Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2017
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Lord Young of Cookham
That the Grand Committee do consider the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2017.
Lord Young of Cookham (Con)
My Lords, these two Motions relate, first, to the disability elements of tax credits, as well as the guardian’s allowance; and, secondly, to the rates, limits and thresholds that govern national insurance contributions. Many of these changes are made simply to bring rates into line with inflation, as measured by the consumer prices index, which put inflation at 1% in the year to September 2016.
I speak first to the draft regulations for the uprating of disability-related tax credits and the guardian’s allowance. In short, the regulations provide for an increase in line with inflation to the disability elements of tax credits. This means that we are maintaining the value of support for both the disabled children whose parents or carers are in receipt of child tax credits and the disabled workers in receipt of working tax credits. The rise in rates also covers the new element for disabled children who were born on or after 6 April this year, regardless of the two-child limit for claims of child tax credit. The regulations also increase the guardian’s allowance in line with inflation, to sustain the level of support for children whose parents are absent or deceased. The two things I just outlined—the disability elements of tax credits and the guardian’s allowance—are exempt from the benefits freeze. This is so that we can provide support to those who face the additional cost of disability and care.
Let me turn to the other set of draft regulations we are debating: those that make changes to the rates, limits and thresholds for national insurance contributions, and make provision for a Treasury grant to be paid into the national insurance funds if required. These changes will take effect from 6 April this year. Starting with Class 1 national insurance contributions, the level of earnings at which employees start to gain access to contributory benefits, known as the lower earnings limit, will rise in line with inflation. The primary threshold, which is the level at which employees begin to pay Class 1 national insurance at 12%, will also rise with inflation. The upper earnings limit, which is the level at which employees start to pay Class 1 contributions at 2%, is being raised from £827 to £866 a week. This reflects the Government’s commitment to align this limit with the higher rate income tax threshold, which is being raised from £43,000 to £45,000 for the 2017-18 tax year.
As the Chancellor announced at the Autumn Statement, the levels at which employers and employees start to pay Class 1 national insurance are being aligned. To do this, the secondary threshold, where employers start to pay, is being increased from £156 to £157 per week. This will be the same as the primary threshold for employees from 6 April this year, and will make it easier for employers, as they will no longer have to operate two similar thresholds at slightly different rates.
Finally, for the employed, the level at which employers of people under 21 and of apprentices under 25 start to pay employer contributions will keep pace with the upper earnings limit and rise from £827 to £866 per week. This maintains our commitment to reduce the costs of employing young apprentices and young people. This is an above-inflation increase and maintains alignment with the upper earnings limit, meaning that employers pay national insurance only for the highest earning young apprentices and those under 21.
Moving on to the self-employed, the level at which they have to pay class 2 contributions will rise with inflation to £6,025 a year, and the weekly rate of class 2 contributions will also rise in line with inflation to £2.85. Self-employed people who earn above the lower profits limit, currently £8,060, also pay class 4 national insurance contributions at 9%. This threshold will rise with inflation. Above the upper profits limit, the self-employed instead pay 2%. Like the upper earnings limit for the employed, this limit for the self-employed will rise from £43,000 to £45,000 per year.
Finally, for those making voluntary class 3 contributions, the rate will increase in line with inflation from £14.10 to £14.25 a week.
I note that these regulations make provision for a Treasury grant of up to 5% of forecast annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2017-18. This is a routine measure which does not impact the Government’s overall fiscal position. A similar provision will also be made in respect of the Northern Ireland National Insurance Fund.
I hope that has been a helpful overview of the changes the Government are making to increase rates of support and contributions to the Exchequer in line with inflation. Noble Lords will of course be aware that the Chancellor announced yesterday that the main rate of class 4 national insurance will be increased to 10% in 2018-19 and 11% in 2019-20. This, alongside the abolition of class 2 NICs, is a progressive change to the self-employed NICs system. Over 60% of self-employed people who have to pay national insurance will be better off as a result of these changes. However, the rate of class 4 is not affected by these regulations and there will be an opportunity for noble Lords to discuss this measure in the Budget debate next week. I commend to the Committee the draft regulations on tax credits and the guardian’s allowance, as well as on social security contributions. I beg to move.
Baroness Wheeler (Lab)
My Lords, I thank the Minister for introducing these two instruments. The first on the agenda, the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations, would enact the annual re-rating of national insurance contribution rates, limits and thresholds and allow for the payment of Treasury grant not exceeding 5% of the estimated benefit expenditure for the coming tax year to be paid into the National Insurance Fund. These come into effect in April this year. Given that we are dealing with national insurance contribution rates, I am sure the noble Lord will not be surprised by my first question, to which he has already referred. In view of the surprise announcement in yesterday’s Budget, which is attracting some controversy, is he able to clarify or provide further information on the proposed changes?
