The Institute for Fiscal Studies (IFS) has come out in favour of Philip Hammond’s plan to increase National Insurance contributions (NICs) for the self employed, as set out in Budget 2017, arguing that this is a first step to addressing long-standing distortions in the employment tax system
The think tank argues that the current system needs reform as it ‘distorts decisions, creates complexity and is unfair.’
Paul Johnson, director of the IFS, described the proposal to introduce a 2% rise in NICs for the self employed as ‘a small change taking a small step to correcting a big problem with the current tax system. That problem needs a much more thorough review and strategy to deal with it, as do many other problems in the tax system.’
The IFS says the maximum loss, affecting those with profits over £45,000, would be £589 per year.
Treasury estimates suggest 2.5m people will lose £240 a year as a result of the NICS class 4 change. The number of people seeing a NICS rise in April 2018 when it comes in will fall to 1.6m because of the move to abolish class 2 NICS previously announced.
There is further support for the NICs change from the Resolution Foundation, a think tank focused on lower earners. It argues that those earning less than £16,250 are unaffected or gaining as result of the change.
Its analysis suggests the self-employed have typical earnings of just under £14,000 this means over half will be better off or unaffected by these coming changes – including two thirds of all self-employed women.
The Resolution Foundation also calculates that over half of the overall tax increase, which is estimated at £200m, will come from the richest 10% of households.
The think tank argues that even after this change, self-employment will still be heavily incentivised by much lower national insurance bills, partly because they will still pay only 11% compared to the 12% by employees, but because there is no equivalent of employer national insurance. The Resolution Foundation says overall, the Treasury is still forecast to lose around £6bn each year from this favourable tax treatment.
However, the move to increase NICs for the self employed has led to a storm of protest, including from within the Conservative party, as it breaks a pledge in the election manifesto.
The IFS said in its analysis: ‘To commit yourself to not raising the three main taxes - income tax, NI and VAT - ties your hands to an absurd extent. No party should repeat these sorts of promises.’
