Social Security (Contributions) (Amendment No. 2) Regulations 2011

Lord Davies of Oldham Excerpts

Wednesday 16th March 2011 Grand Committee

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I am pleased to introduce the Social Security (Contributions) (Amendment No. 2) Regulations 2011 and the Social Security (Contributions) (Re-rating) Order 2011. It is worth noting that all the changes covered by these two instruments were announced as part of a Written Ministerial Statement in December last year. As both the regulations and order deal with national insurance contributions, it seems only sensible that they should be debated together. As a matter of course, I can confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights.

I shall begin with the social security regulations. The previous Government’s 2008 Pre-Budget Report announced an increase in class 1 and class 4 national insurance contribution rates of 0.5 per cent. These rate rises were due to come into force from the start of the 2011-12 tax year, but 12 months later the former Chancellor of the Exchequer declared his intention to double the increases. This would have placed additional burdens on businesses at a time when they are most in need of our support. While this Government confirmed that these rate rises would be implemented, we are implementing them as part of a wider package of reforms that will reduce the overall cost of employment and will support people on lower incomes. We will achieve this by increasing the income tax personal allowance, the primary threshold and the secondary threshold. The social security regulations before the Committee today are a vital part of this process.

To start with, the point at which employers will have to start paying national insurance will increase from £110 per week to £136 per week from April of this year. This is a weekly rise of £21 above indexation, which means that employers will not pay any national insurance on the first £7,072 of any worker’s earnings.

From April of this year, the class 1 primary threshold, which is the point at which employees start to pay class 1 national insurance contributions, will increase from £110 per week to £139 per week. This is an increase of £24 a week above indexation, which will help to mitigate the effects that a 1 per cent increase in the employee’s rate of national insurance contributions will have on the lower-paid.

As a result of the increases in thresholds included in today’s regulations, around 950,000 low earners will no longer pay national insurance contributions, while their contributory benefit entitlements will be protected. Employees earning under £35,000 a year will pay less both in terms of income tax and NICs. Employers will pay less in NICs on all workers earning less than £20,000 a year. In relation to NICs thresholds, employers will be better off by £150 for every employee earning above the secondary threshold.

Compared with the plans that this Government inherited, more than £3 billion a year is being returned to employers through the secondary threshold rise. Even more money will be going straight into the pockets of hard-working families due to the changes in the primary threshold.

Today’s regulations also set the level of the lower earnings limit. This takes into account changes that we are making to the way in which the basic state pension will be uprated. As part of last year’s June Budget, my right honourable friend the Chancellor announced that the basic state pension will be linked to earnings from April 2011. Not only that, we included the added guarantee that it would rise in line with either earnings, prices or 2.5 per cent, depending on which is greatest.

Now that the earnings link has been restored, the lower earnings limit is no longer legislatively linked to the basic state pension. This means that the Treasury can set its level independently of the basic state pension through affirmative resolution. As a result, large rises in the basic state pension will not result in lower earners being taken out of contributory benefit entitlement. This is fair and progressive and it will support the poorest and most vulnerable in our society. For the upcoming tax year, the lower earnings limit will increase by RPI to £102 per week, while the upper earnings limit will go down from £844 per week to £817 per week. This is to maintain the alignment with the point at which the higher rate of income tax is paid. It is also worth noting that the regulations will increase the main rate primary contributions paid by women who married before 6 April 1977, taking them up to 5.85 per cent from this April.

The social security order sets out the NICs rates and thresholds for the self-employed and those paying voluntary contributions. In the case of the self-employed, it raises the small earnings exception for paying class 2 contributions. The exception will rise in April from £5,075 to £5,315 a year, which is broadly in line with prices. The rate of class 2 contributions will increase from £2.40 to £2.50 a week. The rate of voluntary class 3 contributions will also increase from £12.05 a week to £12.60 a week. Again, this is similar to the general increase in prices.

Today’s order sets the profit limits for which main rate class 4 contributions are paid. The lower limit at which these contributions are due will increase from £5,715 to £7,225 a year, in the same fashion as the class 1 primary threshold. At the other end of the scale, the upper profits limit will be reduced from £43,875 to £42,475. This maintains alignment with the upper earnings limit for employees, which, as I said, is being reduced to reflect the changes made to the higher rate of income tax. The changes to the class 4 limits will ensure that the self-employed pay contributions on a similar range of earnings to employees paying class 1 contributions. The increase in the lower profits limit will guarantee that the 1 per cent increase in the class 4 NICs main rate is offset for the self-employed. This is in much the same way as the increase in the primary threshold offsets the 1 per cent increase for employees.

