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Institute for Fiscal Studies backs National Insurance increase Institute for Fiscal Studies backs National Insurance increase
(about 3 hours later)
The chancellor was right to raise National Insurance contributions for the self employed in his Budget, the Institute for Fiscal Studies (IFS) says The chancellor was right to raise National Insurance for the self employed in his Budget, the Institute for Fiscal Studies (IFS) said.
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. And the independent think tank's director, Paul Johnson, said further rises were needed, calling Wednesday's announcement "baby steps".
Philip Hammond's move has been heavily criticised, but the IFS think tank said the current system needed reform. Philip Hammond's move has been heavily criticised, but Mr Johnson said the current system needed reform.
"It distorts decisions, creates complexity and is unfair," it said. "It distorts decisions, creates complexity and is unfair," he 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. "A tax system which charges thousands of pounds more in tax for employees doing the same job as someone else needs reform," he added.
The change to self-employed taxation was widely seen as breaking a Conservative election manifesto promise. The NI 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 see their NI contributions fall.
The previous prime minister, David Cameron, said there would be "no change" to National Insurance contributions. 'Bung in the dyke'
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. 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.
Mr Johnson said: "These [NI changes] feel like 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."
He added that as more workers became self-employed and "incorporated" by starting up their own companies, it would reduce tax revenues for the government.
"[The Chancellor] has put a bung in the dyke as the water floods through. Ten years down the road the move to self employment and incorporation will create a serious erosion of the tax base.
"If he were to do a U-turn and give up on reform, I would be seriously worried," he said.
Mr Johnson added that the old National Insurance system also distorted the labour market, adding that there were huge incentives for companies to claim that people who work for them were self employed, rather than employees.
Wrong message
But Mr Hammond is facing a backlash against the Budget announcement, which breaks a 2015 manifesto pledge on tax rises.
Some Conservative MPs openly criticised Wednesday's announcement.
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.
Former leader Iain Duncan-Smith said the move should be kept "under review".
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'
Former leader Iain Duncan-Smith said the move should be kept "under review".
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.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.
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'
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.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 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. 'Silly pledges'
However, the IFS was less happy with the changes to the taxation of dividends that the chancellor announced on Wednesday. The IFS was less happy about a Budget announcement that the £5,000 tax free dividend allowance, which was introduced less than a year ago, would be cut to £2,000.
It said that to change this so quickly does not look like "coherent policy making". That will mean a basic rate tax payer who receives more than £5,000 in dividends will have to pay an extra £225 tax. A higher rate tax payer will pay £975.
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." Many small traders and individuals set up businesses by forming a company and paying themselves through dividends as well as a salary.
The announcement comes less than a year after the last Chancellor George Osborne introduced the £5,000 tax free dividend allowance.
Mr Johnson said that to change this so quickly does not look like "coherent policy making".
He said it was never sensible to pledge no change to taxes: "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."