Social Security (Contributions) (Rates, Limits and Thresholds Amendments, National Insurance Funds Payments and Extension of Veteran’s Relief) Regulations 2025

Lord Livermore Excerpts

Monday 3rd March 2025 Grand Committee

Moved by

[Lord Livermore]

That the Grand Committee do consider the Social Security (Contributions) (Rates, Limits and Thresholds Amendments, National Insurance Funds Payments and Extension of Veteran’s Relief) Regulations 2025.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, I beg to move that the Committee approves these regulations, which are made each year to set national insurance contributions rates, limits and thresholds; and to uprate child benefit and the guardian’s allowance.

First, the Social Security (Contributions) (Rates, Limits and Thresholds Amendments, National Insurance Funds Payments and Extension of Veteran’s Relief) Regulations 2025 set the national insurance contributions —NICs—limits and thresholds of a number of national insurance contributions classes for the 2025-26 tax year. The lower earnings limit, the small profits threshold, the rate of class 2 and the rate of class 3 will all be uprated by the September CPI of 1.7%, while the other limits and thresholds that these regulations cover will remain fixed at their existing level.

The regulations also make provision for a Treasury grant to be paid into the National Insurance Fund if required for the same tax year, which is a transfer of wider government funds to the National Insurance Fund, and for the veterans’ employer NICs relief to be extended for a year until April 2026. The scope of the regulations under discussion today is limited to the 2025-26 tax year.

National insurance contributions are social security contributions, paid when individuals are in work to receive contributory benefits when they are not working—for example, after they have retired or if they become unemployed. NICs receipts fund these contributory benefits, as well as helping to fund the NHS.

The primary threshold and lower profits limit are the points at which employees and the self-employed start paying employee class 1 and self-employed class 4 NICs respectively. The primary threshold and lower profits limit have been frozen by the previous Government at £12,570 until April 2028. However, the level of these thresholds does not affect people’s ability to build up entitlement towards contributory benefits, such as the state pension. For employees, this entitlement is determined by their earnings being above the lower earnings limit, which these regulations will uprate from £123 per week in 2024-25 to £125 per week for 2025-26. That is equivalent to an uprating from £6,396 to £6,500 per annum. For self-employed people, their entitlement is determined by their earnings being above the small profits threshold, which these regulations will uprate from £6,725 in 2024-25 to £6,845 for 2025-26.

Uprating the lower earnings limit and small profits threshold maintains the real level of income where someone gains entitlement to contributory benefits and is the standard approach that has been taken by Governments in most years since 1999 for the for the relevant thresholds. Wage growth is currently higher than inflation, which means that, following the uprating by CPI, there will be a reduction in the number of hours that someone who has received a typical wage increase needs to work to gain entitlement compared to last year.

The upper earnings limit, the point at which the main rate of employee NICs drops to 2%, and the upper profits limit, the point at which the main rate of self-employed NICs drops to 2%, are aligned with the higher rate threshold for income tax at £50,270 per annum. The previous Government also froze those thresholds until April 2028.

Self-employed people earning below the small profits threshold of £6,845 may pay class 2 NICs voluntarily to protect their entitlement to certain contributory benefits. The flat cash rate of class 2 NICs will increase from £3.45 in 2024-25 to £3.50 in 2025-26, in line with September CPI of 1.7%. Class 3 NICs allow people to voluntarily top up their national insurance record. The rate for class 3 will increase in line with inflation from £17.45 a week in 2024-25 to £17.75 a week in 2025-26.

On thresholds for employer NICs reliefs, noble Lords will be aware that the Government have had to make difficult decisions to fix the public finances. One of the toughest decisions that we faced was to increase the rate of employer NICs and reduce the secondary threshold. Although those changes are contained in the National Insurance Contributions (Secondary Class 1 Contributions) Bill, and not the regulations before us, they are the context in which our decision to maintain other targeted NICs reliefs is so important. Those employer NICs reliefs include those for under-21s, under-25 apprentices, veterans and new employees in freeports and investment zones. The regulations that we are debating set these thresholds in line with other personal tax thresholds or maintain the existing level.

The regulations also make provision for the NICs relief for employers of veterans to be extended for another year until April 2026. This measure means that next year businesses will continue to pay no employer NICs on salaries up to the veterans’ upper secondary threshold of £50,270 for the first year of a qualifying veteran’s employment in a civilian role. The continuation of this relief is part of the Government’s commitment to support our veterans. It is intended to further incentivise employers to take advantage of the wide range of skills and experience that ex-military personnel offer; it supports those who have given so much to our country, and it helps make sure that our country further benefits from the skills and potential of our service leavers.

