I rarely feel sorry for politicians but I do for Philip Hammond. The Chancellor of the Exchequer is far from an easy role and always open to criticism which is regarded as part of the job. The political fallout however over his U-turn on increasing Class 4 NICs is completely disproportionate. You would think from some of the commentary that something cataclysmic had happened.
U-turns by a chancellor are nothing new. How can we not forget George Osborne’s 2012 budget and the failed attempt at the introduction of the “pasty tax”. Give Mr Hammond his due though, despite his “pasty” U-turn he did not look particularly flustered or show any sign of wanting to hide himself in some relic of a bunker from the Cold War and for good reason.
First of all look at the facts. Of the total HMRC receipts of £534bn in 2015/16 NICs was the third largest contributor at £114bn after income tax at £168bn and VAT at 115bn. The increase in Class 4 NICs from 9% to 10% in 2018/19 would have raised an additional £325m and the increase to 11% the following year to £645m. So as a percentage increase to overall NIC receipts that works out to be at around 0.3% and 0.6% respectively. The reason why the increase is so low is that Class 4 NICs actually only make up around 4% of total NIC receipts. So in the over all scheme of things it is not a major issue.
The whole NIC regime is somewhat dated, complex and unfair. The very fact that an employee earning £32,000 pa will incur between him and his employer £6,170 of NICs yet a self employed person earning the same will pay just over £2,300 does appears unreasonable. This is particularly so since 2016 the self employed have been able to build up the same entitlement to the state pension and the Chancellor said he would address the other disparities in benefits.
If there has been a flaw in this affair it is very much a case of timing. If the increases had been introduced as part of giving the self-employed enhanced pension benefits in 2016 there would have likely been less resistance. If you have a donkey you do not give it the carrot first then expect it to move. As one former prime minister may have said “the donkey is not for turning”.
This will not be the end of the matter. The Chancellor himself said on advising of the U-turn that he would review the position and we will of course have a budget in the Autumn. It is also worth noting that the Government is looking at aligning NICs with income tax. This has been on-going since 2012 but the current view is to move employer NICs to a payroll levy and have the calculation of employee NICs on a similar basis to PAYE. It could be an ideal opportunity to revisit how the self employed are treated.
This blog first appeared on Professional Adviser