For those hoping for the government to sit on its hands while negotiations get underway, the blunder made over national insurance (NI) could yet prove to be a fly in the ointment.
NI saga
The decision that resulted in the some uproar was the intended hike to class four national insurance contributions (Nics) – payable on self-employed profits exceeding £8,060. The chancellor announced plans to increase the current rate of 9 per cent to 10 per cent and 11 per cent in 2018 and 2019, respectively.
During his budget speech Mr Hammond claimed the NI system would be “a little bit fairer”, but his comments fell on deaf ears where those affected and parts of his own party were concerned. After all, only two years earlier, the government had promised no increases to VAT, NI or income tax during this parliament as part of its 2015 general election manifesto.
The plans also acknowledged that a previous decision to axe class 2 Nics would come into force this April – softening the blow – but this seemed to fly somewhat under the radar as the reaction hit home. An estimated 2.5 million people were spared the changes as a result of the government’s subsequent backtrack, but savers of all kinds may have to face the consequences, according to former pensions minister Steve Webb.
Mr Webb, now director of policy at Royal London, says of the U-turn: “It’s pretty indefensible really. There’s a perfectly good case to say the self-employed have had a windfall in pensions and therefore they should pay more into the system. That’s a perfectly reasonable thing to argue; the only constraint was they said they wouldn’t do it.”
Paul Darlow, head of proposition development at Xafinity, says the change will have little impact on the retirement income crisis that could be forthcoming if saving continues to be a low priority.
“Although the amount of state pension the self-employed would have accrued in the new system would have been higher, it does not do anything to resolve their lack of saving into private pensions,” Mr Darlow explains.
The chancellor has now left himself in a tricky situation. It was forecast that the class 4 Nic hike would raise £600m pa in revenues, and now the government must switch its attention elsewhere to plug the gap. This now increases pressure on Mr Hammond’s first autumn budget to find a viable solution without the same public outcry.
In assessing how the government will make up the lost revenue, Mr Webb beats a drum that has taken quite an assault from the pensions industry in recent years, and warns that tax reliefs may be in danger.