I will now move on to the Treasury grant and National Insurance Fund, which is where the majority of NICs are paid, and which is used to pay the state pension and other contributory benefits. The National Insurance Fund is generally self-financing, with NICs receipts paying for contributory benefits. However, the Treasury has the ability to transfer funds from wider government revenues into the National Insurance Fund in the event that the balance of the National Insurance Fund falls below one sixth of estimated annual benefit expenditure. The regulations before us make provision for a transfer of this kind—known as a Treasury grant—of up to 5% of forecasted annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2025-26. A similar provision will be made in respect of the Northern Ireland National Insurance Fund.

It is important to note that the Government Actuary’s Department report laid alongside these regulations forecasts that a Treasury grant will not be required in 2025-26, but, as a precautionary measure, the Government consider it prudent to make a provision at this stage for a Treasury grant, which is consistent with previous years.

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, I thank the Minister for clearly outlining the essence of these two SIs, and the noble Baroness, Lady Kramer, for her comments. We had substantial discussions about national insurance in this House last week, on the national insurance contributions Bill, during which significant amendments were made. If carried through the whole legislative process, the changes agreed would result in significant changes to declared government policy. But from those political highs, we move to today’s debate, which is at a much more technical level and, as the Minister said, does not impinge directly on the proposed changes in the Bill.

I note in passing that I read with great interest the Government Actuary’s report, the existence of which I confess I was previously unaware. It provides first-rate briefing across the whole complex of social security benefits, and I thank the Government for it. Reflecting on the references to the National Insurance Fund, already mentioned by the noble Baroness, Lady Kramer —and, sadly, in the absence of the noble Lord, Lord Davies of Brixton—I ask the Minister whether the Government have any plans to put matters on a more realistic basis. The fund does not do what it says on the label.

In particular, the projections in the report indicate that the estimated 2025-26 end-year fund balance of £81.6 billion is only 53% of the estimated benefit expenditure of £152.9 billion. This is another factor in the case for reform of the welfare system, which we in the Conservative Party have called for to incentivise work, cut costs and fraud, and raise productivity. This is not least because of the significant long-term demographic changes which, as the last quinquennial review published in 2022 shows, are projected to exhaust the fund before 2085. There is a big challenge ahead.

Finally, on the measures in these two orders, the Minister will be glad to know that we are also broadly content. I welcome especially the rollover of support for Armed Forces veterans entering the civilian workforce, which we introduced in April 2021. The truth is that readjusting to civilian life is a major problem for many, and this measure is an imaginative incentive to employers to give them a chance and take advantage of their skills and experience, as the Minister pointed out in his opening remarks. Incidentally, the arrangement also shows that exemptions from the standard national insurance rules are possible.

[Lord Livermore (Lab)]

My Lords, I am very grateful for the support from the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, for the measures I outlined.

The noble Baroness, Lady Kramer, asked some questions about the National Insurance Fund and the review. The noble Baroness, Lady Neville-Rolfe, also touched on the Government Actuary’s Department report and the National Insurance Fund. The next quinquennial review of the fund will provide an update of these longer-term issues and projections over the period starting April 2025, so perhaps we will return to debate some of these issues at that point.

The noble Baroness, Lady Neville-Rolfe, also talked about reform of the welfare system. She will know that we are coming forward very shortly with a Green Paper to achieve exactly the things that she set out. I know we tend to be less political in this Room, but I will say that they were in power for 14 years and did not do those things. However, I hope that we will be doing those things very shortly to ensure that the welfare system incentivises work in the way the noble Baroness described.

I am very grateful to both noble Baronesses for their support of the extension of the veterans’ relief, which I totally acknowledge the previous Government introduced. The relief is part of the Government’s commitment to make the UK the best place in the world to be a veteran. It is intended to further incentivise employers to take advantage of the wide range of skills and experience that ex-military personnel offer. I totally take the points that the noble Baroness, Lady Kramer, made: you see homeless veterans across London and the transport network, and of course we need to do more work across government to support them in their efforts to get back into work and to eliminate that homelessness.

Finally, I take the point made by the noble Baroness, Lady Kramer, around CPI for child benefit. The noble Baroness, Lady Sherlock, in the previous debate very eloquently made the point that some of those smaller upratings compound previous upratings when CPI has been so much higher. I echo the words she said. I hope I have covered the points made by both noble Baronesses.

Motion agreed.