The decision to scrap the increase in NI contributions followed strong criticism by both Labour and a number of backbench Tory MPs, who argued that it would break the Conservative manifesto pledge not to raise National Insurance, VAT and income tax for five years.
Reacting to the news, the Resolution Foundation said that the government "has missed an opportunity to correct a big structural flaw in our tax system", which, according to the think tank, "allows better-off self-employed workers to pay far less tax than employees".
Director Torsten Bell added, "The U-turn means the cost of lower National Insurance for the self-employed will now grow from £5.1bn this year to an estimated £6.2bn in 2019-20.
“It is deeply regrettable that a U-turn on a small and sensible piece of tax reform that affects higher income households coincides with the decision to press ahead with benefit cuts that leave low and middle income households facing a far greater hit in the coming weeks. Addressing these policies should be the real issue for those concerned about the living standards of ordinary working families.”
Meanwhile, the Association of Independent Professionals and the Self Employed (IPSE) said that 2.5 million "hard working people will sleep easier tonight”.
Chris Bryce, chief executive at IPSE, said, “After the Budget announcement, people working for themselves up and down the country made their voices heard and government did the right thing in listening.
“Tax for the self-employed is an incredibly complex issue and any policy needs to be carefully considered."
Frank Haskew, head of ICAEW's Tax Faculty, said, "With working practices and employment patterns now very different to how they were in the past, the time is right for a thorough review on the questions of how the self-employed should be taxed and what should be the correct balance of fairness between the tax systems for the employed and the self-employed.
“While the increase in the NIC Class 4 rate has been stopped due to a manifesto promise, it was clearly part of a strategy to reduce the differences between the amount of tax (including NIC) individuals pay depending on the business structure they adopt.
He added, “The fact that the rises have been canned a week after they were announced shows the need for a clear and sustainable tax policy on the self-employed.”
Whilst the chancellor has decided to not proceed with the increase in Class 4 now, the stage is set for the future. (Genevieve Moore, partner at Blick Rothenberg)
Just last week, Hammond said during the Spring Budget he would increase the main rate of Class 4 NICs by 1% to 10% from April 2018, and by a further 1% in April 2019.
But on Wednesday, Hammond wrote to Tory MPs saying that, despite believing this would still be the right approach, “in light of the debate over the last dew days, it is clear that compliance with the legislative test of the manifesto commitment is not adequate”.
In a letter seen by the Guardian, he added, “It is very important both to me and to the prime minister that we are compliant not just with the letter, but also the spirit of the commitments that were made [not to raise income tax, National Insurance or VAT].
“In the light of what has emerged as a clear view among colleagues and a significant section of the public, I have decided not to proceed with the Class 4 NIC measure set out in the Budget.”
Hammond said that he would make a statement in the House of Commons later today.
During the parliamentary questions that followed the news, May said that MPs have pointed out that self-employment created structural problems that would need to be addressed, but confirmed there would be no NIC rises during this parliament.
The Labour party leader Jeremy Corbyn said, “I think the prime minister should offer an apology for the chaos that her government has caused during the past week and the stress it’s caused to the 4.8 million self-employed people in the country."
Mike Cherry, FSB national chairman, said, “We are delighted for our members and all the nation’s self-employed that the chancellor has recognised the strong opposition to this measure, admitting it was against the spirit of the Tory manifesto on which his party stood, and has now decided to scrap it for the duration of this parliament.
“The army of self-employed make a massive contribution to the UK economy. We’ve consistently argued, since this measure was announced last week, that a tax-grab on the genuine self-employed – the hairdresser, electricians and plumbers – makes absolutely no sense."
The Institute of Directors said that the National Insurance "saga" could only be described as "chaotic".
Stephen Herring, head of taxation at the IoD, added, "The irony is that there are good reasons to look at leveling the playing field for employees and the self-employed, as the tax on direct employment is disproportionally higher.
"However, it would have been much better if, as the IoD had suggested, the government had waited for the conclusions of its own review of modern employment, and reformed wholesale how different forms of work are taxed.
"Instead they announced they would raise one tax in isolation, only to cancel it a week later. Successive governments have acknowledged that the growth in self-employment has implications for tax revenues, but not one has wanted to take the political risk of undertaking real long-lasting reform.
“The business community needs to feel that the government has confidence in its plans for the tax system, and policy isn’t going to chop and change from week to week. Credibility takes a long time to build, but can be lost in a moment. It is now even more important that the November Budget is more far-sighted than the one we have just seen.”
Meanwhile, Tim Stovold, head of tax at Kingston Smith, said, “The chancellor’s climb-down may be politically embarrassing, but more importantly he still has to contend with the tax cost of the growth in self-employment and the gig economy.
“The NI increase was reasonably modest and may be replaced with something more draconian in the Autumn Budget which will make the plumbers, electricians and cabbies wish they had settled on the 2%.
Roy Maugham, tax partner at UHY Hacker Young commented, “SMEs will welcome this U-turn. Hitting small business owners with an extra £2.1bn in tax on the eve of Brexit seemed a very strangely timed measure.
“In the future we would like to see the chancellor spending more time listening to the concerns of small businesses. Politicians always claim to value entrepreneurs and “strivers” but then they keep cranking up their tax rates.
“The self-employed take big risks and miss out on holiday pay, sick pay and many other benefits. It is time The Treasury stopped picking on them.”
Genevieve Moore, partner at Blick Rothenberg, commented, “The self-employed are a key part of the UK economy, they do not get paid holidays, they do not have the security of earning a wage even when it’s a quiet day, if they don’t work, they don’t earn.
"They take the risk of a downturn in the market, they are the true heart of the entrepreneurs of the UK economy. The proposals to increase Class 4 NI rates, so they were almost on par with that paid by employees, were ludicrous and I am relieved to see Hammond has come to his sense.”
However, Moore warned, “Whilst the chancellor has decided to not proceed with the increase in Class 4 now, the stage is set for the future. Class 4 NICs will increase in the future, perhaps with a bigger jump in the rate in one year, rather than 1% increases staggered over several years.”
Michael Lavan, tax director at KPMG, warned, “It should be noted that today’s announcement leaves the government with a £2bn hole to fill over the next five years, based on the policy costings which were published last week.
“Many will be asking whether this will lead to an extension of the new IR35 rules, from the public sector and into the private sector, as a means by which to close the tax gap.”
Last Friday, Theresa May defended the chancellor’s decision by saying, “The decision on National Insurance was taken in the context of a rapidly changing labour market in which the number of people in self-employment often doing the same work as people who are employed more traditionally is rising rapidly.
“This is a change that leaves lower paid self employed workers better off, it’s accompanied by more rights and protections for self-employed workers and it reforms the system of national insurance to make it simpler to make it fairer and to make it more progressive.”