The Chancellor has today made a surprise U-turn on the widely criticised increase to class 4 national insurance rates from 2018, announced in last week’s Budget. Whilst we welcome the climb down, it is worth noting two things.
First, the threshold at which the higher rate of class 4 NIC is applied increases from 6 April 2017 by £2,000, meaning the liability will increase by £131 anyway for those earning more than £45,000, even without a rise in actual rates. Second, the whole concept of self employed versus employed was to be consulted on this Summer anyway, but the scope of this review will now be widened, which could potentially leave the self employed even worse off.
Mr Hammond had announced that class 4 NIC rates, which are charged on the self-employed, would increase from 9% to 10% from April 2018, and to 11% from 2019. Mr Hammond justified the increase by explaining that the gap between state benefits received by the self employed compared with the employed had closed considerably, most notably with the introduction of the new State Pension, and that the scale of difference needed to be dealt with.
The Chancellor did not anticipate the backlash from his Budget announcement for supposedly going against the Conservative’s manifesto not to increase national insurance as part of the triple tax lock. Mr Hammond defended his position, clarifying that the tax lock applied only to the employed, as supported in the detail behind the manifesto, and the only concession made after last week’s outcry looked like it would be nothing more than a delay in the legislation being published.
However, Mr Hammond confirmed today that even though it was clear the lock applied only to the employed, he would stick to the spirit of the manifesto and has pledged there will be no further NIC increases during the term of this Parliament, which means the increase in the class 4 rates will no longer go ahead. He has not however pledged to keep the thresholds the same and so we could still see rises in the future.
Furthermore, Mr Hammond has also widened the review to be undertaken of the differences between self-employed and the employed later this year, stating that most commentators believe the increase in self-employed numbers is at least in part driven by tax differences. He will also need to plug the £2 billion black hole that the climb down is reported to be worth.
It therefore remains to be seen as to how generous the U-turn will be!
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