Hammond U-turn on Class 4 NICs

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Tom Herbert
Business Editor
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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.

Spectacular climbdown

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.”

AccountingWEB's Spring Budget coverage is brought to you in association with TaxCalc. Visit our Budget page to keep up with all the predictions, debates and post-Budget analysis.

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15th Mar 2017 13:48

I think the biggest about turn should be the scrapping of MTD for at least 5 years!

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to MM Bookkeeping Services
15th Mar 2017 14:05

I would happily pay the extra NIC in exchange for MTD being scrapped.

Thanks (13)
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15th Mar 2017 14:47

U turn for nic and U bend for MTD.

Thanks (4)
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15th Mar 2017 14:54

omNICshambles budget anyone? (Sadly not my own work)

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By mabzden
15th Mar 2017 15:01

So is the cut in the 0%-band for the Dividend Tax still going ahead?

The impact of that change is much bigger than the Class 4 hike.

Thanks (5)
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to mabzden
15th Mar 2017 15:34

As he got to find the money already allocated through NIC he might well get rid of tax allowance for divis altogether and quite right too.

Thanks (3)
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By sawebs
to johnjenkins
16th Mar 2017 11:49

Why "quite right too"?? In your opinion maybe. Not in the opinion of so many people with Ltd companies who keep bending over and taking it from these deluded buffoons.

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to sawebs
16th Mar 2017 12:19

I was being flippant. The NIC increase was supposed to pay for the care packages (mostly for the elderly). Pensioners who have only divi incomes (as well as state pension) will be hit with the reduction in tax free divi allowance and would be hit if the divi tax free allowance was eliminated altogether (which it will be).
A bit like Zinidine Zidane saying he's frightened of Leicester.

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to mabzden
15th Mar 2017 15:35

The NIC u-turn was never about the numbers, it was the principle of breaking the manifesto pledge.
The dividend tax wasn't in the tax lock as it hadn't been invented at the time of the general election in May 2015. So the dividend tax increase is likely to go ahead.

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15th Mar 2017 15:58

The lunchtime news had a very excited reporter telling us how important this was.

When you do the maths, its the square root of chaff all.

I am more concerned about the larger fall out here, in that if there is such a (Largely uninformed) fuss in the press about replacing a slab rate tax Class 2 with a variable tax class 4, what hope in hell has anyone got in combining NI and income tax? The computational basis are quite different, so even if the total tax take is the same, there will be winners and losers (largely part time workers with multiple jobs)

Of course as above, not a word about much much bigger things such as MTD and the flat rate VAT withdrawal.

Thanks (2)
15th Mar 2017 15:59

As an aside what are the chances of Class 2 NI not being abolished after all?

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15th Mar 2017 16:17

"U-Turn if you want to... this chancellor's not for .... oh wait... yes I am"

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By BIGWAL
15th Mar 2017 20:36

How long before Hammond gets the sack ?

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By NH
15th Mar 2017 20:18

After Rebecca Bennyworth doing all those sums too, what a shame, come on get your calculator out again....
Suspect there is no tax advantage to being incorporated any longer for most people so hmg have after all achieved what they wanted

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By mabzden
to NH
15th Mar 2017 20:38

That's the fickle world of forecasting for you. You do lots of projections for the next five years and a week later they're out of date.

God only knows what's going to happen next. Rebecca, keep your calculator handy and a few spare batteries in the drawer!

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By seitler
15th Mar 2017 21:43

What the public don't realise is that MTD will cost most businesses a lot more than any class 4 Ni change not just in hard monetary terms but also in aggravation and time lost trying to sort it out

Thanks (6)
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to seitler
15th Mar 2017 21:57

Do any of the public even know about MTD?
Of all the people I have spoken to, including clients, about MTD, so far only one person has actually said they 'had heard something about it'.
So until the press or TV do a story on this then I'm afraid the public will remain in the dark.

Thanks (2)
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By seitler
to MM Bookkeeping Services
15th Mar 2017 22:27

MM Bookkeeping Services wrote:

Do any of the public even know about MTD?
Of all the people I have spoken to, including clients, about MTD, so far only one person has actually said they 'had heard something about it'.
So until the press or TV do a story on this then I'm afraid the public will remain in the dark.