The second SI is on tax credits and guardian’s allowance upratings for the increase in working tax credits and child tax credits for individuals who are disabled or severely disabled. It would also increase the weekly rate of the guardian allowance, again with both changes taking effect in April 2017. Since 2011, the inflation measure used to determine the uprating of social security benefits is the CPI. The uprating is based on the change in level of the CPI from September 2015 to September, recorded at 1%.
A rise in support for working families, however small, is welcome, and we have no intention of opposing either of the orders this afternoon. However, although I do not want to rehearse the arguments that will be had during the Budget debate next week, it is important to consider on the record this 1% uprating in context. Inflation is rising, and indeed is expected to increase further still over the course of this Parliament. As the Resolution Foundation has recently reported, the result of that could mean that average earnings in 2020 will be only just higher in real terms than they were 15 years ago and, crucially, we could see a fall in real pay at the end of this calendar year as price increases outstrip pay rises.
The same report from the Resolution Foundation found that the Government’s benefit freeze will raise an extra £1 billion a year by 2020, or £3.6 billion over the Parliament, compared with what was expected in the 2016 Budget. My noble friend Lady Sherlock asked a question about this figure last week in Committee but was unable to get an answer, so I hope the Minister will be able to respond today. Is the figure accurate? If not, will the Minister tell the Committee the value of savings that the Chancellor expects to make?
The Resolution Foundation analysis has been supported by the Institute for Fiscal Studies, which has underlined that the Government’s approach represents,
“a shifting of risk from the Government to benefit recipients”.
The institute has also stressed that this risk is borne by low-income households and that, unless this policy changes, higher inflation will reduce their real incomes.
I have one final question regarding the Treasury grant. In what circumstances do the Government anticipate such a grant would be made; when was a grant of this nature last paid into the National Insurance Fund; and what does 5% represent in real terms? The economic outlook for working people is one of less disposable income. Although we do not oppose these instruments, it is clear from the Government’s overall approach that their priorities are not compatible with a society that truly wants to support the most vulnerable. I look forward to the Minister’s response.
Lord Young of Cookham
My Lords, I am grateful to the noble Baroness for her support for these measures. I will try to answer the three or four questions that she put to me, starting with the easiest on the provision of a Treasury grant. The provision in the estimates does not mean that it will be drawn down. Indeed, this year the provision is being made only as a precaution. The 5% provision is equivalent to £5 billion in the case of the GB National Insurance Fund, and £134 million in the case of the Northern Ireland fund. A Treasury grant was last paid into the National Insurance Fund in 2015-16. We do not anticipate a payment being made in the current year because the reserves in the fund seem at the moment to be adequate.
I turn to the question posed by the noble Baroness, Lady Sherlock, about the savings from the uprating freeze. I hope I can provide some helpful information. When we legislated for the four-year uprating freeze in the Welfare Reform and Work Act, we published an impact assessment of those rates included in the four-year uprating freeze. Both Houses debated the clauses and passed the Bill, which received Royal Assent in March last year. At Budget 2016, which was the last fiscal event before the change came into effect, the freeze was expected to save £3.5 billion in 2020-21 to help to deal with the underlying deficit. However, neither the Government nor the OBR has re-costed the freeze. The uprating freeze has already been implemented and is subsumed within the welfare spending forecast. I hope that gives the noble Baroness the information that she asked for.
On the report by the Resolution Foundation and the impact on household incomes and distribution, we considered the impact of the four-year uprating freeze when we announced the policy in the July 2015 Budget. The background was that we found that the majority of working-age benefits and tax credits had grown faster than earnings since 2008. As part of our commitment to make work pay, we introduced the four-year uprating freeze to reverse that trend of benefits rising faster than earnings. We introduced the uprating freeze alongside other measures to support work incentives such as the national living wage, and we exempted elements of benefits and tax credits that related to the additional cost of disability and care, in recognition of the additional costs that these claimants face. Indeed, the regulations today increase those elements of tax credits in line with prices.
With regard to the legitimate question the noble Baroness posed about inequality, income inequality is now lower than it was in 2010 and the share of total income tax paid by the top 1% is 27%. According to the latest data from the Office for National Statistics, income inequality in the UK is at its lowest level since 1986.
Finally, as I have said, there will of course be an opportunity to discuss yesterday’s Budget announcement in the Budget debate and when the necessary legislation comes before the House. I am not sure that I can add to what the Chancellor has said, not just in his Budget but in his many interviews during the day. The background is basically that, at the moment, self-employed people pay less in national insurance contributions than people in employment and, historically, this was because the self-employed received much less in state pension and contributory benefits. Since last year, because of the changes that we have made, self-employed workers now build up the same entitlement to the state pension as employees, which is an £1,800 a year pension boost for the self-employed. At the moment, someone who is employed and earning £32,000 will incur, with their employer, over £6,000 in national insurance contributions, while a self-employed person earning a similar amount will pay £2,300. That is why we needed to address the point of fairness in the national insurance contributions, which fund the NHS and pensions. That is the background which has given the noble Baroness, Lady Wheeler, the ammunition she needs to come back next week with her colleagues in the debate on the Budget. I welcome what she has said about these regulations and I beg to move.