The Chancellor has announced that the proposed hike in the main rate of self-employed National Insurance Contributions (NICs) will be scrapped.
The change of heart was apparently prompted after he perceived a "clear view" had arisen amongst fellow Conservative MPs that the increase would have broken their election manifesto pledge not to increase NICs.
It was initially pointed out on the Chancellor's behalf that the precise wording of the legislation that implemented that pledge - the so-called "tax lock" - in relation to NICs, focused solely on employment NICs, and said nothing about NICs for self-employment. ( National Insurance contributions (Rate Ceilings) Act 2015 ) But the manifesto pledge itself was pretty clear, and made no such distinction.
The Chancellor was, I think, reasonably disingenuous about the affair, in that:
- He tried to frame the argument in the context of how much more NICs would be payable - including by the employer - if the self-employed individual were an employee instead; as if the sole trader had a choice in the matter, and that this was therefore unfair to ordinary employees - who were, bizarrely, credited with Employers' NICs as well.
- (One wonders at what point people are going to realise that the past increases in NICs, driven by governments keen not to be seen to be raising Income Tax, are actually responsible for this discrepancy).
- He tried to link the increase in Class 4 NICs to the abolition of Class 2 NICs
- He used a very much higher income level to illustrate the perceived shortfall in self-employed NICs than when trying to reassure listeners that the pain of the increase would be only marginal - a mere 60p per week across all sole traders (and yet strangely, the self-employed earner in his earlier example of £32,000 in annual profits would be £6 a week worse off thanks to the hike, not 60pence).
He may be wondering, then, how his predecessor managed to get away with so many tax hikes in the Summer 2015 Budget, at the very time the so-called tax lock was being trumpeted.
The answer is that the measures took many months before even we tax advisers could discern how they were actually going to work in practice, by which time the public's attention had moved on. Imagine, if you will, what would have happened if his predecessor had said in July 2015:
"Despite saying that Income Tax rates wil not be changed thanks to the tax lock, I am in fact going to increase actual dividend tax rates and, more importantly, effective dividend tax rates, to the point that your average family company shareholder/director with an annual income of, say, £32,000, will see his or her Income Tax bill rise by, er, ooh, say £100 a month next tax year. But you'll all have forgotten about this long before 31 January 2018, when this all comes home to roost in your first tax payment under the new regime, because I've bedazzled you with a new Dividend Allowance".
If 60pence a week sparked a U-turn, I dread to think what £100 a month is going to do. (Truly, nothing, I suspect).
But the Chancellor did, I think, get one thing right: he announced the further restriction of the Dividend Allowance now, rather than in Autumn. Because he probably realised that there will be quite a bit of negative feedback against the new dividend regime in January next year, so he had to make sure the legislation to make things even worse was on the statute books long beforehand, rather than face a potentially more serious backlash early next year.