There are concerns that Chancellor Philip Hammond’s decision to backtrack on the increase to National Insurance Contributions for the self-employed could see pensions tax relief targeted to cover the shortfall.

During the Budget, last Wednesday 8 March, Hammond announced that due to the introduction of the new state pension, which increased the self-employed’s state pension entitlement, NICs for the self-employed would increase.

The plan was to increase Class 4 NICs from 9 per cent to 10 per cent in April 2018 and then to 11 per cent in 2019, which many criticised the Chancellor for as it breached a manifesto promise.

However, Hammond has now made a u-turn on the policy “in light of the debate” and has promised there will be no increases to NICs rates in this parliament. He said the cost of not implementing these changes will be funded by further measures announced in the Autumn Budget.

Old Mutual Wealth pensions expert Jon Greer said the real risk is that the Chancellor targets pensions tax relief to make up the shortfall the increase in Class 4 National Insurance would have provided.

“The small increases to the national insurance contributions from the self-employed were supposed to guard the government’s funds against the increasing threat of a growing tax gap. It felt like an attempt to solve an issue that required a much more fundamental review of the distortions provided by the current tax system.

“Greater attention will now be paid to the auto-enrolment review. The self-employed are currently excluded from the private pension system unless they make their own arrangements. The government has already said they are looking to address this imbalance and ensure the self-employed enjoyed a comparable opportunity to save for their retirement. However, this u-turn suggests a ‘pseudo auto-enrolment’ for the self-employed funded through national insurance contributions would be unpalatable so the government may need to explore other avenues.”

In addition, former Pensions Minister and Royal London director of policy Steve Webb said it is time for an end to the “roller-coaster of policy making from the Treasury”.

“What is needed is a long-term strategy for tax, not a serious of short-term announcements. Now that the Chancellor has committed to leave NICs for the self-employed alone, we also need a long-term commitment to stop meddling with pension tax relief. That would provide savers with the certainty that they urgently need. We also need a strategy to tackle the pensions saving crisis amongst the self-employed which remains unaddressed,” he said.

However, Hargreaves Lansdown head of retirement policy Tom McPhail said the NICs increase for the self-employed was a “modest and redistributive measure”, which would have helped bring the self-employed National Insurance rates closer into alignment with the increased state pension benefits they now enjoy.

“This is a stay of execution. With only one in 10 of the self-employed paying into a pension, their later life funding is high up on the government’s agenda. The inclusion of the self-employed in the auto-enrolment system is looming on the horizon. If this is how it is going to be until 2020, the government might be better off triggering an early general election in pursuit of a fresh mandate and an increased majority. In the meantime, this U-turn will increase pressure in other areas of fiscal policy and may increase the risk of further pension tax tinkering in the Autumn Budget."

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