Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2021

Baroness Penn Excerpts

Monday 8th February 2021 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2021.

[Baroness Penn (Con)]

My Lords, these regulations set the national insurance contributions limits and thresholds, as well as the rates of a number of national insurance contributions, for the 2021-22 tax year and make provision for a Treasury grant to be paid into the National Insurance Fund if required. National insurance contributions, or NICs, allow people to make contributions when they are in work in order to receive additional contributory benefits when they are not working; for example, when they are retired or if they become unemployed. NICs receipts go towards funding these contributory benefits, as well as the NHS. As announced in November, the Government are using the September consumer prices index—CPI—figure of 0.5% as the basis for setting all national insurance limits and thresholds, and the rates of class 2 and class 3 national insurance contributions, for 2021-22.

I will first outline the specific changes to the class 1 primary threshold and class 4 lower profits limit. The primary threshold and lower profits limit indicate the points at which employees and the self-employed start paying class 1 and class 4 NICs, respectively. These thresholds will rise from £9,500 to £9,568 per year. The rates of class 1 and class 4 NICs are unchanged by these regulations. Increases to the primary threshold and lower profits limit do not impact on state pension eligibility. This is determined by the lower earnings limit for employees, which will remain at £6,240 in 2021-22, and payment of class 2 NICs for the self-employed, which I will come to shortly.

The upper earnings limit, the point at which the main rate of employee NICs drops to 2%, is aligned with the higher rate threshold for income tax. The upper earnings limit will increase from £50,000 to £50,270 per year. Similarly, the upper profits limit is the point at which the main rate of class 4 NICs drops to 2%. This will also increase from £50,000 to £50,270 per year. As well as class 4 NICs, the self-employed also pay class 2 NICs. The rate of class 2 NICs will remain at the weekly rate of £3.05, due to the rounding rules which require the calculation of the CPI increase to be rounded to the nearest 5p. The small profits threshold is the point above which the self-employed must pay class 2 NICs. This will increase from £6,475 to £6,515 per year. 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 £15.30 a week to £15.40.

The secondary threshold determines the point at which employers start paying employer NICs on an employee’s salary. This threshold will increase from £8,788 to £8,840 per year. The threshold at which employers of people under 21, and of apprentices under 25, start to pay employer NICs on these employees’ salaries will increase from £50,000 to £50,270 per year. The rate of employer NICs is unchanged by these regulations.

The regulations also make provision for a Treasury grant of up to 17% of forecasted annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2021-22. A similar provision will be made in respect of the Northern Ireland National Insurance Fund. The Government Actuary’s Department report laid alongside the re-rating regulations forecast that a Treasury grant will not be required in 2021-22, but in view of the economic challenges created by the Covid-19 pandemic, the Government consider it prudent to make the maximum provision at this stage.

These regulations will also ensure that tax credits, child benefit and the guardian’s allowance increase in line with the consumer prices index, which had inflation at 0.5% in the year to September 2020. As noted in the Secondary Legislation Scrutiny Committee’s report, the increases provided for in these regulations result from the statutory annual review of benefits and credits rates and, as such, are separate from the temporary measure announced by the Chancellor in March 2020 and enacted in the Coronavirus Act 2020. The powers in the Act increased the basic element of working tax credit by an extra £1,045 for the tax year 2020-21 and ensured that the temporary increase was not to be considered for the purpose of the annual review.

In summary, this proposed legislation makes changes to the rates, limits and thresholds for national insurance contributions and provision for a Treasury grant. It also increases the rates of tax credits and guardian’s allowance in line with prices. I hope noble Lords will join me in supporting these regulations. I beg to move.

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[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions to this short but interesting debate. The noble Lord, Lord Blunkett, touched on the wider debate about the nature of national insurance contributions, particularly the fact that people over state pension age do not continue to pay national insurance contributions if they are still in work. The noble Baroness, Lady Bowles, touched on the complexity of the national insurance system overall and asked about any plans for simplification. The noble Lord, Lord German, made similar points about the burden that the complexity can place on businesses. I thank the noble Lord, Lord Tunnicliffe, for his constructive tone and, indeed, all noble Lords for their constructive tone in posing some of these questions.

I am familiar with many of these issues on national insurance. It is a complex area and many of these questions go beyond the scope of our debate today. I also express a small amount of caution because I have scars on my back from tentative proposals for reform of national insurance under a previous Government. I am well aware that proposals for changes in these areas may need to be looked at carefully and cautiously.

