Cancellation of planned NICs rise may be followed by more radical action, says expert

Out-Law Analysis | 17 Mar 2017 | 10:35 am | 2 min. read

ANALYSIS: Chancellor Philip Hammond has cancelled plans to increase national insurance contributions (NICs) for the self-employed, after Conservative backbench MPs claimed it breached the party's manifesto.

Hammond said that he had made the decision "in the light of the debate of the last few days".

However, while the announcement will be welcome news for those who would have been affected, it also raises the question of what might take its place, and whether more radical change is on the horizon.

The climb-down leaves a £2 billion hole in government finances over the next five years, and the chancellor has promised measures to cover this cost in the autumn budget.

The government is clearly also still committed to the agenda of creating a 'fair' tax system, in which people doing similar work for similar wages and enjoying similar state benefits pay similar levels of tax, and levelling the playing field between employees and people who choose to work through other structures - and, indeed, between contractors engaged individually and those who use a personal service company.

Under the current rules, an employee earning £32,000 per year will contribute £6,170 worth of NICs between employer and employee contributions while a self-employed person earning the equivalent amount will only contribute £2,300, at a cost to the exchequer of over £5 billion each year, according to government figures. This is not only expensive, but also a distinction that is increasingly difficult to justify.

This is happening in the context of the Taylor review, which is looking at modern employment law practices and their wider implications. Matthew Taylor has been asked by the government to consider the effectiveness of the regulatory framework surrounding employment in relation to new, more flexible ways of working, and whether the growth of the ‘gig economy’ and other non-traditional forms of employment undermines policies such as the national living wage, automatic enrolment, parental leave, sickness and holiday pay. He is due to present his final report to the government in the summer.

There must be a real risk that, following publication of that review, the government will look to plug the gap in its finances with more radical action – action that stays on the right side of its manifesto commitments but seeks to tackle the discrepancies between the taxation of different working practices. Any changes in the field of employment status are likely to come with tax consequences, especially where there is further blurring of the boundaries between the treatment of different classes of worker.

An extension of the IR35 changes to the private sector is surely only a matter of time given the distortions which are going to arise. Or perhaps we will see action to apply employee/employer NICs to workers. Employers certainly have some cause for concern and should perhaps start preparing themselves for the possibility of unwelcome announcements in the autumn.

Chris Thomas is an employment tax expert with Pinsent Masons, the law firm behind