An increase in self-employed National Insurance contributions is much needed. But the government has shelved its plans for one—and is pressing ahead with benefit cuts that leave low income households facing a hitby Torsten Bell / March 15, 2017 / Leave a comment
U-turns are a staple of politics, in all but the most honeymoon phases of governments. But Chancellor Philip Hammond’s U-turn on his Budget plan to raise National Insurance for the self-employed is a very unusual one, combining as it does a very firm defence of the need for the policy with the decision to scrap it.
That we have ended up in that place reflects the undeniable fact that the politics of the increase in self-employed National Insurance contributions (NICs) has been a disaster, while the policy rationale remains absolutely undeniable. To put it another way, whatever the rights and wrongs of breaking the spirit of manifesto commitments—be it tax rises, migration targets or membership of the single market—the substance of the Chancellor’s U-turn on NICs means the government has missed an opportunity to correct a big structural flaw in our tax system.
This matters both for fairness and for the public finances.
On fairness, the U-turn means the next few years will now actually see a growing tax gap between employees and the self-employed, at the same time as the benefits gap between the two is closing significantly through the introduction of the single tier pension that gives the self-employed the same pension entitlement as employees. The self-employed do need more support in other areas, including with pension saving and maternity pay, but those do not come close to justifying the tax gap with employees.
We should also be clear that the package of NICs reforms due to come into effect from next April would have left the majority of self-employed workers better off—including two-thirds of self-employed women.
Yes, there were going to be losers—as is always the case with tax rises—and no politician should ever be flippant about the very real impact tax rises (or indeed benefit cuts) can have. But this was a progressive tax rise—the majority of revenues would have been raised from the richest ten per cent of households.
On the public finances, today’s U-turn means the total cost of lower NICs for the self-employed will now grow from £5.1bn this year to an estimated £6.2bn in 2019-20. These are big sums, dwarfing the actual size of the proposed tax rise. More broadly, it is worth reflecting that…