Plans to increase National Insurance levels for self-employed people – announced in the Budget last week – have been dropped.
Chancellor Philip Hammond has said the government will not proceed with the increases which were criticised for breaking a 2015 manifesto pledge.
In a letter to Tory MPs, he said: “There will be no increases in… rates in this Parliament.”
Labour’s Jeremy Corbyn said the U-turn showed a government “in chaos”.
Mr Hammond had faced a backlash by Conservative backbenchers, who accused him of breaking a general election manifesto commitment not to put up National Insurance, income tax or VAT.
In his letter explaining his change of heart, the chancellor 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.”
Mr Hammond’s Budget announcement would have increased Class 4 NICs from 9% to 10% in April 2018, and to 11% in 2019, to bring it closer to the 12% currently paid by employees.
He said “most commentators” believed the “sharp increase” in self-employment over the last few years had in part been “driven by differences in tax treatment”.
But during Prime Minister’s Questions, Mr Corbyn said of the U-turn: “It seems to me like a government in a bit of chaos here – a Budget that unravelled in seven days.”
He said the government should “apologise” for the stress the announcement had caused Britain’s 4.8m self-employed.
In response Prime Minister Theresa May said that she would not take lessons from the Labour leader on many things, but on creating “chaos”, she could.
The SNP’s Westminster leader Angus Robertson accused ministers of a “screeching, embarrassing U-turn” – while Labour’s shadow chancellor John McDonnell tweeted that the chancellor’s authority had been “shredded”.
Corbyn car crash?
Liberal Democrat leader Tim Farron, an advocate of Britain remaining in the EU, questioned whether the chancellor would “now U-turn on another broken election commitment to keep us in the single market”.
Labour MP Louise Ellman said the government had been “very wise” in dropping the self-employed NICs hike now “rather than have it voted down”.
“I would like to hear from the chancellor reassurances that the £2bn promised for social care that was going to come from these tax increases is not going to be withdrawn,” she told the BBC.
BBC assistant political editor Norman Smith said the proposal suggested “a lack of political sophistication”, with Mr Hammond not realising the storm his announcement would provoke.
He added he was surprised Mr Corbyn had not used all six of his questions at PMQs on what had been “a massive story – a huge, hulking U-turn” on a tax rise.
Alastair Campbell, Tony Blair’s former director of communications, added: “Unless the Corbyn team actually planned for that to be a car crash, the inquest should be long, hard and honest. He just can’t do it.”
Mr Hammond is due to make a statement on the subject to MPs from about 13:45 GMT.