The government has announced a U-turn on its controversial plans to increase National Insurance Contributions for self-employed workers. The proposed changes were a key policy point in last week's Spring Budget.
In his speech, Chancellor Phillip Hammond announced that the Class 4 National Insurance (NI) rate would be increased from 9% to 10% in April 2018 and would rise to 11% by April 2019.
The change would have impacted self-employed workers earning more than £16,250 and was expected to cost them an extra 60p per week or £31 a year.
The measure would have raised £145 million a year.
But the announcement enraged many who saw it as breaking a Tory manifesto pledge from 2015 of ‘no increases in VAT, Income Tax or National Insurance.’
In his speech, the Chancellor pointed out that the reasons for the difference in contribution rates no longer applied.
“Historically, the differences in NICs [National Insurance contributions] between those in employment and the self-employed reflected differences in state pensions and contributory welfare benefits. But with the introduction of the new State Pension, these differences have been very substantially reduced,” he said.
He also highlighted that an employee earning £32,000 a year faced an NI bill of £6,170, but a self-employed person would only have to pay £2,300 under the current rules.
Now, just a week after announcing the measure, Hammond has said the government will not carry out the planned increases.
Hammond announced the U-turn in a letter to Tory MPs: 'The measures I announced in the Budget sought to reflect more fairly the difference in entitlement in the contributions made by the self-employed and address the challenge of sustainability in the tax base.
'The government continues to believe that this is the right approach.
'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.
'In 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 measures set out in the Budget.
'There will be no increases in NICs rates in this Parliament.'
The Chancellor says he will explain the change of heart in a Commons statement later. In the letter, he also said he would address how he would plug the gap in government finances the U-turn has created in the Autumn Budget.