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Chancellor U-turns on planned NIC hike

Chancellor U-turns on planned NIC hike

Category: Money

Updated: 16/03/2017
First Published: 16/03/2017

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This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

You may remember from last week's Budget that the Chancellor planned to raise Class 4 National Insurance Contributions (NICs) for the self-employed, amid much uproar from such workers and even those in the Conservative party. Well, you'll be pleased to hear that Philip Hammond has taken an almighty U-turn on that stance, and the planned increase is no longer going ahead.

In a letter to Conservative MPs, the Chancellor explained his reason for backtracking, saying that it was to ensure that the Government remained true to its 2015 manifesto, in which the Conservatives had pledged to not raise NICs during the course of Parliament – which has been the crux of the argument against the rise over the last week.

He stated the original tax lock (which was set out in the National Insurance Contributions Act 2015) would only apply to Class 1 contributions, or those paid by employees and employers. This meant that the measures proposed in the Budget technically fall within those constraints, in that they only apply to Class 4 NICs, but that rationale hasn't gone down well with the public at large.

He acknowledged that in his letter, noting that there had been "much comment on the question of commitments made in our 2015 manifesto," and that while he felt that those commitments had been maintained, "it is clear that compliance with the 'legislative' test of the Manifesto commitment is not adequate," he wrote. "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." He confirmed that there would now be no increases in NIC rates in this Parliament, but that the scrapping of Class 2 NICs from April 2018 will go ahead as planned.

What next?

If you're one of the many self-employed people who's no longer facing a tax hike, you'll no doubt have welcomed the news – but you may also have noticed that the spotlight is still on the differences between the rights and benefits of the employed and self-employed, with a particular focus on pension saving.

Graeme Robb, senior technical manager at Prudential, said that the U-turn "is good news for the millions of self-employed people in the UK who no longer face increased National Insurance contributions," but highlighted the continued divide in pension saving. "One of the best ways for self-employed people to reduce their tax bills is to save into a pension," he said. "Prudential research indicates that only one in 10 self-employed people save into a pension and increasing contributions now is one effective way to beat possible tax rises later in the year."

Steven Cameron, pensions director at Aegon, is pinning his hopes on the future of the auto-enrolment system: "We hope that the Government will look more closely at what can be done to close disparities between the employed and the self-employed; within pensions, we need to find a solution equivalent to auto-enrolment, using nudges for the self-employed to halt the growing retirement income divide we'll otherwise face between them and their employed peers when they come to retire."

While there's no way of knowing what could come to pass in future Budgets, it's clear that the self-employed need to be proactive when it comes to pension saving. You may not be enrolled in a workplace scheme with the associated benefits of employer contributions, but that doesn't mean you can't save for yourself – setting up a personal pension should be at the top of the agenda, and at the very least, saving into an ISA (or the upcoming Lifetime ISA) would never go amiss. That way, you can be confident that your financial future is as secure as possible, no matter what happens to tax rules in years to come.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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