The government will no longer increase the level of National Insurance paid by the self-employed, just a week after announcing plans to do so in the 2017 Spring Budget.
Chancellor Philip Hammond had proposed increasing Class 4 National Insurance contributions by 2% over two years, starting in 2018, to bring them closer to the rates paid by employees.
This, however, broke a Conservative manifesto pledge not to raise income tax, VAT or National Insurance over this Parliament.
National Insurance tax increases explained
National Insurance is a tax on income, which is used to pay for and entitle you to a variety of benefits, including the state pension.
Self-employed and employed people pay National Insurance at different rates. Employees of companies currently pay 12% on income between £8,060 and £43,000, and 2% on any income above £43,000.
It works differently for the self-employed. They pay a flat rate of ‘Class 2’ National Insurance contributions and then a lower percentage of ‘Class 4’ contributions – 9% of taxable profits between £8,060 and £43,000, and 2% on anything more.
Class 2 contributions will be scrapped in 2018, and the Chancellor wanted to bring employees and the self-employed closer together in terms of the tax they pay. So, he proposed:
- Increasing Class 4 contributions to 10% in April 2018
- Increasing Class 4 contributions to 11% in April 2019
The graphic below shows what impact this could have on the amount of tax the self-employed paid.
Broken manifesto promise
Today, however, the Chancellor walked back his plans to increase the tax, following outcry that it broke the Conservative party manifesto promise of not increasing income tax, National Insurance or VAT in this Parliament (until 2020).
Initially, Mr Hammond had argued that he had not broken this pledge, as the Conservatives had only committed not to increase Class 1 contributions – the rate that employees pay.
In a letter to MPs, the BBC reports that Mr Hammond said: ‘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 the 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 [National Insurance contribution] measure set out in the Budget.’
Is anything changing to National Insurance?
One thing we do know is that the amount of income or taxable profit you need to earn before you pay either Class 1 or Class 4 contributions is increasing. From April 2017:
- Employees will pay 12% on income between £8,164 and £45,000
- The self-employed will pay 9% on taxable profits between £8,164 and £45,000
- Both will pay 2% on income or profits above £45,000
Will other personal tax increases get cancelled?
The National Insurance hike wasn’t the only tax increase proposed in the Budget.
The Chancellor will lower the amount of dividends that can be earned tax-free from £5,000 to £2,000 from April 2018, pushing more people to pay tax on any dividend income they earn.
Find out how to beat this cut to the dividend income tax allowance in our guide.