Bell, director of living standards think tank the Resolution Foundation, stated that the government has “missed an opportunity to correct a big structural flaw in our tax system which allows better-off self-employed workers to pay far less tax than employees”.
|AccountingWEB expert view – Rebecca Cave, consulting tax editor
“It’s a foolish politician who makes promises not to increase taxes before a general election, and Hammond is suffering from David Cameron’s legacy – the tax lock.
“The rise wasn’t going to take effect until 2018 anyway, so there’s no effect in the current or next tax year, The proposed changes were a 1% rise in the main class 4 rate from 6 April 2018 and another 1% rise from 6 April 2019.
“The abolition of Class 2 is going to save a self-employed person £148.20 a year on 2017/18 rates – how will that money be clawed back into the Treasury? We can but wonder…
“The interesting point is the tax gap Philip Hammond now has to plug. He’s now got to find around £500m per year in the Autumn Budget, and we can only speculate how. The pain is likely to fall on the self employed or small businesses in some form, but we will have to wait until Autumn to see where the pain is going to fall next.”