By: The Gateway Team On: March 17, 2017 In: Self-Employed, Tax Matters Comments: 0

Last week, we had the Chancellor, Phillip Hammond, release details of the Spring Budget. The news of what he is planning to do in the upcoming year rumbled its way through the country and has continued to stay a main vocal point this week.

Hammond said that 2.48 million people (contractors) will be hit by Class 4 NIC rise from 9 percent to 10 percent, averaging £240 each, per year.

Currently, the self-employed may have to pay both Class 4 and Class 2 NICs:

  • Class 4 NICs at 9% are paid on profits between £8,060 and £43,000
  • Class 2 NICs are paid on profits of £5,965 or more

Hammond wanted Class 2 NICs to be abolished by 2018 and for Class 4 NICs to rise to 10 percent in April 2018 and then again to 11 percent in April 2019.

In his 2017 Spring Budget, Hammond stated that “as our economy responds to the challenges of globalisation, shifts in demographics and the emergence of new technologies, we’ve seen a dramatic increase in the number of people working as self-employed or through their own companies”.

He also reminded us that this is “only a self-employed person with profits over £16,250 will have to pay more as a result of these changes” and this change would mean that the difference between NIC’s for employed and self-employed workers was minute.

Many on Twitter believed that the rise in NI contributions wouldn’t come to fruition. Especially after 9th March, when our Theresa May delayed this legislation until the autumn budget because of a lack of Tory numbers behind her.

Anyone got de-ja vu from George Osborne’s #PastyTax? That time when the conservatives said they would add a 20 percent VAT tax levy on pasties, hot pies and sausage rolls (essentially, all food sold “above ambient temp”). For many in Cornwall, the pasty is an institution; so news in May that the government was making a U-turn on the tax was gladly welcomed.

However, after a barrage of complaints from fellow Tories, opposing parties and twitter users for breaking the manifesto pledge not to raise NI contributions, Hammond ditched it.

I must say that it looks pretty embarrassing for May and Hammond considering they’ve gone back on their manifesto, then delayed and then scrapped it altogether. What a nightmare two weeks for them?!

Take a look at Hammond’s u-turn letter to his fellow tories:

Dear Colleague

I am writing to clarify the Government’s position with regard to the changes to National Insurance contributions (NICs) for the self-employed, announced in last week’s Budget.

As I set out last Wednesday, the gap between benefits available to the self-employed and those in employment has closed significantly over the last few years – 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.

It remains our judgment that the current differences in benefit entitlement no longer justify the scale of difference in the level of total NICs paid in respect of employees and the self-employed.

Colleagues will be aware that there has been a sharp increase in self-employment over the last few years. Most commentators believe that at least part of the increase is driven by differences in tax treatment.

HMRC estimates that the cost to the public finances of this trend is around £5bn this year alone and the parallel increase in incorporation will cost more than £6bn a year by the end of the Parliament. This represents a significant risk to the tax base and thus to the funding of our public services.

The measures I announced in the Budget sought to reflect more fairly the differences in entitlement in the contributions made by the self-employed and addresses the challenge of sustainability of the tax base.

The Government continues to believe that this is the right approach.

Since the Budget, however, there has been much comment on the question of commitments made in our 2015 manifesto. Ahead of Autumn Statement last year, the

Prime Minister and I decided that, however difficult the fiscal challenges we face, the tax-lock and spending ring-fence commitments we have made for this Parliament should be honoured in full. I made this clear in the Autumn Statement speech.

As far as National Insurance contributions are concerned, the locks were legislated for in the National Insurance contributions (Rate Ceilings) Act 2015.

When that Bill was introduced, it was made clear that the lock would apply only to Class 1 contributions (employer and employee). The measures proposed in the Budget fall within the constraints set out by the tax-lock legislation and the spending ring-fences.

However, 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 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 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. We will continue with the abolition of Class 2 NICs from April 2018. The cost of the changes I am announcing today will be funded by measures to be announced in the Autumn Budget.

I undertook in the Budget speech to consult over the summer on options to address the principal outstanding difference in benefit entitlement between employed and self-employed: parental benefits. We now intend to widen this exercise to look at the other areas of difference in treatment, alongside the Government’s consideration of the forthcoming report by Matthew Taylor, CEO of the RSA, on the implication of different ways of working for employment rights.

Once we have completed these pieces of work, the Government will set out how it intends to take forward, and fund, reforms in this area.

I plan to make a statement in the House later today.

Philip Hammond

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