Time for chancellor Philip Hammond to tinker about with his National Insurance plan

Julian Harris
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Hammond announced the surprised tax hike in his first (and last) Spring Budget (Source: Getty)

Philip Hammond is unlikely to have enjoyed a peaceful weekend following his debut Budget last week.

The chancellor has been on the end of a daily kicking since he announced a tax rise for self-employed workers, with some Conservatives questioning whether his political judgement is strong enough to hold such a senior position.

One can understand the unrest. Rowing back on a core manifesto pledge is foolish, irrespective of Labour’s feeble opposition.

Read more: Hammond slammed for "rookie error" over national insurance contributions

Also, a tax increase that penalises striving, entrepreneurial citizens sends out exactly the wrong message and sits uncomfortably on the Tory backbenches. A climbing rate of National Insurance hardly chimes with the late Margaret Thatcher’s famous insistence that her party must “back the workers not the shirkers”.

However, while Hammond’s move was politically unwise, there is some logic behind its thinking. The government is trying to ensure self-employed workers receive similar rights to employees (with regards to state pensions, for example) so it makes sense to level out the costs.

Read more: Chancellor defends tax rises in Budget after manifesto criticism

More and more people are becoming self-employed, leading to concern that the tax system incentivises this shift and allows companies to avoid employers’ NI and other taxes. Fiscally, this is a problem – thus the policy was backed by the influential Institute for Fiscal Studies.

Theresa May has kicked the can down the road, buying her chancellor some time and potentially allowing him to stick to his principle of levelling out the NI system while defusing an explosive political threat.

Read more: Downing Street refuses to rule out NICs u-turn as Tory revolt grows louder

For a start, Hammond could do more to make the move revenue-neutral for people on modest incomes. It seems crazy that someone earning £19,000 a year, without holiday pay, should face a tax hike on their income. Raising thresholds for both employees and freelancers would be one approach.

Plus he could – shock horror – reverse the second 1p NI hike and instead bring the rate for employees down by 1p. This would, admittedly, be at odds with his efforts to balance the Budget, but with enough will savings could surely be found elsewhere.

Read more: Junior legal eagles hit by hike in national insurance

Hammond should also consider an idea floated by former pensions minister Steve Webb who believes some of a worker’s NI payments should be automatically directed towards their personal pension plan.

Such a policy could work alongside the expanding auto-enrolment scheme, and allow the chancellor to argue that his Budget was motivated by a prudent concern for our future wellbeing, rather than a plot to pick our pockets with a sneaky tax hike.

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