Institute for Fiscal Studies backs National Insurance increase

Philip HammondImage copyright BEN STANSALL

The Institute for Fiscal Studies (IFS) says the chancellor was right to raise National Insurance contributions for the self employed in his Budget.

The rise will see millions of self-employed workers pay an average of £240 a year more, but ministers say those earning £16,250 or less will pay less.

Philip Hammond's move has been heavily criticised, but the IFS analysts said the current system needed reform.

"It distorts decisions, creates complexity and is unfair," it said.

"A tax system which charges thousands of pounds more in tax for employees doing the same job as someone else needs reform," the IFS said.

The change to self-employed taxation was widely seen as breaking a Conservative election manifesto promise.

The previous prime minister, David Cameron, said there would be "no change" to National Insurance contributions.

Some Conservative MPs have openly criticised the move. Stephen McPartland, MP, described the measure as "unacceptable", saying it sent out the wrong message to ordinary working families. He appealed to the chancellor to make a "U-turn" quickly before a manifesto promise was broken.

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Tax-free dividend allowance slashed

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Former leader Iain Duncan-Smith said the move should be kept "under review".

And Labour's shadow chancellor, John McDonnell, said his party could even join forces with rebel Conservatives who say the increase does little to encourage enterprise and risk-taking.

But the IFS said the old system of National Insurance distorted the labour market. It added that the incentives for companies to claim that people who work for them were self employed, rather than employees, were huge.

'Coherent'

The IFS traditionally dissects the government's tax and spending plans the day after the Budget, and its verdict is seen as one of the most authoritative comments.

The IFS said the chancellor's 2% increase in NICs for the self employed closed a small fraction of the gap between employees and the self employed.

It said the maximum loss, affecting those with profits over £45,000, would be £589 per year and that the tax advantage to being self employed would still run into the thousands of pounds.

The chancellor also said in the Budget that the £5,000 tax free dividend allowance, which was introduced less than a year ago, would be cut to £2,000.

However, the IFS was less happy with the changes to the taxation of dividends that the chancellor announced on Wednesday.

It said that to change this so quickly does not look like "coherent policy making".

The IFS said it was never sensible to pledge no change to taxes: "As we said at the time these were silly pledges. 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."

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