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  • Government announces National Insurance u-turn

    April 07, 2017

  • The government has made a U-turn on their controversial plans to increase Class 4 national insurance contribution rates (NICs) for self-employed people.

    The change, announced in the spring budget, had come under fire from many groups, including the Federation of Small Businesses (and from famous entrepreneur Lord Sugar).

    Criticism of government policies is nothing new, so what prompted the U-turn?

    The reputation of the Conservative Party

    Although Philip Hammond and Theresa May initially said there would be no turning back, a substantial rebellion from Conservative backbenchers prompted them to take another look at the proposal.

    When the Conservatives were elected to government in 2015, their manifesto pledged "no increases in VAT, national insurance contributions or income tax" for the next five years. Sources claim that May was concerned about the party's reputation if they reneged on this promise. Hammond then wrote a letter to the chair of the Treasury Select Committee to announce that the plans were being dropped.

    The tax change would raise costs without increasing benefits

    The proposed increase was designed to make the level of NICs self-employed people pay more in line with what employees pay. There was some concern about this, however, as people who are self employed don't get the same benefits, for example workplace pensions, holiday pay and sick pay.

    It's worth noting that the government U-turn didn't include the scrapping of Class 2 NICs, so low-earning self-employed people will now need to pay the voluntary Class 3 NICs if they want to receive the state pension, which could mean an increase of 400% or more.

    Reform is still on the way

    Despite the budget U-turn, the Prime Minister is still preparing to overhaul employment rights in response to the increase in self employment. A government review by Matthew Taylor, which is set to be published in June, will address issues surrounding the "gig economy", particularly tackling companies who wish to control their workers' time but ask them to become sole traders so they can avoid paying employer national insurance contributions, as well as sickness, holiday and maternity pay.

    Whatever happens, the growth in self employment, and the tax and policy challenges that come with it, is set to remain in the news.

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