The Press are not interested in the story because its not happening just yet. I've tried. And they mistakedly think its been delayed by a year anyway

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to seitler
16th Mar 2017 11:45

re MTD (Making Tax Diabolical) keep writing to the press, House of Commons Treasury Committee, House of Lords Finance Committee and anyone else you think might publicise this awful idea. Don't think about postponing it. ABOLISH IT.

Thanks (3)
to seitler
16th Mar 2017 16:36

seitler wrote:

MM Bookkeeping Services wrote:

Do any of the public even know about MTD?
Of all the people I have spoken to, including clients, about MTD, so far only one person has actually said they 'had heard something about it'.
So until the press or TV do a story on this then I'm afraid the public will remain in the dark.

The Press are not interested in the story because its not happening just yet. I've tried. And they mistakedly think its been delayed by a year anyway

The correct approach would be to tell newspaper editors, freelance journalists etc that they will need to see their accountant 4 times a year instead of 1. It will soon move up the political agenda.

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16th Mar 2017 09:10

Brilliantly Hammy said he listened that's why he ditched the NIC increase. Well matey you ain't listening to loads more people about MTD are you? Or is it that sometimes you listen with your deaf ear.

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By IANTO
to johnjenkins
16th Mar 2017 11:09

"Well matey you ain't listening to loads more people about MTD are you?"

or the IR35 changes in the Public Sector either!

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16th Mar 2017 11:23

Everyone says that the big digital business don't pay enough tax. It is very simple to monitor as every online computer is a point of sale with an IP address. As the government can monitor our email etc, it surely cannot be that hard to calculate the point of sale value and tax google and co accordingly - up to those companies to decide want to price increased tax back to consumers

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16th Mar 2017 13:17

While he was at it he should have scrapped the imposition of S24 Finance Act 2015 disallowing finance costs for unicorporated landlords of residential properties.

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By Emthi
16th Mar 2017 18:35

Any changes in IR35???

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By IANTO
to Emthi
17th Mar 2017 11:54

Not in the law itself. It's just who determines if it applies is changing. From April, it will be the Public Sector organisation which will decide and initial observations show that they are deeming everybody subject to IR35. Many contractors have already left the PS and many more are not renewing after 31/03/2017. HMG shot itself in the foot again!

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By mabzden
to IANTO
17th Mar 2017 12:19

Have public sector bodies really said most contracts will be covered by IR35? That's not my experience.

What I have seen is agencies telling contractors all sorts of [***] including that IR35 is going to apply to all or most contracts. These agencies then recommend that the contractor signs up to an umbrella company on their "approved" list - i.e. an umbrella company they have a financial arrangement with.

It's all about commission with these clowns.

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By IANTO
to mabzden
17th Mar 2017 12:28

yes, we know that agencies are spreading FUD, but some PS organisations have already formally announced that all contracts will be subject to IR35, which is why many contractors have already left the PS and many more are not renewing after end of March.

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18th Mar 2017 10:39

Amazing how quickly one's mind can be changed after such so called careful planning. What is Hammond getting paid for - and what is he paid ? What a plonker.
At least this debacle is drawing attention to HMG's policy of squeezing our nation's small businesses and the still relatively unadvertised next stage in the execution- MTD. But at last , I see some reference in one of our tabloids about this enforced quarterly laborious administration. As other readers have commented , it is surprising that proposed idea of quarterly tax returns { AND LET'S NOT PRETEND OTHERWISE - BUT CALL IT SOMETHING ELSE IF YOU ARE GOING TO MAKE SOME MONEY OUT OF MTD } has not received the adverse publicity it deserves.
Whether Hammond will be allowed to juggle his balls in the air, in the interest of the national economy, remains to be seen.
But from this embarrassing kNICker twisting experience , he or his successor MTD { MUST TRY DIFFERENTLY }

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to Mr J Andrews
18th Mar 2017 13:29

Couldn't have put it any better myself!
Especially the last sentence - well said! :)

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