Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014

Lord Tunnicliffe Excerpts

Monday 3rd March 2014 Grand Committee

[Lord Newby (LD)]

My Lords, I am pleased to introduce to the Committee the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014 and the Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2014. As both the regulations and the order deal with national insurance contributions, it seems 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.

The changes to the NICs rates and thresholds covered by these two instruments were announced as part of the Chancellor’s Autumn Statement on 5 December last year. It is worth confirming from the start that the basis of indexation that has been used to calculate the changes covered by these two instruments is the same as that used since the 2012-13 tax year.

In the Budget 2011, we announced that from the 2012-13 tax year the basis for indexation of most NICs rates limits and thresholds would be the consumer prices index, the CPI, instead of the retail prices index, RPI, rate of inflation. This is because the Government believe that the CPI is the most appropriate measure of the general level of prices. The exceptions to this are the secondary threshold and the upper earnings and upper profits limits.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These regulations are necessary to set the class 1 national insurance contributions lower earnings limit, primary and secondary thresholds and the upper earnings limit for the 2014-15 tax year. The class 1 lower earnings limit will be increased from £109 to £111 per week from 6 April 2014. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold. The class 1 primary threshold will be increased from £149 per week to £153 per week from 6 April 2014. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment in Budget 2011, this is being increased by RPI from £148 to £153 per week.

From this April, the income tax personal allowance for people born after 5 April 1948 will be increased above indexation by £560 from £9,440 to £10,000. The point at which higher rate tax is payable will be increased to £41,865 in the 2014-15 tax year. As I mentioned, the upper earnings limit is not subject to CPI indexation. This is to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid. The upper earnings limit will be increased from £797 to £805 per week from 6 April 2014. The regulations also set the prescribed equivalents of the primary and secondary thresholds for employees paid monthly or annually. There will be no changes to NIC rates in 2014-15. Employees will continue to pay 12% on earnings between the primary threshold and the upper earnings limit, and 2% on earnings above that. Employers will continue to pay contributions at 13.8% on all earnings above the secondary threshold.

I move on to the social security order. This order sets out the NICs rates and thresholds for the self-employed and those paying voluntary contributions as well as providing for a Treasury grant. The order raises the small earnings exception below which the self-employed may claim exemption from paying class 2 contributions. The exception will rise in April, from £5,725 to £5,885 a year. Many self-employed people choose to pay these contributions in order to protect their benefit entitlement even though they may claim exemption from paying class 2 contributions. The rate of class 2 contributions for the 2014-15 tax year will rise from £2.70 to £2.75 a week. The rate of voluntary class 3 contributions will also increase from £13.55 to £13.90 a week for the 2014-15 tax year.

Today’s order also sets the profit limits for class 4 contributions. The annual lower profits limit on which these contributions are due will increase from £7,755 to £7,956 in line with the increase to the class 1 primary threshold. At the other end of the scale, the annual upper profits limit will increase from £41,450 to £41,865 for the 2014-15 tax year. This is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to the class 4 limits will ensure that the self-employed pay contributions at the main rate of 9% on a similar range of earnings as employees paying class 1 contributions at the main rate of 12%. Profits above the upper profits limit are subject to the additional rate of 2% in line with the 2% paid by employees on earnings above the upper earnings limit.

Finally, I need to ensure that the National Insurance Fund can maintain a prudent working balance throughout the coming year, which the Government Actuary recommends should be one-sixth or two months of benefit expenditure. The rerating order provides for a Treasury grant of 5% of benefit expenditure to be made available to the fund in the 2014-15 tax year. Similar provision will be made in respect of the Northern Ireland National Insurance Fund. I commend the regulations and order to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, I have studied the Explanatory Memorandum and these regulations with great care, and I have to confess that I am finding it very difficult to find any questions whatever to ask on them. The report of the general committee in the other place was equally bereft of any serious exchange. There were some technical questions asked but I will not repeat them, on the basis that I am sure that the Treasury machine would give precisely the same answers. There was an exchange on some thinking that we are developing about a different rate of benefit for people who have paid contributions over a number of years but that has to be developed further, to make sure that it is cost-neutral. The 5% that the Minister mentioned is, as I understand it, essentially a piece of book-keeping and does not represent any increase in overall public expenditure. I am not sure whether the Minister said that explicitly and I would value it if he were to confirm that but otherwise we have no comments to make on these regulations.

[Lord Newby]

My Lords, I can confirm that the provision of a 5% Treasury grant is indeed a piece of book-keeping and does not involve any additional expenditure.

Motion agreed.

[Lord Tunnicliffe]

My Lords, before we start the next business, due to the efficiency with which we have executed our previous business, we are rather scratching to find a spokesman. I wonder whether we might take a 10-minute break for the Opposition to find a spokesman for the next round.

[The Deputy Chairman of Committees]

My Lords, yes, in due course but the noble Lord, Lord Tunnicliffe, is being a little previous.

[Lord Tunnicliffe]

I am so sorry.