The legislation included as part of today’s order and regulations is an important part of the Government’s plans to reduce the taxation of labour. It will encourage employers to take on more workers, help those on the lowest incomes and support private enterprise and employment across the country. This is important for the economy and important for the recovery. I commend the regulations and the order to the Committee.

[Lord Davies of Oldham]

My Lords, I am grateful to the Minister for the explicit way in which he outlined the contents of the regulations and the order. He will forgive me if I do not spend a great deal of time responding to them. First, it seems that the main principles adumbrated in his contribution were debated pretty thoroughly at the general election and largely resolved by crucial decisions then. Secondly, we have had the opportunity to debate national insurance contributions with some degree of intensity over the past few weeks. These issues have also already been considered by the other place. Therefore, the noble Lord will forgive me if I am not able to match the strength, force and length of his opening contribution. However, I have two specific questions to ask, to which I would like him to address his mind and respond.

The Government—or the more senior party of the coalition—made much of this in their rhetoric during the general election. Afterwards, there was in the coalition agreement this commitment—indeed, a pledge—to stop the rise in employer national insurance contributions from April 2011. However, there seems to be a difference between the expectations to which this might give rise and the reality that we see in the SI before us. What is given back to the employer through the threshold changes to class 1 secondary contributions? The threshold goes up from 12.8 to 13.8 per cent but this appears to be somewhat less than employers might have thought they were getting following the pledge to stop the rise entirely as far as employers are concerned. It looks as though the Government are giving back with a degree of generosity that does not quite fulfil their commitment. The noble Lord mentioned that he thought that as much as £3 billion was being returned. Can he confirm that figure and say whether it is consistent with employers’ expectations of what they would get back?

Secondly, I want to comment on what I am sure the noble Lord will indicate is a minor issue, although it is not minor to many of us. I refer to the contribution of married women and widows. I know that they form a limited group but I see that the increase in their contributions will be from 4.8 to 5.8 per cent. What are they getting for that increase? We know that they get no retirement pension, that they cannot get jobseeker’s allowance if they become unemployed and that they receive no sickness benefits. Yet, in all the Government’s bravado about the restrictions that they would place on increasing national insurance contributions, they could not exempt this group. That seems to be at one with an awful lot of the dispositions made by the Chancellor and by Ministers responsible for Treasury matters over the past few months. I think particularly of child benefit for women who earn more than £40,000 a year. Whether intended or not, the legislation seems to discriminate pretty heavily against women when we would have thought that, if the Government were true to the principle that the noble Lord adumbrated in his concluding remarks, which reflected some fairness, this group would have been treated more generously. Will the Minister comment on that? In more general terms, the Opposition are supportive of the regulations.

[Lord German]

My Lords, perhaps I may add a few words of welcome for these regulations. They give effect to a significant commitment that this Government made to try to reduce the costs to business of employment, to try to make sure that those who are in employment at lower levels of income receive a boost and to give effect to that commonly held and often-referred-to statement that work will always pay. Taken in the round, we cannot omit the other part of this package—the Welfare Reform Bill—which will ensure that those on lower earnings always benefit by being in work and that they do not lose their pensions.

Primarily, these regulations give help to support people on lower incomes. They help those at the lower end of the pay scale but, as the Minister said, they are part of a package to lift people—many tens of thousands and nearly a million in this case—out of national insurance contributions altogether and to reduce the tax burden as a whole for a substantial number of working people throughout the country. That is a crucial change, which, taken with the Welfare Reform Bill, will support the poorest and ensure that it will always pay for people to be in work, to seek work and to find work. It is progressive and as such should be encouraged.

We were told by the opposition party during the last general election that it would be better not to raise VAT but to raise national insurance contributions. We have increased VAT to 20 per cent. To what level would national insurance contributions have to rise to match that switch? Is it not far better to ensure that people who are on the lowest earnings can keep more of their income and that the poorest in our society benefit most from these changes? Is not the progressive nature of these changes crucial to fairness in our society?