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New clause


Lords amendment: No. 64, after clause 50, to insert the following new clause--Class 1 contributions--
".--(1) For subsection (1) of section 5 of the Contributions and Benefits Act (earnings limits for Class 1 contributions) there shall be substituted the following subsections--
"(1) For the purposes of this Act there shall for every tax year be--
(a) a lower earnings limit (for primary Class 1 contributions);
(b) an upper earnings limit (for primary Class 1 contributions); and
(c) an earnings threshold (for secondary Class 1 contributions).
(1A) For the tax year 1999-2000, the lower earnings limit (for primary Class 1 contributions) shall be £81.
(1B) For the tax year 2000-2001 and each subsequent tax year, the limits and threshold referred to in subsection (1) above shall be specified for that year by regulations which, in the case of those limits, shall be made in accordance with subsections (2) and (3) below."
(2) For subsection (1) of section 6 of that Act (liability for Class 1 contributions) there shall be substituted the following subsection--
"(1) Where in any tax week earnings are paid to or for the benefit of an earner over the age of 16 in respect of any one employment of his which is employed earner's employment--
(a) a primary Class 1 contribution shall be payable in accordance with this section and section 8 below if the amount paid exceeds the current lower earnings limit (or the prescribed equivalent in the case of earners paid otherwise than weekly); and
(b) a secondary Class 1 contribution shall be payable in accordance with this section and section 9 below if the amount paid exceeds the current earnings threshold (or the prescribed equivalent in the case of earners paid otherwise than weekly)."
(3) For subsections (1) and (2) of section 8 of that Act (calculation of primary Class 1 contributions) there shall be substituted the following subsections--
"(1) Where a primary Class 1 contribution is payable, the amount of that contribution shall be the primary percentage of so much of the earner's earnings paid in the tax week, in respect of the employment in question, as--
(a) exceeds the current lower earnings limit (or the prescribed equivalent); and
(b) does not exceed the current upper earnings limit (or the prescribed equivalent);
but this subsection is subject to regulations under section 6(5) above and sections 116 to 120 below and to section 41 of the Pensions Act (reduced rates of Class 1 contributions for earners in contracted-out employment).
(2) For the purposes of this Act the primary percentage shall be 10 per cent; but the percentage is subject to alteration under sections 143 and 145 of the Administration Act."
(4) For section 9 of that Act there shall be substituted the following section--
"Calculation of secondary Class 1 contributions.
9.--(1) Where a secondary Class 1 contribution is payable, the amount of that contribution shall be the secondary percentage of so much of the earnings paid in the tax week, in respect of the employment in question, as exceeds the current earnings threshold (or the prescribed equivalent).
(2) For the purposes of subsection (1) above, the secondary percentage shall be 12.2 per cent; but the percentage is subject to alteration under sections 143 and 145 of the Administration Act.

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(3) Subsection (1) above is subject to regulations under section 6(5) above and sections 116 to 120 below and to section 41 of the Pensions Act.""

Mr. Denham: I beg to move amendment (a) to the Lords amendment, leave out the first 'subsections' and insert 'subsection'.

Mr. Deputy Speaker (Mr. Michael Lord): With this, we may consider Government amendment (b) to the Lords amendment, Lords amendments Nos. 65, 73, 117, 147 to 153, 160 to 162 and 164, Lords amendment No. 166 and Government amendment (a) thereto, Lords amendments Nos. 167, 168 and 176 to 179. I should inform the House that amendment No. 64 involves privilege.

Mr. Denham: This group of amendments puts into effect changes to the structure of national insurance contributions for employees and their employers from April next year. It also includes two amendments that overturn the changes made to the Government's proposals in another place.

In his Budget statement on 17 March, my right hon. Friend the Chancellor of the Exchequer announced a radical reform of the national insurance system. The amendments are a crucial part of that strategy. They help to make work pay by increasing take-home pay for every employee who pays national insurance contributions, they encourage employers to create jobs for people moving from welfare into work, and they cut red tape for business by simplifying the structure of employer contributions. The measures follow the recommendations made by Martin Taylor, the head of the Government's tax-benefit review, following his wide consultation with business. Overall, they are a major step in the Government's drive to bring the national insurance system up to date with the modern labour market. I shall explain the effect of the amendments in more detail.

The main thrust of the changes is provided by Lords amendment No. 64, as it would stand with amendments (a) and (b). In the form originally introduced by the Government, amendment No. 64 would reduce employees national insurance contributions without affecting the ability to build up rights to contributory benefits. I shall deal later with the changes made in the other place to the Government's proposals, and more particularly with the amendments that will overturn those changes. Forthe moment, I should like to concentrate on the Government's proposals.

