Select Committee on Social Security Minutes of Evidence

Annex A


  There are four classes of NI Contributions, one of which is divided into sub-classes:

Class Paid by Notes

1 Employees (primary Contributions) and employers (secondary Contributions). 12 Primary Contributions are paid by employees at a rate of 10 per cent on earnings above the Lower Earnings Limit (£66 per week in 1999–2000) and below the Upper Earnings Limit (£500 per week in 1999–2000). 13 From April 2000 there will be a "zero rate band" between the current LEL and a new Threshold of £76. People with earnings in this band will not pay Contributions, but will build up entitlement as if they had. In April 2001 the Threshold will rise to the same amount as for secondary contributions.
Secondary Contributions are paid by employers at a rate of 12.2 per cent on earnings above an Earnings Threshold (£83 in 1999–2000).
These rates apply where an employee is "contracted in" to the SERPS pension scheme. Where an employee is a member of the employer's pension scheme, and that scheme is "contracted out" the primary contributions rate will be reduced to 8.4 per cent. The secondary contributions rate will also be reduced, to 9.2 per cent for salary related schemes, and 11.6 per cent for money purchase schemes.
Married women and widows who paid reduced class 1 or no class 2 NICs in 1977 when this provision was abolished may still pay reduced/no contributions now if they have done so continuously since then. The current reduced rate is 3.85 per cent.
Class 1 Contributions give entitlement to the full range of Contributory benefits.
1A Employers of employees with company cars Class 1A contributions are paid by employers at a rate of 10 per cent on the value to the employee of the car.
They do not give entitlement to benefits.
1B Employers with a PAYE Settlement Agreement. Class 1B contributions are paid by employers with a PAYE Settlement Agreement with the Inland Revenue, to account for tax on some expenses and benefits. They are paid on items in the Agreement which would normally be liable for NICs.
They do not give entitlement to benefits.
2 Self-employed people Class 2 contributions are paid by self-employed people 14 at a flat rate (£6.55 per week in 1999–2000 tax year). Self-employed people who are also employees will have to pay Class 1 contributions as well.
Self-employed people are also liable for Class 4 contributions (see below).
They give rise to all the contributory benefits except contributions-based Jobseeker's Allowance.
3 Voluntary contributors Class 3 contributions are voluntary, and are paid at a flat rate (£6.45 per week in 1999–2000) to build up a sufficient contributions record to qualify for Retirement Pension and widows' benefits by people who would otherwise fall short. They are often paid by people who have been living abroad or in prison
4 Self-employed people Class 4 contributions are paid by self-employed people on profits and gains between £7,530 and £26,000 at a rate of 6 per cent.

  Contributions do not always have to be paid. Sometimes claimants may have been credited with a Contribution, or may benefit from Home Responsibilities Protection:

Home Responsibilities
A year in which the claimant receives child benefit for a dependant child or looks after an invalid is disregarded for the purpose of calculating the length of working life.
Class 1 Credits A Class 1 contribution on earnings equal to the Lower Earnings Limit is paid for weeks in which one receives JSA, IB, ICA, SMP, WMA, FC and DWA. Class 1 credits are also awarded for full-time education and training and jury service. 15
Starting credits Class 3 credits are awarded to people who would otherwise have an insufficient NIC record for long-term benefits because they stayed at school after 16 for the contribution year in which they reached 16 and the two contribution years after that.

  Credited NICs are not, unfortunately, the answer to the problems faced by workers with earnings below the LEL, highlighted in the main body of this report. Most low paid or part-time employees are unlikely to qualify for credits. First, people in paid work may not be available for employment for the purpose of signing on.

  Second, part-timers may be put off from signing on when they are not entitled to claim benefit and must be prepared to work at least 40 hours a week. Third, most people below the LEL are women working part-time due to family commitments, and unlikely to qualify for education or training credits. Fourth, those with earnings below the LEL are often excluded from SSP and SMP (see below). Fifth, ICA is not payable to carers who are gainfully employed and earning more than £50 a week, so that workers earning between £50 and the LEL a week are ineligible for credits.

