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Chancellor announces tax u-turn

Hammond scraps NIC rise for self-employed

Chancellor Philip Hammond has dropped his plan to increase National Insurance contributions for the self-employed.

In a rapid and embarrassing u-turn on a key Budget measure, Mr Hammond said the government will not go ahead with the planned rises.

His proposed increase in NICs prompted an outcry from the government’s backbenchers who accused him of breaking a 2015 Conservative manifesto pledge.

In a letter to Tory MPs today, he said: “There will be no increases in NI rates in this Parliament.”

His letter continued: “It is very important both to me and to the prime minister that we are compliant not just with the letter, but also the spirit of the commitments that were made.

“In the light of what has emerged as a clear view among colleagues and a significant section of the public, I have decided not to proceed with the Class 4 NIC measure set out in the Budget.”

He had planned to increase Class 4 NICs from 9% to 10% in April 2018, and to 11% in 2019, to bring it closer to the 12% currently paid by employees.

Mr Hammond had been accused of behaving like an accountant in trying to balance the books and showing a degree of political immaturity in how the policy would be received.

In the Commons Labour’s Jeremy Corbyn said the U-turn showed a government “in chaos”.

Steven Cameron, Aegon pensions director, said: “The policy has put the spotlight on the issue of NI and the rights and benefits of those working in the gig economy.

“We hope that the government will look more closely at what can be done to close disparities between the employed and the self-employed.

“Within pensions, we need to find a solution equivalent to auto-enrolment, using nudges for the self-employed to halt the growing retirement income divide we’ll otherwise face between them and their employed peers when they come to retire.

“Delaying the increase allows more time for the government to come up with a pension solution for the self-employed, which could include rebating the increase in NI into a private funded pension of the self-employed individual’s choice.”

Steve WebbSteve Webb (right), director of policy at Royal London, said: “It is time for an end to the roller-coaster of policy making from the Treasury. First we had a dividend tax break introduced and slashed a year later. Then we had a National Insurance rise for the self-employed reversed within days of being announced.

“What is needed is a long-term strategy for tax, not a serious of short-term announcements. Now that the Chancellor has committed to leave NICs for the self-employed alone, we also need a long-term commitment to stop meddling with pension tax relief.

“That would provide savers with the certainty that they urgently need. We also need a strategy to tackle the pensions saving crisis amongst the self-employed which remains unaddressed.”

John Cullinane, tax policy director at the Chartered Institute of Taxation, said:This is yet another example of a Budget ‘rabbit’ that has come back to bite the Chancellor. Philip Hammond is just the latest chancellor to discover the perils of announcing tax changes without consulting or preparing the ground adequately in advance. 

“We urge the Government to change the way it makes tax and budget decisions to reduce taxpayer confusion, cut down costly errors and avoid embarrassing U-turns like today’s.

“The move to a single fiscal event is a step in the right direction but today’s abandonment of the National Insurance increase shows how a better, more careful approach to tax policy is in the interests of not just taxpayers but government too.

“Reducing the volume of tax changes, as the Chancellor did last week, should help the Government to consult more effectively, early and widely enough on the measures they bring forward in future. The Treasury needs a more robust policy making process involving more challenge – internal and external – before measures are decided upon.

“The imbalance between the tax burdens on employment and self-employment remain very large, mainly because of the 13.8% cost of employers’ national insurance and, for the larger employers, 0.5% Apprenticeship Levy which comes in next month.

“We need a wide, open and public debate on the tax treatment of different kinds of employment. If significant differentiation is to remain then this should be redesigned on a clearer basis, perhaps on the model of the statutory residence test.

“These questions, and where we go with employers’ national insurance, are ones we would urge the Government to consider carefully.

“Any changes will take time to implement but we hope that the Government will return to this issue when the Taylor report is published later this year.” 

Ed Molyneux, CEO and co-founder of Edinburgh-based accountancy software firm FreeAgent, said: “Raising National Insurance contributions could have been potentially devastating for the UK’s freelancers and contractors, so I’m delighted to see that this plan has now been scrapped.  

“However, it’s disappointing to see that there has been no similar U-turn over the other contentious issue in the Budget: the decision to cut the dividend allowance….it will not only be a disincentive for business owners to invest and grow, but it will also disproportionately affect Britain’s smallest businesses.”

Lucy-Rose Walker (right), CEO of Entrepreneurial Spark, said: “We are delighted to hear that the Chancellor is no longer penalising job-creating entrepreneurs by increasing their National Insurance contributions, which we opposed last week.

“To truly succeed as a nation we need to reward, rather than discourage, entrepreneurship.

“We’d still like to see more be done regarding other policies announced during the Budget, in particular the cut to dividend tax credits, but this is certainly a step in the right direction.”

Andy Willox, FSB’s Scottish policy convenor, said: “Self-employed people from Plymouth to Peterhead will be breathe a sigh of relief that the Chancellor has come to his senses.

“He’s made the right choice – obviously realising that it doesn’t make sense to squeeze the nation’s strivers while trying to deliver a business boom.

“We agree with him that politicians need to better support people who work for themselves. But the way to do that isn’t by hiking their tax bills.”

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