Neil MacGillivray: NIClear fallout

I rarely feel sorry for politicians but I do for Philip Hammond. The Chancellor of the Exchequer is far from an easy role and always open to criticism that is regarded as just part of the job.

The political fallout, however, over his U-turn on increasing Class 4 National Insurance contributions (NICs) is completely disproportionate. You would think from some of the commentary that something cataclysmic had happened.

U-turns by a chancellor are nothing new. How can we not forget George Osbourne’s 2012 budget and the failed attempt at the introduction of the so-called ‘pasty tax’?  Give Hammond his due though – despite his own ‘pasty’ U-turn he did not look particularly flustered or show any sign of wanting to hide himself in some relic of a bunker from the Cold War – and for good reason.

First of all, consider the facts. Of the total HM Revenue & Customs receipts of £534bn in 2015/16, NICs was the third largest contributor at £114bn – after income tax at £168bn and VAT at £115bn. The increase in Class 4 NICs from 9% to 10% in 2018/19 would have raised an additional £325m and the increase to 11% the following year to £645m.

As a percentage increase to overall NIC receipts, that works out at around 0.3% and 0.6% respectively. The reason why the increase is so low is that Class 4 NICs actually only make up around 4% of total NIC receipts. So, in the over all scheme of things, it is not a major issue.

Dated, complex and unfairThe whole NIC regime is somewhat dated, complex and unfair. The very fact an employee earning £32,000 a year will incur between them and their employer £6,170 of NICs yet a self-employed person earning the same will pay just over £2,300 does appears unreasonable.

This is particularly so as, since 2016, the self-employed have been able to build up the same entitlement to the state pension and the Chancellor said he would address the other disparities in benefits.

If there has been a flaw in this affair, it is very much a case of timing. If the increases had been introduced as part of giving the self-employed enhanced pension benefits in 2016, there would have likely been less resistance. If you have a donkey, you do not give it the carrot first then expect it to move. Or as one former prime minister might have put it: “The donkey is not for turning”.

This will not be the end of the matter. The Chancellor himself said on advising of the U-turn that he would review the position and we will of course have a budget in the Autumn.

It is also worth noting that the Government is looking at aligning NICs with income tax. This has been ongoing since 2012 but the current view is to move employer NICs to a payroll levy and have the calculation of employee NICs on a similar basis to PAYE. It could prove an ideal opportunity to revisit how the self-employed are treated.

Neil MacGillivray is head of technical support at James Hay