The government's U-turn on its plans to raise National Insurance (NI) contributions for the self-employed just one week after they were unveiled in the 2017 Spring Budget could have significant longer-term ramifications, financial services commentators have warned.
While some were quick to pick up on the relief the decision will offer the self-employed in the short run, others were more concerned about what it meant in the longer term for the pension funding of those same self-employed and also for how the broader tax system may be balanced between them and employees.
Chancellor Philip Hammond had told parliament in his Budget speech last Wednesday that Class 4 NI contributions for the self-employed would rise from 9% to 10% in 2018 and then by a further percentage point to 11% in 2019. He explained the rate hike was being introduced in an effort to reduce the gap in rates paid by the self-employed and by employees.
In a letter to Conservative MPs this morning, however - following a week of criticism the party had broken a promise in its 2015 election manifesto - Hammond said the government would backtrack on proposals to increase NI contributions in this way.
"We are delighted to hear the Chancellor is no longer penalising job-creating entrepreneurs by increasing their NI contributions, which we opposed last week," said Entrepreneurial Spark CEO Lucy-Rose Walker.
"To truly succeed as a nation we need to reward, rather than discourage, entrepreneurship. We would still like to see more be done regarding other policies announced during the Budget - in particular the cut to dividend tax credits - but this is certainly a step in the right direction."
'Spotlight on NI'
Aegon pensions director Steven Cameron added: "While the U-turn is likely to be welcomed by many self-employed people, the policy has put the spotlight on the issue of NI and the rights and benefits of those working in the gig economy.
"We hope the government will look more closely at what can be done to close disparities between the employed and the self-employed. Within pensions, we need to find a solution equivalent to auto-enrolment - using nudges for the self-employed to halt the growing retirement income divide we'll otherwise face between them and their employed peers when they come to retire.
"Delaying the increase allows more time for the government to come up with a pension solution for the self-employed, which could include rebating the increase in NI into a private funded pension of the self-employed individual's choice."
For Old Mutual Wealth pensions expert Jon Greer "the real risk" now would be the Chancellor targeting pensions tax relief to make up the shortfall the increase in Class 4 NI would have provided.
"The small increases to the NI contributions from the self-employed were supposed to guard the government's funds against the increasing threat of a growing tax gap," he explained. "It felt like an attempt to solve an issue that required a much more fundamental review of the distortions provided by the current tax system."
As a result Greer expected greater attention would now be paid to the auto-enrolment review. "The self-employed are currently excluded from the private pension system unless they make their own arrangements," he said.
"The government has already said it is looking to address this imbalance and ensure the self-employed enjoyed a comparable opportunity to save for their retirement. However, this U-turn suggests a ‘pseudo auto-enrolment' for the self-employed funded through NI contributions would be unpalatable so the government may need to explore other avenues."
'Stay of execution'
Hargreaves Lansdown head of retirement policy Tom McPhail - who described the proposed NI increase as "a modest and redistributive measure that would have helped bring the self-employed NI rates closer into alignment with the increased state pension benefits they now enjoy" - agreed the U-turn would have some significant policy implications.
"This is a stay of execution," he continued. "With only one in 10 of the self-employed paying into a pension, their later-life funding is high up on the government's agenda. The inclusion of the self-employed in the auto-enrolment system is looming on the horizon. In the meantime, this U-turn will increase pressure in other areas of fiscal policy and may increase the risk of further pension tax tinkering in the Autumn budget."
For ICAEW Tax Faculty head Frank Haskew the fact the NI rises had been "canned" a week after being announced demonstrated the need for "a clear and sustainable tax policy on the self-employed".
He added: "With working practices and employment patterns now very different to how they were in the past, the time is right for a thorough review on the questions of how the self-employed should be taxed and what should be the correct balance of fairness between the tax systems for the employed and the self-employed.
"Matthew Taylor's report on the future of employment, due in the Summer, needs to provide a clear strategic direction on these questions and make recommendations to help fix some of the long-term disparities between the two systems."
Zurich head of corporate market management Martin Palmer agreed the U-turn raised the stakes for the Taylor review. "Ministers need to ensure there is greater consistency between the benefits enjoyed by employees and the self-employed - especially when it comes to saving for retirement," he said.
"We know the growing ranks of self-employed workers are not putting enough aside for later life. It is now even more important the Taylor review considers how auto-enrolment and other incentives can encourage this section of the workforce to save."
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