The government has made a U-turn on a previously announced tax cut which would have saved 3.4 million self-employed workers up to £150 a year.
Chancellor Phillip Hammond has decided to scrap the plan to end Class 2 national insurance contributions (NICs), which was announced in the 2016 Budget and planned to be introduced this year. This cut was tabled to cost HM Treasury about £360m a year from this year onwards.
The move would have saved millions of self-employed workers £150 a week in national insurance contributions but would have hit the lowest earners, who would have had to make up the shortfall with extra contributions to reach state pension entitlements.
According to Treasury analysis, about 300,000 people who make profits of less than £6,000 a year would have had to pay five times more in state pension contributions than they currently do if the cut was implemented.
Treasury Minister Robert Jenrick announced the U-turn yesterday (6 September) in a written statement to Parliament.
He stated: "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."
Mr Jenrick added that it “has become clear” that options identified by the government to address the issue would “introduce greater complexity to the tax system, undermining the original objective of the policy”.
He added: “The government remains committed to simplifying the tax system for the self-employed, and will keep this issue under review in the context of the wider tax system and the sustainability of the public finances."
The government’s announcement has been criticised by the Federation of Small Businesses (FSB), with its chairman Mike Cherry arguing the move was "extremely disappointing" and flew "in the face of tax simplification".
He said: "Class 2 NICs is a regressive levy that indiscriminately hits sole traders and makes life even tougher for those who are hard-up. Once you’ve reached a minimal income, there’s no tapering or means testing in place at all.
"Rather than hitting more than 3 million self-employed people with this levy, the Treasury should have worked harder to develop more effective ways to protect around 300,000 low-earners and maintain their contributions for the state pension."
Pension experts, however, have welcomed the U-turn. Jon Greer, head of retirement policy at Quilter, said it was a "sensible move".
He said: "A significant number of self-employed on lower incomes would have faced substantial rises in the voluntary payments they make to access the state pension.
"However, even with this necessary about turn, we still have the much larger self-employed savings conundrum.
"Figures from the ONS show that 45 per cent of self-employed workers aged between 35 and 55 have no private pension."
Mr Greer said a savings policy for the self-employed needed to acknowledge that there were "legitimate reasons why some self-employed people do not engage in pensions, particularly those on lower incomes".
He said: "One of the biggest challenges facing this group is the lack of certainty and security of income.
"It makes sense to keep an open mind about creative savings solutions for the self-employed and we hope the Department for Work and Pensions will consider a pension ‘sidecar’ which would give early access to cash if required, which could be helpful to self-employed people with volatile or insecure income."
The government-backed workplace pension scheme National Employment Savings Trust (Nest) is currently testing the sidecar model, which would create two different pots – one for short term emergencies and a long-term pension savings plan.
maria.espadinha@ft.com
