The u-turn was announced in a letter to Conservative MPs following a party outcry that the move broke a manifesto pledge made before the last election.
The move has been described as a “stunning u-turn” but also been welcomed by many who say it will enable a fuller consideration of the taxation regime.
In his letter, 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 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 measures set out in the Budget.
“There will be no increases in NICs rates in this Parliament,” he added.
Class 4 National Insurance Contributions were due to increase from 9% to 10% in April 2018 and to 11% in April 2019.
The chancellor will continue with abolition of Class 2 NICs from April 2018.
Hammond maintains that the measures announced to increase Class 4 NICs were necessary to maintain the stability of the tax base and equalise the contributions of the workforce, but has conceded defeat on the matter.
Instead he will address the funding gaps in the Autumn Statement, which is scheduled to be the first Autumn Budget.
DeVere Group CEO Nigel Green said the change illustrated how out of touch the government was.
“This is a stunning u-turn by the chancellor, just a week since his Budget,” he said.
“While we welcome this climbdown, it does show just how out of touch this government is with Britain’s hardworking, already-squeezed and over-taxed entrepreneurs – the lifeblood of the UK economy.
“Hiking taxes on the self-employed would have only served to punish ambition and undermine aspiration to get on in life,” he added.
Instead, Green suggested this was an opportunity for the government to incentivise self-employed and entrepreneurs.
“Surely, if the UK is to thrive outside the EU, it should be aiming to keep and attract more entrepreneurial self-starters,” he added.