As a result of the Government's amendments, employees would pay contributions only on that part of their earnings that exceeds the lower earnings limit--currently £64 a week. Under the current system, employees pay no national insurance contributions when their total earnings are below £64 a week, but when earnings reach the lower earnings limit, they have to pay contributions at a rate of 2 per cent. on all their earnings up to that point.

That perverse "entry fee" costs every employee who pays contributions £1.28 a week. It means that some employees earning above the lower earnings limit receive less take-home pay than their colleagues whose gross earnings are lower. That is clearly an absurdity, and the amendments put an end to it. From April 1999, employees will pay contributions only on the part of their earnings that exceeds the lower earnings limit. That will help to

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ensure that people find work attractive. It supplements the other steps that the Government are taking to make work pay.

Amendment No. 64 also makes three major changes to the structure of employer national insurance contributions. First, at the moment, employers begin to pay contributions when earnings reach £64 a week. The amendment will enable the Government to raise that threshold to the level of the single person's tax allowance--set at £81 a week this year. That will bring the system more closely into line with income tax, thus making it easier for employers to administer the two systems side by side.

Secondly, in parallel with the change to employee contributions, the employer entry fee will be abolished so that employers will not have to pay contributions on any earnings below the level of the single person's allowance.

Thirdly, the amendment simplifies the structure of employer national insurance contributions, bringing in a single rate of 12.2 per cent. in place of the four separate rates that apply now.

The package of changes to employer national insurance contributions is revenue neutral for employers as a whole. The changes will reduce the national insurance costs that employers face in respect of about 12.5 million people who earn below £450 a week. For example, employers will pay around £1.80 a week less for someone earning £155 a week, and £5 less for an employee on £220 a week. Those changes will make a very real difference. They will encourage employers to create jobs for people moving from welfare into work.

The reform of employer contributions will also remove distortions that mean that, when employees' wages increase, their employers' national insurance costs can increase by more than the wage rise itself. Simplification of the structure will reduce the amount that employers need to spend on administering the system.

Amendments Nos. 65 and 73 ensure that the proposed single rate of employer contribution will apply to the new class IB contribution. That is the new class of contribution being introduced in the Bill as part of the measures to enable employers to put items subject to national insurance in annual PAYE settlement agreements.

Amendment No. 147 makes a similar change in respect of class IA contributions paid by employers on company cars and car fuel provided to employees. I must make it absolutely clear that none of those changes to employee or employer national insurance contributions will affect people's rights to benefits and pensions, or their ability to build up such rights.

We have taken specific steps in amendment No. 166 to ensure that the changes do not reduce the rebates for employers with occupational pension schemes contracted out of the state earnings-related pension scheme. That means that people's future contracted-out pensions will not be affected. Government amendment (a) to amendment No. 166 is a consequential amendment required to correct a technical deficiency. Excluding those needed to reverse the changes made in the other place, the remaining amendments in the group are Nos. 117, 148, 149, 150, 151, 152, 153, 160, 161, 162, 164, 167, 168, 176, 177, and 178. Those make changes to schedules 7 and 8 by way of minor consequential amendments arising from the new contribution structure.

I must also draw the attention of the House to the fact that contributions payable into the national insurance fund are the subject of Commons privilege. That means that it

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is the privilege of this House to introduce measures on that subject. It is, of course, a privilege which the House is able to waive, and I invite the House to do so in this case.

I now turn to amendments (a) and (b) to Lords amendment No. 64, which seek to remedy the damage caused by the introduction into our measures of changes put forward by members of the Conservative party in the other place--changes that are ill judged, irresponsible and imprudent.

The Conservatives seek to introduce into the Bill a change that my right hon. Friend the Chancellor of the Exchequer has said that he will make at a later date. It is indicative that the only amendments that the Opposition seek to make to the structural national insurance measures relate to an idea that they have stolen from our Chancellor. Those amendments would have a damaging effect. They would remove access to certain contributory benefits from up to 1 million low-paid workers, four fifths of them women. They would cut future SERPS, occupational and personal pensions for millions of others, and they would reduce national insurance contribution revenue by almost £1.5 billion a year without any consideration of whether the financial circumstances are right. I will go on to say more about those effects later; they show how reckless the Opposition amendments really are.

However, the main arguments advanced by the Opposition in the other place for their amendments were not--


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