National Insurance Hike: What’s It All About?

Chancellor Philip Hammond’s Budget 2017 dominated the news cycle – for all the wrong reasons.

Against the backdrop of Brexit, Hammond took a battering after his announcement of tax increases – from both members of his own party, and the opposition parties. But taxes always rises, right? So the ensuing chaos in the aftermath of the budget might’ve left you wondering what all the fuss was about?

Specifically, it relates to the 2% increase in national insurance contributions (NICs) for the self-employed. The hike ripped open a hole across the political spectrum, in part because the 2015 Conservative Manifesto pointedly promised that there would be no increase in NICs – something the current Government is now trying to deny on a technicality; it is being spun that the promise only related to those in employment.

National Insurance Hike: What's It All About? - Gladstone Budget box - Via MH Treasury - Flickr

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When Hammond took the opportunity to raise taxes on the self-employed, it was immediately met with hostility, savaged by both the press and, by and large, from Conservative MPs. In part, this is because a core Conservative principle is lower taxes (which flow back to the Treasury coffers because when people have more money, they buy more things), and Budget 2017 directly conflicts with this principle.

It also breaks David Cameron’s aforementioned election promise – a move that the former PM apparently considers ‘stupid’ – as Chancellor prepares to raise NIC from 9% to 11% for Class 4 NICs in order to raise around Β£1.5bn.

While it’s true that self-employed workers pay less in national insurance contributions, and the number of people working for themselves has risen dramatically, this is considered a minor perk for entrepreneurial types – since the self-employed aren’t eligible for sick pay or assured holidays, and don’t always have the job security of PAYE workers. All told, the hike will cost 2.5million self-employed workers an average of Β£240 per year.

Stephen McPartland, MP for Stevenage, certainly thought this was a step in the wrong direction, and his words were echoed across the political spectrum. In response to the Budget, he said:

These families and businesses are the backbone of our economy. The Chancellor needs to do a U-turn and quickly.

Labour’s shadow chancellor, John McDonnell was clear: ‘Certainly the Labour Party will oppose this. I think other parties will as well. We may be able to persuade enough Conservative MPs to ask the Chancellor now to think again.’ Elsewhere, Lib Dem leader Tim Farron called the budget an ‘omNICshambles’, and the SNP dubbed the NIC hike a ‘tax on ambition.’

While plenty are calling for a re-think to the plans, Hammond found some support for the tax increase. Indeed, it was hailed as ‘welcome and progressive’ by the Resolution Foundation, who champion low-income workers.

The Institute for Fiscal Studies, meanwhile, were scathing of David Cameron’s original manifesto pledge not to raise NICs, calling the promise ‘foolish’, and stating that the tax increase was just a ‘small fraction’ of what’s needed to address the imbalance between the self-employed and PAYE workers.

Tony Blair’s former strategist Matthew Taylor, who heads up the Royal Society of Arts, also called the announcement ‘progressive’, saying that the rise, which mainly affects wealthier self-employed workers, was ‘economically rational.’

National Insurance Hike: What's It All About? - White Van

However, there are fears that it may impact the less well-off, with Bromley and Chislehurst MP Bob Neill taking a poor pragmatic line:

It needs to be kept under review … We need to keep an eye on it because if it does start squeezing the genuine White Van Man, that is something we need to look at.

Ultimately, then, a political maelstrom is unfolding, despite both the Chancellor and the Prime Minister calling the initiative fair. Indeed, Hammond tried to clear up the issue on the BBC, declaring that it was ‘a fair measure, it is a modest measure.’

He pointed out that the top 20% of self-employed earners will pay half of all the money raised, while those earning less the Β£16,250 won’t pay any more than they already do. In addition to that, Hammond claimed that a full 60% of self-employed workers will see their NICs reduced.

‘This is a fair and appropriate measure,’ said Hammond.

He’ll be hoping enough people, both in the Houses of Parliament and across the country, will eventually agree with him.

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