Class 4 National Insurance Contributions - Statement

Part of the debate – in the House of Lords at 4:02 pm on 15th March 2017.

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Photo of Lord Young of Cookham Lord Young of Cookham Lord in Waiting (HM Household) (Whip), Lords Spokesperson (Cabinet Office) 4:02 pm, 15th March 2017

My Lords, with the leave of the House, I shall now repeat a Statement made in the other place by the Chancellor of the Exchequer, the right honourable Philip Hammond. The Statement is as follows:

“With permission Mr Speaker, I wish to make a statement on national insurance contributions paid by the self-employed. As I set out in the Budget last Wednesday, the gap between benefits available to the self-employed and those in employment has closed significantly over the last few years. Most notably, the introduction of the new state pension in April 2016 is worth an additional £1,800 to a self-employed person for each year of retirement. It remains our judgment, as I said last week, that the current differences in benefit entitlement no longer justify the scale of difference in the level of total national insurance contributions paid in respect of employees and the self-employed.

Honourable and right honourable Members will also be aware that there has been a sharp increase in self-employment over the last few years. Our analysis suggests that a significant part of that increase is driven by differences in tax treatment. HMRC estimates that the cost to the public finances of this trend is around £5 billion this year alone and the OBR estimates that the parallel increase in incorporation will cost more than £9 billion a year by the end of the Parliament. This represents a significant risk to the tax base and thus to the funding of our vital public services.

The measures that I announced in the Budget sought to reflect more fairly the differences in entitlement in the contributions made by the self-employed. The Government continue to believe that addressing this unfairness is the right approach. However, since the Budget parliamentary colleagues and others have questioned whether the proposed increase in class 4 contributions is compatible with the tax lock commitments made in our 2015 manifesto. Ahead of the Autumn Statement last year, the Prime Minister and I decided that however difficult the fiscal challenges we face, the tax lock and ring-fenced spending commitments we have made for this Parliament should be honoured in full.

I made that clear in my Autumn Statement to this House. As far as national insurance contributions are concerned, the locks were legislated for in the National Insurance Contributions (Rates Ceilings) Act 2015. When the Bill was introduced, it was made clear by Ministers that the lock would apply only to class 1 contributions. The measures I set out in the Budget fall within the constraints set out by the tax lock legislation and the spending ring-fences. However, it is clear from discussions with colleagues over the last few days that this legislative test of the manifesto commitment does not meet a wider understanding of the spirit of that commitment.

It is very important both to me and to my right honourable friend the Prime Minister that we comply not just with the letter but also with the spirit of the commitments that were made. Therefore, as I said in my letter this morning to the chairman of the Select Committee, my right honourable friend the Member for Chichester, I have decided not to proceed with the class 4 NICs measures set out in the Budget. There will be no increases in national insurance contribution rates in this Parliament.

For the avoidance of doubt, as I set out in the Budget, we will go ahead with the abolition of class 2 national insurance contributions from April 2018. Class 2 is an outdated and regressive tax and it remains right that it should go. I will set out in the Autumn Budget further measures to fund in full today’s decision.

I undertook in the Budget speech to consult over the summer on options to address the principal outstanding area of difference in benefit entitlement between employed and self- employed, which is in parental benefits. We will go ahead with that review. We now intend to widen this exercise to look at the other areas of difference in treatment alongside the Government’s consideration of the forthcoming report by Matthew Taylor, chief executive of the Royal Society of Arts, on the implications of different ways of working in a rapidly changing economy for employment rights. Once we have completed these pieces of work, the Government will set out how they intend to take forward and fund reforms in this area.

Reducing the unfairness of the difference in the tax treatment of those who are employed and those who are self-employed remains the right thing to do. But this Government set great store in the faith and trust of the British people, especially as we embark on the process of negotiating our exit from the European Union. By making this change today, we are listening to our colleagues and demonstrating our determination to fulfil both the letter and the spirit of our manifesto tax commitment. I commend this Statement to the House”.