Chancellor Philip Hammond picks a self-employed pocket or two in his first (and last) Spring Budget

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The chancellor slashed the tax-free dividend allowance from £5,000 to £2,000 (Source: Getty)

Chancellor Philip Hammond stands accused of breaking a key Conservative manifesto pledge after announcing a double-raid on Britain’s self-employed workers during yesterday’s Budget.

Delivering the first of two Budgets this year, Hammond said he would raise the main rate of Class 4 National Insurance contributions (NICs) for the self-employed by one percentage point to 10 per cent from April 2018 with a further one per cent rise in April 2019.

Critics of the plan pointed to the Tories’ 2015 General Election manifesto; the party said it would not increase National Insurance as part of a five-year tax lock. Yesterday Hammond’s party said the lock applies to Class 1 NICs, which are paid by employed staff.

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The chancellor also slashed the tax-free dividend allowance from £5,000 to £2,000, hitting self-employed people who pay themselves through dividends. Hammond said the allowance has led to the “proliferation of incorporation”.

The move is expected to affect 2.3m people of whom 1.4m are basic rate taxpayers losing an average of £200 each; 725,000 higher rate taxpayers will lose an average of £440 each, while 124,000 additional rate taxpayers will find themselves £890 worse off.

Meanwhile, up to 1.6m people are expected to be affected by the changes to NICs, paying an average of £240 more per year from next April.

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The Federation of Small Businesses (FSB) slammed the hike in NICs as “a £1bn tax hike on those who set themselves up in business”. The hit to dividends is “a further disincentive for businesses to invest and grow,” it added.

Anger over the tax hikes was swelling among Conservative backbenches last night, with Hammond facing growing criticism from fellow MPs.

“I don’t think we should be going out of our way to tax work and enterprise and success,” said John Redwood.

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“We need to make sure it’s as easy as possible to get into self-employment and then that it’s as worthwhile as possible when they are successful.”

Rupert Harrison, former aide to then-chancellor George Osborne, said: “Dividend changes are likely to encounter more opposition in Tory heartlands... Brave stuff.”

During his Budget speech, Hammond said that self-employed people “now build up the same entitlement to the state pension as employees,” and so levelling NIC rates would improve “the fairness of the tax system”.

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