Thoughts on the partial NIC ‘lock’ law

The Conservative manifesto for the May 2015 election committed a Conservative government not to increase “the rates of VAT, income tax, or national insurance” in the next Parliament (ie. this one).

But the NIC lock, enacted in the National Insurance Contributions (Rate Ceilings) Act 2015, applied only to the class 1 NICs paid by employers and employees.

Writing in The Sun on March 16, chancellor Philip Hammond said he and the prime minister had decided, a week after announcing a proposal to increase the class 4 NICs paid by the self-employed, that it was “not enough simply to stay within the letter of our tax lock law”.

It was important that “we meet the spirit of our [manifesto] commitment as well”, he said. So he has now pledged not to increase any NIC rates during this Parliament – there’s more on this, and the political fallout, at Tax Analysts (paywall).

I wondered how an NIC “lock” omitting any reference to class 4 contributions, despite the manifesto commitment, became law in 2015. This is a brief account based on information on the government and parliament websites. The income tax and VAT locks were enacted separately.

During a September 2015 debate on the bill, an MP noted that the “lock” appeared to apply to class 1 only. She presumed that the other classes “will be covered in due course”.

This appears to have been the only question, about the absence of a reference to class 4, that was raised during the parliamentary debates before the bill became law in December 2015.

Harriett Baldwin, then economic secretary to the Treasury, replied that the government had announced at the summer 2015 budget that it was asking the Office of Tax Simplification (OTS) to “look at class 2 and class 4 contributions”. An OTS consultation would inform the 2016 budget, she added. And that was that, it seems.

The OTS’s brief was actually wider than classes 2 and 4. The summer 2015 budget document said that “the government will commission the OTS to review the closer alignment of income tax and [NICs].” The terms of reference published by the OTS in July 2015 said all classes of contribution would be considered.

The summer 2015 budget did announce that the government itself would consult on the abolition of class 2 contributions – flat-rate weekly contributions by the self-employed in return for access to contributory benefits – and a proposed restructuring of class 4 NICs to allow access to benefits. These reforms were the subject of a December 2015 consultation and will be implemented from April 2018.

Closer alignment

The OTS published in March 2016 seven recommendations towards closer alignment of income tax and NICs, including “aligning self-employed NICs more closely with employees’ NICs – and benefits”. But it warned that the potential changes, if that alignment was pursued, would “impact on millions of people.” It estimated that 7.1 million people would pay less but 6.3 million would pay more, while some would gain contributory state benefits.

Responding to that OTS report, the government noted that “this is not a straightforward issue” and that the OTS would conduct further work on employer and employee NICs.

In November 2016 the OTS reported that, while there was “near-universal” support for bringing income tax and NICs closer together, there was a need for “proper, informed debate about the considerable implications.”

That debate seems unlikely to happen soon, but Hammond did tell MPs that when it has considered the Taylor review of employment practices – expected in June – the government will “seek to audit the differences in treatment between the employed and the self-employed.”

See also:

NICs U-turn fallout extends beyond UK tax debate

NICs reversal follows staunch defence of budget proposal