Government breaks promise to axe Class 2 NICs

A government decision to quietly abandon its 2015 pledge to axe Class 2 National Insurance (NI) Contributions has been condemned by freelance groups, albeit with one big caveat.

In fact, if the move last week by chancellor Philip Hammond to go back on his predecessor’s promise to give the self-employed a £150 tax cut is part of a wider NI strategy, it has potential.

Such is the suggestion from three experts on self-employed taxation -- Qdos, the FCSA and the LITRG. On its own, however, as an isolated U-turn, the trio are unhappy for freelancers.

“This is very disappointing and another blow for self-employed people on low incomes who can least afford it,” said Freelancer & Contractor Services Association CEO Julia Kermode  

“It is disingenuous of Mr Hammond, to say the least, and once again he is penalising hard-working self-employed workers who are the backbone of the UK economy.”

Seb Maley, chief executive of Qdos agrees. “The government has gone back on its word, choosing to reverse what would have been a very welcome tax break for millions of self-employed workers.”

He added: “After IR35 reform, the slashing of tax-free dividend allowance and now this U-turn, the government seems intent on removing the financial benefits of working independently”.

The Low Incomes Tax Reform Group also sounds very against the preservation of Class 2, in line with an alert back in 2005 that it simply, ‘confuses partners and the self-employed.’

The government [has] ran into unintended consequences and have now decided to abandon it [its plan to axe Class 2 NICs] entirely,” said LITRG chair Anne Fairpo.

“Whilst we agree that making the tax system more complex is not desirable, we do think the benefits gained may have outweighed any additional complexity.”

There is a single, potentially significant upside, however.

“Class 2 will remain, at least for the remainder of this parliament,” Fairpo observed. “The government have stated they will keep this issue under review. This is welcome.”

It is 'welcome’ because the LITRG believes there are “wider changes” than the singular issue of an approximate £150 tax cut a year that National Insurance ‘needs to adapt to.’

And they are ‘wide’ enough that a wholesale review of National Insurance is needed and needed so much that the tearing up of the pledge to axe Class 2 could be worthwhile if it leads to the review.

“Given the significant changes in people’s working patterns including…holding more than one employment at a time or being employed and self-employed at the same time, we would like to see the whole system of national insurance reconsidered rather than tinkering and piecemeal changes,” LITRG said.

“This is especially important given the ever-increasing numbers of self-employed workers.”

Even the FCSA’s Ms Kermode, perhaps the most critical of the Class 2 U-turn, says the tax treatment of freelancers will only improve once the government takes a “holistic approach.”

It is this approach, as opposed to “knee-jerk reactions” like vowing to end Class 2, and then vowing not to, that the association says it would endorse. And mainly, it added, because today’s tax system for the self-employed is “broken”.

And Qdos’ Mr Maley, who previously worked at the tax authority, confirmed piecemeal is no longer preferable if freelance sole traders are to flourish in the way that ministers’ rhetoric implies they ought to be able to.

“The government regularly voices its support for the self-employed,” he said, “but action speaks louder than words. It’s time the tax system supported those brave enough to strike out alone”.

Freelance trade group IPSE called for much the same last year, in reply to the government’s admission that ‘unintended consequences’ meant the removal of Class 2 from the tax system required more time, as campaigners had warned.

In particular, the group hailed ‘the ultimate solution’ as ministers announcing a “complete review of the tax system for the self-employed” because ministers “clearly don’t have a handle on it.”

But the sheer “betrayal” that is the Class 2 U-turn, outlined in a statement put out by Exchequer Secretary to the Treasury Robert Jenrick, is first going to take some getting over.

An aghast, disappointed Andy Chamberlain, IPSE’s deputy director of policy also reflected: “Not proceed[ing] with abolishing the tax during this parliament…represents a fundamental breach of faith by a government who seems to have turned its back on the self-employed.”

Editor’s Note: Related –

Vow not to raise self-employed NICs divides business groups

Government wants input on self-employed NICs

Call to let self-employed NIC changes bed in

 

12th September 2018

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