Chancellor Philip Hammond has scrapped the plan, it was announced around midday, following pressure from Tory MPs and widespread criticism in the media.
The move was attacked for breaking a Conservative party manifesto pledge in 2015.
Mr Hammond is due to speak to Parliament later today but a letter to MPs has revealed the decision.
The main rate of Class 4 NICs for the self-employed was proposed to increase by 1% to 10%, with a further 1% increase in April 2019. The government had already announced that it will abolish Class 2 NICs – an at-rate charge on the self-employed – from April 2018.
Mr Hammond said last week that “such dramatically different treatment of two people earning essentially the same undermines the fairness of the tax system”.
Jon Greer, pensions expert at Old Mutual Wealth, said: “Such a high profile Budget 'U-Turn' will damage the credibility of the measured and methodological 'spreadsheet Phil’. The former Chancellor, George Osborne, had a reputation as a maverick capable of both an 'omni-shambles' Budget, but also credited with revolutionising retirement with his 2014 surprise pension reforms. Hammond had been positioned as a more considered, consultative successor."
He said: “The small increases to the national insurance contributions from the self-employed were supposed to guard the government’s funds against the increasing threat of a growing tax gap. It felt like an attempt to solve an issue that required a much more fundamental review of the distortions provided by the current tax system.
“Greater attention will now be paid to the auto-enrolment review. The self-employed are currently excluded from the private pension system unless they make their own arrangements.
"The government has already said they are looking to address this imbalance and ensure the self-employed enjoyed a comparable opportunity to save for their retirement. However, this u-turn suggests a ‘pseudo auto-enrolment’ for the self-employed funded through national insurance contributions would be unpalatable so the government may need to explore other avenues.”
Steven Cameron, Aegon pensions director, said: “While the u-turn is likely to be welcomed by many self-employed people, the policy has put the spotlight on the issue of NI and the rights and benefits of those working in the gig economy. We hope that the government will look more closely at what can be done to close disparities between the employed and the self-employed.
"Within pensions, we need to find a solution equivalent to auto-enrolment, using nudges for the self-employed to halt the growing retirement income divide we’ll otherwise face between them and their employed peers when they come to retire. Delaying the increase allows more time for the government to come up with a pension solution for the self-employed, which could include rebating the increase in NI into a private funded pension of the self-employed individual’s choice.”
deVere Group CEO, Nigel Green, said: “This is a stunning u-turn by the Chancellor, just a week since his Budget.
“Hiking taxes on the self-employed would have only served to punish ambition and undermine aspiration to get on in life.
“This grinding u-turn is now a golden opportunity for this government to go one step further and better incentivise those self-reliant individuals who take on the responsibility, risk and burden of setting up companies and creating jobs and wealth.
“Surely, if the UK is to thrive outside the EU, it should be aiming to keep and attract more entrepreneurial self-starters."
Answer to deficit is not tax and NHS contributions on the self employed-it's government spending. Sadly this is unlikely to be retweeted.— Peter Hargreaves (@PkhPeter) March 15, 2017
Nics changes get knocked! Oh dear bit of a day Spreadsheet Hammond— just urquhartstewart (@ustewart) March 15, 2017
@PensionsGirlie So just when I sign off the Budget factsheet ....— Rachel Vahey (@RayVay) March 15, 2017
Do the NI U-turn and the Scottish issue make an early general election more likely?— Tom McPhail (@PensionsMonkey) March 15, 2017
Presumably the NIC increase was going to pay for something, part of a balanced budget. So what goes now they've u-turned on NICs?— Chris Budd (@ovationchris) March 15, 2017
Tory government cocking up NICs and budget - not exactly instilling confidence with huge Brexit task ahead.— Richard Allum (@TheParaplanner) March 15, 2017
@PensionsDave Will he become known as "no NICs " Hammond ?— Mike Morrison (@AJBellMike) March 15, 2017