Institute for Fiscal Studies backs National Insurance increase

The chancellor was right to raise National Insurance for the self employed in his Budget, the Institute for Fiscal Studies (IFS) said.

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 Mr Johnson said the current system needed reform.

"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," he added.

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.

'Bung in the dyke'

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".

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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.

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 thousands of pounds.

'Silly pledges'

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.

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.

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."