Chancellor Philip Hammond has gone back on the much-criticised increase to National Insurance Contributions for the self-employed announced in his budget last week.
Under the proposals made in the Spring budget, Class 4 NICs were to increase from 9% to 10% from April 2018, and again up to 11% in 2019. This would, Hammond said at the time, serve to put employees and self-employed workers on more of an even footing when it comes to tax – where the current imbalance disproportionately favours the self-employed, he argued.
However, in the days following the budget announcement, the move drew criticism from both inside and outside the conservative party. Hammond had argued that historically, the effective tax relief granted to the self-employed could be justified in terms of reduced benefits received. Now though, the gap has been reduced significantly, “most notably by the introduction of the new State Pension in April 2016, worth an additional £1,800 to a self-employed person for each year of retirement”. Others disagreed that the benefits gap had closed significantly enough, and that outside of state pension contributions, self-employed people still face a lack of basic protections that are due to employees.
Over and above this was the fact that the rise seemed to directly contradict the Conservative’s 2015 manifesto promise that NICs would not go up during this parliament. It is this, in particular, that Hammond cited as reason for the U-Turn.
He announced the decision in a letter written to Andrew Tyrie, in which he made it clear that the NICs lock committed to in the manifesto, and reiterated in the most recent Autumn statement “would apply only to Class 1 contributions (employer and employee)”. As such, the increase to Class 4 NICs would “fall within the constraints set out by the tax-lock legislation”.
However, he said “in light of the debate over the last few days, it is clear that compliance with the ‘legislative’ test of the Manifesto commitment is not adequate.
“It is very important 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”.
As such, he said: “I have decided not to proceed with the Class 4 NIC measures set out in the Budget. There will be no increase in NICs rates this parliament.”
Reactions to the U-turn have been mixed. Conservative MP Stephen McPartland, for example, praised Hammond’s strength in admitting his error, saying: “It’s fantastic news, and shows he’s a strong chancellor, because he can admit when he’s made a mistake. I’m delighted with the announcement and I really look forward to working with him to deliver for self-employed people going forward.”
On the other hand, Jeremy Corbyn took the opportunity to criticise Theresa May during PMQs for leading a government that he described as ‘chaotic’, producing a “budget that unravels within seven days”.
May had been put in an awkward position, forced to defend the U-turn during PMQs just days after defending the hike in Brussels. In Commons on Wednesdays she reiterated support for the spirit of the hike, but conceded that commitment to the 2015 manifesto pledge takes priority right now.
She said: “We made a commitment not to raise tax and we put our commitment into the tax lock, and the measures we put forward in the budget were consistent with those locks.
“But as a number of my parliamentary colleagues have been pointing out in recent days, the trend towards greater self-employment does create a structural issue in the tax base, on which we will have to act.”
The U-turn presented other issues, however. Namely, how Hammond intends to make up the money that the increase was initially supposed to raise. The rise would have raised some £645 million a year by 2020, Hammond had said – money that was to contribute towards the extra £2 billion due to be added to the social care budget, among other things. In his letter to Tyrie, he said that “the cost of the changes [he is] announcing will be funded by measures announced in the Autumn budget”.