Philip Hammond has dropped plans to increase national insurance contributions (NICs) for the self-employed, conceding that it breached the wording of the Conservative manifesto.
In a letter to Andrew Tyrie, the chair of the Treasury select committee, the chancellor stuck by his argument that the change would have made the tax system fairer but said he had decided “in the light of the debate of the last few days” to drop the changes.
The planned rise had sparked a fierce backlash among Conservative MPs, who were concerned that the measure, which was due to be implemented in April next year, would undermine entrepreneurs and hit “white van man”.
The issue dominated exchanges at PMQs, with Theresa May insisting the U-turn did not mean she accepted that the rise in NICs went against the 2015 manifesto.
Answering a question from the Conservative backbencher Huw Merriman, the prime minister said: “We made a commitment not to raise tax and we put our commitment into the tax lock, and the measures we put forward in the budget were consistent with those locks.
“But as a number of my parliamentary colleagues have been pointing out in recent days, the trend towards greater self-employment does create a structural issue in the tax base, on which we will have to act.”
The government would await the report from Matthew Taylor on the future of employment, May said, but would not raise NICs in this parliament.
Jeremy Corbyn responded by saying May was presiding over “a government in a bit of chaos here”, which had produced “a budget that unravels within seven days”.
May responded to the Labour leader: “I normally stand at this dispatch box and say I won’t take any lectures from the right honourable gentleman. When it comes to lectures on chaos he’d be the first person I’d turn to.”
The Conservative backbencher Stephen McPartland, who objected to the changes, welcomed Hammond’s climbdown. “It’s fantastic news, and shows he’s a strong chancellor, because he can admit when he’s made a mistake. I’m delighted with the announcement and I really look forward to working with him to deliver for self-employed people going forward.”
May had been forced to defend the rise at a press conference in Brussels on Thursday, and promised the government would not legislate to introduce the changes until the autumn. That would allow MPs to consider the measure alongside other planned changes, including improved maternity and paternity rights for the self-employed.
Class 4 NICs were due to rise from 9% to 10% next April and 11% in 2019. Hammond said in his budget speech that would help address the fact that employees were taxed more heavily than the self-employed.
In his letter, he underlined that rationale, saying: “The measures I announced in the budget sought to reflect more fairly the differences in entitlement in the contributions made by the self-employed and addresses the challenge of sustainability of the tax base. The government continues to believe that this is the right approach.”
The Treasury said last week the measure did breach the detail of the “tax lock” legislation introduced after the 2015 general election to implement the manifesto pledge not to increase national insurance rates.
But in his letter, Hammond conceded that the move did not comply with “the spirit” of the pledge. “It is very important both to me and the prime minister that we are compliant not just with the letter, but also the spirit, of the commitments that were made,” he said.
Speaking to journalists afterwards, the prime minister’s spokesman defended the reversal, saying May and Hammond had listened to concerns and acted quickly. The decision had been made on Wednesday morning, the spokesman said.
The spokesman said: “The prime minister and the chancellor have heard what colleagues have had to say in recent days, and they have taken a decision that has been announced to parliament at the earliest opportunity.”
He denied the government was accepting that the scale of rebellion among their own backbenchers was so great that the party could not have passed legislation on the issue.
Asked whether Hammond and May had read the 2015 Conservative manifesto, the spokesman said: “They stood on that manifesto.” He insisted May retained full confidence in her chancellor.
The measure was due to raise £645m a year by 2019-20 to help fund new schools and social care. Hammond will now face questions about how he will make his budget plans add up. In his letter he said he would announce in the autumn statement how the extra funds would be raised.
The shadow chancellor, John McDonnell, said: “The chancellor’s authority is shredded only a week since his first budget, after being forced to U-turn under Labour pressure.”
Rachel Reeves, the former shadow work and pensions secretary who sits on the Treasury select committee, accused the government of an “extraordinary U-turn after a shoddy announcement”.
She said Hammond “now needs to show where the £2bn shortfall is going to be made up”.
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