Following criticism, including by some Conservative MPs, of his decision to raise Class 4 National Insurance (paid by the self-employed), Chancellor Philip Hammond announced in a parliamentary statement that he would be dropping the proposal. The u-turn was welcomed by MPs across the political spectrum.
Philip Hammond stood by his overall direction of travel on ‘levelling the playing field’ between the employed and the self-employed. He said the gap between benefits available to the self-employed and those in employment has closed ‘significantly’ over the last few years. Most notably, this had been achieved by the introduction of the new state pension in April 2016. The Chancellor said government analysis suggests that a significant part of the increase in self-employment was driven by differences in tax treatment. HMRC estimates that the cost to the public finances of this trend is around £5 billion this year alone, and the OBR estimates that the parallel increase in incorporation will cost more than £9 billion a year by the end of the Parliament. “That represents a significant risk to the tax base, and thus to the funding of our vital public services”, he said.
However, he said the proposed increase in class 4 contributions was not compatible with the tax lock commitments made in the Tory 2015 manifesto. No National Insurance contribution rate increases will now happen in the remainder of this Parliament, he promised. He will go ahead with the abolition of class 2 National Insurance contributions from April 2018, which he described as an ‘outdated and regressive tax’.
Hammond said the planned consultation this summer on options to address what he says is the principal outstanding area of difference in benefit entitlement between the employed and the self-employed, parental benefits, will be widened to look at the other areas of difference in treatment. This will be alongside the Government’s consideration of the forthcoming report by Matthew Taylor, chief executive of the RSA, on the implications for employment rights of different ways of working.
The Chancellor said he will seek advice on this issue from Angela Knight, chair of the Office of Tax Simplification. The spring Budget is no longer broadly fiscally neutral, but Hammond is committed to addressing that issue in the autumn.
Treasury Committee chair Andrew Tyrie said a differential should remain in the long run to reflect the additional risk taken by the self-employed when they are doing their job. Anne-Marie Trevelyan wants the Chancellor to work over the coming months with colleagues to take a ‘holistic and simplifying’ view on personal taxation for the self-employed. Anne Main said her self-employed constituents would welcome the three-year end-of-Parliament commitment on this matter. Steve Double said there ‘absolutely nothing wrong’ in someone legitimately choosing to be self-employed. Michelle Donelan said the new state pension marks a significant increase in retirement provision for the self-employed, but without any auto-enrolment scheme, they still do not have parity on pensions.
Peter Bone wants to narrow the difference between the employed and the self-employed by reducing the contribution that the employed make. Nigel Mills said Hammond should go after self-employed partners in limited liability partnerships, who have the advantages of limited liability and of not paying National Insurance. Ben Howlett was the only MP to talk about merging income tax and National Insurance into a single tax. Hammond told him it is a ‘superficially attractive proposition (but) it is fraught with practical difficulties’. Dr Andrew Murrison wants Hammond to look afresh at the possibility of hypothecating National Insurance contributions. Charlie Elphicke wants a ‘new deal’ for the self-employed, not just on the tax side of the ledger, but in respect of workplace support.
Oliver Letwin does not want Hammond to be distracted from fiscal neutrality or from the need for the structural reforms. James Cartlidge said representatives of Hermes, Deliveroo, Amazon and Uber have told him they were interested in a type of auto-enrolment for the self-employed through one single payroll controller. Bob Blackman said every single self-employed person in this country will experience a tax cut over the next two years when class 2 is abolished.
Welcoming the change, Shadow Chancellor John McDonnell went on to say that the Chancellor was cutting taxes for the rich and corporations, while large numbers of self-employed people have been put through the ‘mangle’ over the past week, worried about how they would cope with this tax increase. “We need him to address the real issues facing the self-employed: the scourge of bogus self-employment; the exploitation that goes on under that guise; the pressure from large corporations to reduce costs relating to the self-employed unrealistically; the problem of late payments; the lack of access to maternity pay; no paternity pay; no adoption pay; no sick pay; no compassionate leave; and no carer’s leave.” McDonnell said that the Labour party has a self-employment commission, which it established last November, to address the discrepancies in access to entitlements and the contributions.
Frank Field wants the Chancellor to bear down on those employers who force their employees into self-employment against their wishes, ‘destabilise their lives’ and thereby get out of paying National Insurance contributions. Helen Goodman wants Hammond to look at the ‘absurd way’ in which National Insurance kicks in at £8,000, well below the personal tax allowance, and at the ‘very unfair’ top two per cent rate.
Stewart Hosie (SNP) welcomed the U-turn because about 140,000 Scottish self-employed people would have been affected by it, and many of them would have earned slightly below, on or only slightly more than the average wage. He added: “Today’s U-turn has all the characteristics of the pasty tax, the caravan tax and the omnishambles Budget.”
Greg Mulholland (Lib Dem) said the Budget was ‘disappointing and unambitious, and is now mired in this chaos’. Mulholland said it is time to consider having an NHS tax specific to fund the NHS, which he said did not receive enough funding. This has the support of the majority of the British public, he added.
Sammy Wilson (DUP) said the imposition of quarterly tax returns and the closing of the flat-rate VAT system will also have an impact on self-employed people. He said: “Should he not concentrate his efforts on the large corporations, such as the BBC, that abuse the tax system and have self-employment contracts to avoid paying tax?”