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Institute for Fiscal Studies backs National Insurance increase Institute for Fiscal Studies backs National Insurance increase
(35 minutes later)
The Institute for Fiscal Studies (IFS) says the government was right to raise National Insurance contributions for the self employed in the Budget. The Institute for Fiscal Studies (IFS) says the chancellor was right to raise National Insurance contributions for the self employed in his Budget.
The changes would 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. 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.
The IFS said a system that charges some thousands more in tax for employees doing the same job needed reform. Philip Hammond's move has been heavily criticised, but the IFS analysts said the current system needed reform.
However, the IFS was less happy with the changes to taxation of dividends. "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.
What the Budget means for youWhat the Budget means for you
At a glance - Budget key pointsAt a glance - Budget key points
Tax-free dividend allowance slashedTax-free dividend allowance slashed
National Insurance rise due to 'new challenges'National Insurance rise due to 'new challenges'
The change to self-employed taxation is widely seen as breaking a Conservative election promise. David Cameron said there would be "no change" to National Insurance contributions. Former leader Iain Duncan-Smith said the move should be kept "under review".
But the IFS said the old system of National Insurance distorted the labour market, created complexity and was unfair. 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.
It added that the incentives for companies to claim that people who work for them were self employed rather than employees were huge. 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''Coherent'
The IFS, which traditionally gives its assessment of the government's tax and spending plans the day after the Budget, said the 2% increase in NICs for the self employed closed a small fraction of the gap between employees and the self employed. 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.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.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".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."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."