The Government has abandoned its plan to increase National Insurance Contributions for self-employed workers announced in last week's Budget.
Chancellor Philip Hammond's plan to increase Class 4 NICs from nine to 10 per cent this year and 11 per cent next year had been criticised as a "tax grab" on the self-employed that broke a 2015 manifesto pledge not to increase National Insurance.
In his Budget speech, the Chancellor had said there has been a "dramatic increase" in self-employment, including many highly paid professionals working through LLPs. Yet a self-employed worker earning £32,000 a year would pay less than half the National Insurance of an employee and their employer at £2,300 compared £6,170.
Lower NICs from self-employed workers would cost public finances an estimated £5bn this year alone and "that is not fair on the 85 per cent of workers who are employees," he added.
However, in a letter to Conservative MPs, Hammond said there would be no increases in NICs in this parliament.
"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," he wrote.
"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."
Labour's shadow chancellor John McDonnell described the U-turn as a "humiliation" for the Chancellor.
"Did the Prime Minister or the rest of the Cabinet, who must have seen the Budget in advance and known this measure was to be implemented, raise their concerns with the Chancellor before he announced it, worrying millions of families? It was in the weekend papers before the Budget so they can't say they were unaware it was to happen," he said.
"On the day the Brexit secretary has admitted that he hasn't looked into the costs of the Prime Minister's negotiating strategy, this is yet more proof that there is disarray at the top of a Government clearly making things up as they go along."
Ian Cass, chief executive of the Forum of Private Business, said: "The Forum has long lobbied for a simplified tax system and continues to do so. This does not necessarily mean that the National Insurance paid by the self-employed should the same as those paid through PAYE.
"Self-employed business owners do not benefit from the likes of holiday pay and sick pay, for instance, and take personal financial risks as they add to the growth of the economy and create jobs. All of these aspects should be considered as the Government reviews the whole tax landscape. We will continue to push for simplicity, transparency and fairness."
Mike Cherry, national chairman of the Federation of Small Businesses, said the decision is a "victory for our economy's strivers and risk-takers".
"The army of self-employed make a massive contribution to the UK economy. 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," he added.
"We look forward to engaging with the summer review into the benefits that the self-employed need to be able raise families, pay the bills when sick and prepare for retirement. We need to see what other measures are brought forward to make sure they support the UK's small business and self-employed community."