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'Stealth tax' for self-employed: Philip Hammond U-turns on tax cut, leaving 3.4 million worse off

The Telegraph logo The Telegraph 07/09/2018 Anna Mikhailova
a man wearing a suit and tie: Philip Hammond © Simon Dawson /Reuters Philip Hammond

The Chancellor has decided to scrap a tax break for 3.4million self-employed people, in a move that has been branded  a "stealth tax".

Philip Hammond has announced he is going back on the Government’s pledge to abolish Class 2 National Insurance contributions (NICs), in a move which will raise an extra £435 million a year for the NHS.

The change will scrap a tax cut of £134 a year on average for millions of self-employed.

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Class 2 NICs apply to self-employed people with profits of between £6,205 and £8,424 a year. George Osborne announced he would be abolishing them in the 2015 Budget. The change was meant to be implemented this year, but Mr Hammond delayed it until April 2019.

On Thursday, he quietly announced scrapping the measure through a written ministerial statement.

The Chancellor faced a fierce backlash when he tried to raise the rates for Class 4 NICs, which apply to self-employed people with profits over £8,424, in 2017. He was accused of breaking Tory manifesto pledges and eventually ditched the plan.

Britain's Chancellor of the Exchequer Philip Hammond leaves 11 Downing street in London on July 18, 2018. (Photo by Tolga AKMEN / AFP)        (Photo credit should read TOLGA AKMEN/AFP/Getty Images) © Getty Britain's Chancellor of the Exchequer Philip Hammond leaves 11 Downing street in London on July 18, 2018. (Photo by Tolga AKMEN / AFP) (Photo credit should read TOLGA AKMEN/AFP/Getty Images)

However, cancelling the expected tax cut has been seen as another attack on the self-employed.

Sam Dumitriu, head of research at the Adam Smith Institute, said: "This is a stealth tax rise. 

"Philip Hammond didn't win the argument in Parliament on raising Class 4 NICs. As a result, he is going back on the  scrapping Class 2 as a backup."

John Redwood, the Conservative MP, said: "This is a big let down for Conservative voters, which will be extremely unpopular.

"The Government should get behind the self-employed and enterprise."

John McDonnell the shadow Chancellor, said: “This is yet another betrayal of the self-employed.

“These people are the engine of the economy and have been let down again, while giant corporations have seen their tax bills slashed. Few will ever trust Philip Hammond or the Tories again.”

The written statement made by the Treasury said: "The Government is announcing today that it will not proceed with the abolition of Class 2 National Insurance contributions (NICs) during this parliament.

The Federation of Small Businesses said the move "raises serious questions once again about the Government's commitment to supporting the self-employed".

Berlin, Germany - February 13: In this Photo Illustration £ 10 and £ 20 pound sterling (Great Britain Pound - GBP) bills stuck in a wallet on February 13, 2017 in Berlin, Germany. (Photo Illustration by Thomas Trutschel/Photothek via Getty Images) © Getty Berlin, Germany - February 13: In this Photo Illustration £ 10 and £ 20 pound sterling (Great Britain Pound - GBP) bills stuck in a wallet on February 13, 2017 in Berlin, Germany. (Photo Illustration by Thomas Trutschel/Photothek via Getty Images)

"This change was originally intended to simplify the tax system for the self-employed. We delayed the implementation of this policy in November to consider concerns relating to the impact on self-employed individuals with low profits. We have since engaged with interested parties to explore the issue, and further options for addressing any unintended consequences."

About 300,000 lower-income people do not have to pay national insurance but volunteer to, in order to qualify for the state pension. Critics of abolishing Class 2 NICs said the move would have forced those people to pay a higher rate if they wished to receive the state pension.

The Treasury's  statement said: "A significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the State Pension rise substantially. Having listened to those likely to be affected by this change we have concluded that it would not be right to proceed during this parliament, given the negative impacts it could have on some of the lowest earning in our society.

"Furthermore, it has become clear that, to the extent that the Government could address these concerns, the options identified introduce greater complexity to the tax system, undermining the original objective of the policy."

John O'Connell, chief executive of the TaxPayers' Alliance said: “Millions of self-employed people in Britain, who were promised lower and simpler taxes next year, will be extremely disappointed by this announcement.

"High taxes on the self employed discourages entrepreneurship and risk taking. If the Government wants to make contributions more equivalent between the employed and self employed, then they should instead give those on salaries a tax cut.”

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