The decision to increase the main rate of Class 4 NICs by 1% to 10% from April 2018, and by a further 1% in April 2019 will see millions of self-employed workers pay an average of £240 a year more.
IFS director Paul Johnson said the measure is a “modest but welcome change designed to shore up the tax base and create a slightly less unequal playing field between the self-employed and employees.”
He added that “it is a small change taking a small step to correcting a big problem with the current tax system”.
However, the proposal to increase contributions was criticised by the opposition and some backbench MPs who highlighted that it breaks a key manifesto pledge from the 2015 general election not to increase income tax or National Insurance.
Johnson said David Cameron's 2015 general election pledge had been "foolish".
The IFS highlighted the difference in tax due on a job generating £40,000 for a self-employed individual (£8,713) compared to an employee (£12,146). The increase in class 4 NICs will increase a self-employed individual’s (earning £40,00) tax bill to £9,202.
Johnson added, “A tax system which charges thousands of pounds more in tax for employees doing the same job as someone else needs reform. It distorts decisions, creates complexity and is unfair.”
“The incentives for companies to claim that people who work for them are self-employed rather than employees are huge.”
The IFS said the Budget announcements will reduce incentives to switch from employment to self-employment.
Johnson added, “The 2% increase in NICs for the self-employed closes a small fraction of the gap between employees and the self-employed.
“In combination with the abolition of class 2 NICs to be introduced at the same time it will leave any self-employed person with profits of less than about £15,570 better off. The maximum loss, affecting those with profits over £45,000, will be £589 per year. The tax advantage to being self-employed will still run into the thousands of pounds.”
Johnson was less pleased with the chancellor’s decision to reduce the tax free dividend allowance from £5,000 to £2,000.
He said the decision “reflected the concern that if you increase tax on the self-employed you increase their incentive to incorporate” but warned that because the £5,000 rate was only introduced last year, “to change it so quickly does not look like coherent policy making”.
“All in all these feel like baby steps in the right direction. But they are sticking plasters not the fundamental look at the tax base as well as tax rates that is required. A lot more work, analysis and consultation is needed,” Johnsons said while welcoming further consultation on self-employed workers.
Johnson also welcomed Hammond’s decision to consult on business rates before the next revaluation is due.
“That we are to get a consultation on business rates rather than diving in to change immediately is a good thing,” he said.
Rejecting pleas to abolish business rates entirely, Hammond also announced that he will provide a £1,000 discount on business rates bills in 2017 for all pubs with a rateable value of less than £100,000 and pledged £110m to help small businesses who are set to lose their small business rates relief.
The chancellor will also provide local authorities with a £300m fund to provide discretionary relief to businesses most affected by business rates revaluation.
Johnson said, “The transitional protections announced yesterday will be welcome and are needed in large part because the revaluation which has led to changes in rates took place seven years after the last valuation.
“That’s a lot of time for relative property values to change and hence for bills to change.”
Johnson welcomed Hammond’s suggestion that revaluations will be more frequent going forward.
Johnson remarked that the only “substantive spending announcement” was for more money for social care but called for less consultation and more action on social care funding.
While yesterday’s Budget was reasonably muted, the IFS warned that taxpayers still have a lot of changes due next month.
“The biggest of them are cuts to benefits– to ESA and to tax credits. These will have much bigger effects on people’s incomes than anything announced yesterday.”
Johnson also highlighted, “It looks like being, I’m afraid, a third parliament of austerity”.
“Keeping some headroom against the fiscal target makes sense given the uncertainty over economic outcomes over the next few years. But the desire to get to budget balance during the next parliament, especially given demographic pressures, will necessitate yet more years of spending restraint or perhaps yet another post election tax rise,” he said.
He also warned of weak wage growth; “On current forecasts average earnings will be no higher in 2022 than they were in 2007.”
He added that 15 years without a pay rise is “completely unprecedented”.