Philip Hammond backs down over self-employed NICs

UPDATE: Picking on the little guy isn't smart in politics, as the chancellor has discovered.

by Adam Gale
Last Updated: 15 Mar 2017

UPDATE: So Philip Hammond's budget plans to hike national insurance contributions for the self-employed didn't last a week.

While a willingness to change your mind when confronted with convincing new arguments is the mark of intellectual maturity, this U-turn has more to do with the hail of criticism Hammond has received, largely from within his own party. 

Some of this was centred on accusations of breaking the 2015 manifesto pledge not to raise NI, but it's also a sign of the sympathy the general public has for the country's nearly five million self-employed people.

While some of them may indeed have gone solo in a fiendish ploy to exploit the tax benefits, that's just not the majority experience. Mostly, these are just people trying to make ends meet, as permanent employment has become harder to come by. 

Was he right to try to level the playing field, or was this just picking on the little guy? Below is our assessment from budget day on the rights and wrongs of the NIC hike.


Budding entrepreneurs, gig economy workers and the self-employed will not have greeted Philip Hammond’s first budget with much enthusiasm. The chancellor has hit them with a double whammy: national insurance contributions for the self-employed will go up, while the tax-free allowance for dividend payments will go down.

Predictably, journalistic inboxes were soon deluged with comments.

‘We are worried that the government increasingly sees the self-employed as an easy target,’ said Ed Molyneux, CEO and co-founder of cloud accounting business FreeAgent.

‘The Chancellor has delivered yet another blow the gig economy,’ added Charles Urquhart, employment partner at Clyde and Co.

‘If you are one of the hardworking self-employed people who face a significant increase on your tax bill, you might feel that the Chancellor has it in for you,’ said Chris Bryce, chief executive of IPSE.

But is it really that hostile? Hammond’s logic is that it is unfair to those in traditional employment - and costly to the Exchequer - to continue to subsidise the self-employed, when the apparent reasons for the discounted rates have been significantly eroded.

On the one hand, the new state pension narrows the formerly considerable gap in weekly payments between the two groups by allowing the self-employed to receive contributions-based pensions on top of the basic state pension.

On the other, there are apparently plans to be announced later this year to address the disparity in parental leave rules (that is, employed people are currently entitled to paid parental leave, while the self-employed clearly are not).

The problem with this thinking is that there are other factors that count against the self-employed: no paid holiday, no employer pension contributions and, of course, much less security. Going self-employed is a risk.

The question is whether that risk should be subsidised at all. Hammond cites RSA chief executive and MT contributor Matthew Taylor, who is writing a review on the changing world of work, in saying that a lot of people are becoming self-employed precisely because of the tax incentives involved. If they are essentially doing the same job but paying less tax, then surely that is an incentive that ought to be shut down.

The counterargument is that it penalises entrepreneurship and modern, flexible ways of working that many people prefer.

Who’s right depends on who the self-employed actually are. Are they budding entrepreneurs or casual workers, £300 an hour lawyers trying to save on tax or Uber drivers trying to make ends meet?

They are of course all of them. People go self-employed for a variety of reasons, not all of them of their own choosing (there’s a reason businesses like hiring contractors – it makes them more agile, a useful quality in uncertain times). They are found at all levels of the economic spectrum, in all sorts of sector.

In truth, this policy probably won’t deter or cripple sharp-suited, big-dreaming entrepreneurs, because it doesn’t fundamentally alter the risk proposition of a dynamic, high-growth start-up for wannabe Mark Zuckerbergs.

It probably won’t hurt the poorest of self-employed people either – Hammond pointed out that the already announced abolition of lower-level Class 2 NI payments will cancel out the increases for those earning less than £16,000 a year. But those in the middle, earning the equivalent of average wages, it will hurt and it will deter.

Is that worth the trade-off, the extra cash and perceived fairness? Clearly Hammond thinks it is. Let us know what you think below or on Twitter.

Tags:

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today