The government had initially said it would scrap Class 2 National Insurance contributions (NICs) in April. But the move had been delayed by a year and has now been abandoned entirely.
The change will scrap a tax cut of £134 a year on average for millions of self-employed workers.
Concerns that low-earning self-employed people would pay more to access the state pension, and that this would make the tax system more complex, were cited as the main reasons behind the decision.
Originally, the government was due to scrap Class 2 NICs, paid by self-employed people with profits of £6,205 or more a year, in April 2018. But last year it announced it was delaying this for a year.
In a written statement, Treasury minister Robert Jenrick said the change had been intended to simplify the tax system for the self-employed, but that it had "become clear" that a "significant number" of self-employed people with the lowest profits would have ended up paying more.
'Having listened to those likely to be affected by this change, we have concluded that it would not be right to proceed during this parliament, given the negative impacts it could have on some of the lowest earning in our society,' it said.
Speaking on Radio 4's Today programme, director of the Institute For Fiscal Studies (IFS) Paul Johnson said that the self-employed still pay less tax than employees, and that the move was necessary to provide more money for the Treasury.
“The self-employed still pay a lot less than employees. If you are employed, you and your employer pay 25% for National Insurance, whereas if you are self-employed you pay 9%. That’s a very big difference," he said.
“The Office for Budget Responsibility has pointed out that the Treasury will be losing several billion pounds a year as more people claim to be self-employed. Another way of looking at this is at that employees pay too much, and more than they would do to make up for the relatively smaller amount that employers and the self-employed pay as a result of their contractual arrangements."
However, also speaking on the Today programme, Conservative MP for Harlow Robert Halfon said the government should be focussing on reducing the cost of living for low-paid workers.
“I understand why the Treasury has made this decision," he said. "But they need to look at doing a lot more for the lower paid. They are going to save a few hundred million by not doing this tax cut."
Referencing shadow chancellor John McDonnell's description of the move as a "betrayal", Halfon added that while he did not view the decision as such, the government must now come forward with a plan to support those on low incomes in the next Budget.
“What they’ve got to do, is come back with a serious package in the Budget for cutting the costs of living for the lower paid […] it’s not a betrayal, but it will be if they don’t come back with ways of cutting the costs of living for the lower paid."
In response to the government's U-turn, shadow chancellor McDonnell said: “These people are the engine of the economy and have been let down again, while giant corporations have seen their tax bills slashed. Few will ever trust Philip Hammond or the Tories again.”
Mike Cherry, chairman of the Federation of Small Businesses (FSB), said the Treasury "should have worked harder" to find ways to protect low-earners. "The self-employed community has been let down today, missing out on a promise to reduce their tax burden," he said. "This raises serious questions once again about the government's commitment to supporting the self-employed."
Cherry added: "Class 2 NICs is a regressive levy that indiscriminately hits sole traders and makes life even tougher for those who are hard-up."