I will have to disappoint noble Lords in my response to today’s debate and remind the Committee that national insurance contributions are different from income tax and other contributions: they are social security contributions. The rationale for not paying contributions after state pension age is that there is no opportunity for an individual to increase their entitlement to the state pension. However, employer national insurance contributions are paid for those workers.

I think that all noble Lords touched on the question of extending the £20-a-week uplift to the basic element of working tax credit and the universal credit standard allowance. As was acknowledged, that is not a subject for this debate. However, as they have done throughout this crisis, the Government will continue to consider how best to support people as the economic and health situation develops. The recent development of the Covid-19 vaccine demonstrates how quickly the situation is evolving. It is important that we make the right decision at the right time and remain flexible.

The noble Lord, Lord Blunkett, said that the costs of the uplift were small. As an illustration, I remind noble Lords that extending the £20 increase by a further 12 months would cost over £6 billion. That is equivalent to adding 1p to the basic rate of income tax, plus a 3p increase in fuel duty. The £20-a-week increase forms just one part of a wide-ranging package of support that the Government have provided to protect people’s jobs and incomes, including income support schemes, mortgage holidays, support for renters, the £500 million local authority hardship fund and the £500 payments for people on low incomes required to self-isolate by NHS Test and Trace. There is also a temporary suspension of the universal credit minimum income floor for self-employed claimants and an increase to the local housing allowance rates for housing benefit and universal credit, which is being retained at the same cash value into 2021-22. I reassure the noble Lord, Lord Blunkett, that I faithfully report back to Her Majesty’s Treasury the debates that we have in this House and noble Lords’ views on these matters. I will continue to do that, including on this topic.

The noble Lord, Lord German, touched on the administrative burden that small businesses are facing, particularly during the pandemic. The Government have provided an unprecedented package of support to help businesses through the pandemic. The noble Lord asked about the furlough scheme: that is a huge support in paying employees’ wages and encouraging employee retention. I would happily write to him on the administration of that scheme, but I understand that it has been made as straightforward as possible for businesses to administer. In addition, the Government increased the employment allowance in national insurance to £4,000 from April 2020. This includes over 650,000 businesses that have been taken out of paying national insurance contributions altogether since the introduction of the allowance in 2014.

The noble Lord, Lord German, also asked about the uprating of the state pension to those who live within the EU now that we have left the end of the transition period, and touched more closely on the payments to those in receipt of the state pension who live outside the EU. I say to the noble Lord that the policy on those receiving their state pension who live outside the EU is a long-standing policy of successive Governments. It has been in place for around 70 years and there are no plans to change it. We continue to uprate the state pension where there is a legal requirement to do so, for example in those countries with which the UK has a reciprocal agreement. The Government understand that people move abroad for many reasons, and the decision remains a personal choice. For a number of years, advice has been provided to the public that the UK state pension is not uprated overseas, except where there is a legal requirement to do so. As I said to noble Lords on the issue of tax credits, I say to the noble Lord, Lord German, that I will happily take this issue and the offer he raised from the Canadian Government back to Her Majesty’s Treasury.

The noble Lord, Lord Tunnicliffe, posed a question on some of the changing statistics on the number of inquiries conducted under Section 19 and the number of penalties and prosecutions on tax credits changing. The number of penalties and prosecutions in the 2019-20 tax year decreased due to multiple factors that affect volumes of penalties and prosecutions, and the cumulative effects of those different factors are significant. For example, universal credit has led to a reduced customer base, which would already naturally lead to a reduction in penalties.

As around 80% of the problems with tax credit claims stem from customer error, we have also embedded a further upstream approach to compliance whereby we look to educate customers to avoid errors and to identify those most likely to make an error or where we would have expected a change to be reported. This is paying dividends through reductions in error and fraud, which reduces the propensity for penalties to arise. The number of inquiries conducted under Section 19 increased from 13,752 in 2018-19 to over 15,000 in 2019-20. Section 19 allows HMRC to carry out inquiries into awards after the end of the tax year, once they have been finalised. The increase in the number of Section 19 inquiries is because our digital services, particularly around income, highlight where the customer has likely made a mistake when finalising their awards, giving us the basis to inquire about the information provided at finalisation. This process will help us to support claimants in getting their tax credit award on the right footing going forward, reducing the risk of claimants accruing further debt—which would occur if the issue was not corrected—receiving penalties or potentially being prosecuted.

I hope I have answered most points made by noble Lords in response to this debate. If there are any specific questions I have not managed to address, I will happily write to noble Lords. I therefore beg to move.

Motion agreed.