Philip Hammond has cancelled plans to increase class 4 national insurance contributions for the self-employed, creating a £2bn shortfall in the nation’s accounts between 2018 and 2022, which many fear will be plugged by changes to pension tax relief.
Increasing NICs was a major feature of the chancellor’s Spring Budget last week, designed to reflect the fact that both employees and the self-employed now have access to the single state pension.
But the policy was quickly cancelled in a U-turn reminiscent of Hammond’s predecessor George Osborne, after intense pressure from Conservative MPs who said the move penalised entrepreneurial spirit.
I’d personally like to see them grasp a few nettles here and say, ‘We’ll have a standard rate of tax relief for everybody’
Malcolm McLean, Barnett Waddingham
In a letter to colleagues, Hammond said the decision was taken in order to honour the 2015 Tory election manifesto pledge not to lift VAT, income tax or national insurance.
He also insisted the logic behind the policy held up, writing: “It remains our judgment that the current differences in benefit entitlement no longer justify the scale of difference in the level of total NICs paid in respect of employees and the self-employed.”
A hole in the accounts
The resulting shortfall in the Spring Budget will be addressed at the Autumn Budget. The policy would have been worth an average of £515m a year to the Treasury by 2022.
Experts feared that the chancellor could respond by altering pensions tax relief, a change long foreseen by the industry.
“He’s going to probably look at tax relief again,” to plug the hole in the Budget said Steve Webb, director of policy at Royal London and former pensions minister.
He called the U-turn “pretty shambolic”, and urged the government to pursue clarity in future plans, to enable people to plan for their financial future. “Pensions and savings are a long-term business,” he said.
Change for the better
If the chancellor does finally decide to change the rules around pension tax relief, experts said that the annual allowance looks a likely target.
But some hoped that if policy change is unavoidable, Hammond would take the opportunity to create lasting reform rather than chipping away at existing arrangements.
“Every time there’s a Budget or an Autumn Statement we’re all sat on the edge of our seats wondering what’s going to happen next,” said Malcolm McLean, senior consultant at Barnett Waddingham. “I’d personally like to see them grasp a few nettles here and say, ‘We’ll have a standard rate of tax relief for everybody’.”
Among the current features that should be scrapped, he said, are the tax penalty triggered by the lifetime allowance, which could be kept for tax relief purposes only, and the overly complicated tapered annual allowance.
For others, the stability the pensions system needs would be best delivered by a complete amnesty on pensions tax change.
“I don’t really have too much idea of whether they’re going to change the tax system, I’m just hoping they don’t,” said Jon Greer, pensions expert at platform provider Old Mutual Wealth.
Select committee hears evidence on how to get the self-employed saving
Proposals including an expansion of auto-enrolment and raising class 4 national insurance contributions, aimed at boosting pensions coverage in the UK, have been put before the Work and Pensions Committee as part of its inquiry into self-employed workers.
He hoped for a commitment from legislators to stop using pensions tax to further political aims, and for changes to the auto-enrolment system to be delayed until after its review this year, when a considered response to undersaving can be formulated.
What next for self-employed savings?
The chancellor’s U-turn seems to signal the near-term demise of a proposal for enrolling the self-employed, credited to Webb.
Under the proposed system, self-employed workers could opt to have HM Revenue & Customs pay the rise in their NICs into a workplace pension, conditional on them matching that contribution from their own pockets.
McLean said he hoped the government would revisit the idea under a new manifesto, simultaneously rectifying what he perceived as inequality between employees and the self-employed.
But Webb himself said he was less optimistic. “I think it’s hard to see how raising class 4 NICs is now a runner,” he said. Instead, he suggested that auto-enrolment of the self-employed may have to be brought about through the submission of tax returns.
