Philip Hammond has dropped his plan to increase National Insurance Contributions for the self-employed in what has been described as a “screeching, embarrassing” U-turn.
In a letter to Conservative MPs, the chancellor said he would not proceed with the reform, announced during the Budget just a week ago.
The move to raise Class 4 contributions – intended to bring in £2billion – would have hit almost 2.5million people with a £240 rise.
It sparked much criticism from Tory backbenchers, who accused Mr Hammond of breaking an election pledge, and business leaders.
He also faced a furious backlash in the Highlands, where many communities have levels of self-employment which are significantly above national averages.
Yesterday, the chancellor confirmed there would be no increases in NICs rates in the current parliament.
He wrote: “It is very important, both to me and to the prime minister, that we are compliant not just with the letter, but also the spirit of the commitments that were made.”
Meanwhile, the planned abolition of Class 2 contributions -also paid by the self-employed – from April 2018 will still go ahead.
Mr Hammond acknowledged the Budget was no longer “fiscally neutral”, but he committed to addressing that in the autumn.
And he insisted the spending commitments – on health, social care and education – outlined last week would be kept.
A planned consultation to be carried out over the summer -looking at the different parental benefit entitlements enjoyed by employees and the self-employed – will now be widened to look at other areas of different treatment as well.
And the chancellor insisted the government stood by its approach of trying to address the growing unfairness in the system.
SNP Westminster leader, Angus Robertson, branded the move a “screeching, embarrassing U-turn”.
The Moray MP added: “We once had a prime minister who said that the lady is not for turning. My goodness.
“Isn’t it welcome that the prime minister today has admitted she is for turning?”
Shadow chancellor John McDonnell called it a “humiliating reversal”, adding: “His authority is now shredded after just one Budget, and he tore up a manifesto commitment to do it.”
Andy Willox, Federation of Small Businesses Scottish policy convener, said self-employed people across the UK would “breathe a sigh of relief” now that the chancellor had “come to his senses”.
But Sean McCann, chartered financial planner at NFU Mutual, issued a warning that Mr Hammond would look to recoup the money from other sources.