The increases in Class 4 National Insurance Contributions (NICs) announced in the budget have been dropped after the Government came under pressure from the self-employed, business groups and its own backbenchers.
Chancellor of the exchequer Philip Hammond has been accused of breaking a general election manifesto commitment not to put up National Insurance, income tax or VAT.
Hammond said: "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. In the light of what has emerged as a clear view among colleagues and a significant section of the public, I have decided not to proceed with the Class 4 NIC measure set out in the budget."
The Federation of Small Businesses (FSB) described the news as a "victory for our economy's strivers and risk-takers".
Mike Cherry, FSB national chairman, said: "We've consistently argued, since this measure was announced last week, that a tax-grab on the genuine self-employed - the hairdresser, electricians and plumbers - makes absolutely no sense."
The FSB lobbied against the measure on the grounds that self-employed workers do not enjoy the same benefits as salaried employees. This week, the FSB published a list of 37 specific problems that the self-employed face. They include:
Insecurity/volatility of income;
Poor access to mortgages;
No redundancy pay;
No access to pensions auto-enrolment;
No employer pension contributions;
No maternity pay, paternity pay or adoption pay;
No rights against unfair dismissal;
No holiday pay or right to notice;
No sick pay, compassionate leave or carers' leave;
Late payment and unfair contract terms from big business;
High cost of tax administration.
FSB national chairman Mike Cherry said: "The risks that the self-employed face makes them fundamentally different to employees."
The Taylor review is due to report on modern employment practices, including the needs of the self-employed, in the Summer.
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