  For all these reasons most low-paid employees on less than the LEL fail to satisfy the contribution conditions for short-term NI benefits such as contributory JSA and Incapacity Benefit. In 1993–94, two in five of nearly 800,000 men earning below the LEL had a poor contribution record for the previous two or more years. One in three received no contribution credits. Women fared even worse. Of the 1.3 million women earning below the LEL, over half had a poor contribution record for two or more years, and two-thirds received no credits. (Hansard, 1997d)

  Home Responsibilities Protection (HRP) and voluntary contributions help to improve entitlement, but neither goes far enough in addressing the problems faced by vulnerable workers. Each year of HRP is ignored for the purpose of calculating the length of a person's `working life,' reducing the requisite years to 20 or half of what they would otherwise be (whichever figure is lower). Because many part-time workers earning less than the LEL are mothers with dependent children, HRP is a valuable protection for their pension rights. However only full years of caring are counted towards HRP. Short breaks in caring commitments can mean years of protection lost.

  A further potential protection is the ability to pay voluntary Class 3 NICs. Class 3 NICs only help with entitlement to pensions and widows' benefits—there is no voluntary contribution for short-term NI benefits such as CJSA. During years of HRP Class 3 contributions are not necessary, but those who don't qualify for HRP—for example, because their children are over age 16—can make up for missing years by paying voluntary contributions. In 1997–98 Class 3 NICs are charged at a rate of £6.15 a week. This sum is very steep for a low paid worker—amounting to 10 per cent or more of their earnings. In the most recent available year (1993–94), just 181,000 individuals paid voluntary Class 3 NICs. (Hansard, 1996) It is not known how many of these had insufficient contributions due to low wages or for other reasons (eg, years abroad or in prison).


Benefit First Condition Second Condition

Contributory Jobseekers Allowance (CJSA) Paid NICs producing an earnings factor = 25 x LEL in one of the last two complete tax years before relevant benefit year Paid or credited with NICs producing an earnings factor = 50 x LEL in each of the last 2 complete contribution years ending before relevant benefit year
Incapacity Benefit Paid NICs producing an earnings factor = 25 x LEL in any tax year before relevant benefit year Same as CJSA
Maternity Allowance Paid NICs for 26 weeks in the 52 weeks ending at end of 15th week before the expected week of confinement—earnings factors irrelevant None
Widowed Mother's Allowance, Widow's Pension Husband paid in any one tax year before his death NICs producing earnings factor = 52 x LEL Husband paid or credited with NICs producing an earnings factor = 52 x LEL for each of the requisite number of years—depending upon length of `working life'
Retirement Pension You (Category A pension) or either you or spouse (Category B pension) paid in any one tax year before retirement NICs producing earnings factor = 52 x LEL You (Category A pension) or either you or spouse (Category B pension) paid or credited with NICs producing an earnings factor* = 52 x LEL for each of the requisite number of years—depending upon length of `working life'**
*`Earnings factor' Class 1 contributions—the amount of earnings on which contributions have been paid.
Class 2/3 contributions—the Lower Earnings Limit.
**`Working Life'
beginning in the year in which contributor reaches age 16, for the purpose of calculating requisite years for 2nd condition
Length of Working Life No. of Requisite Years
1-10 years Length of working life minus 1
11-20 years Length of working life minus 2
21-30 years Length of working life minus 3
31-40 years Length of working life minus 4
41-50 years Length of working life minus 5


  1.  The TUC wanted the industrial injuries scheme to be entirely separate from National Insurance.

  2.  That is, excluding unemployment assistance and social assistance.

  3.  Grimshaw and Rubery (1996) found that unemployed women (as measured by the ILO definition) were less likely than unemployed men to receive Unemployment Benefit in 11 of the 12 EU member states they surveyed.

  4.  The DSS research quotes similar findings in Delivering Benefits to Unemployed People, K Kellard and B Stafford, 1997; Moving in to Work, Stafford et al, 1997 and Customer Contact with the Benefits Agency, Stafford et al, 1998.

  5.  In 1985 the World Health Organisation concluded "it is almost certain that unemployment damages mental health" (WHO, 1985). Other studies of the impact of unemployment on mental health include Platt, 1984; Jackson and Warr, 1984; Warr, 1985; Warr, 1987 and Gallie, Marsh and Vogler, 1994.

  6.  A graduated retirement pension was introduced in 1961, earnings related supplements to UB, SB, MA and Widows' Allowance in 1966 and the State Earnings Related Pension in 1975.

  7.  In addition to proposals relating to contribution conditions, these reports made important proposals for extending eligibility to Statutory Sick Pay and Statutory Maternity Pay to workers with earnings below the Lower Earnings Limit. These proposals go beyond the scope of the current inquiry, but they may be of interest to the Committee, and are enclosed with this submission.

  8.  These figures do not take account of the effect of the introduction of the minimum wage.

  9.  The 1980 Social Security Act broke the link between the basic pension and the rise in average earnings or prices, whichever was higher. The LEL is linked to the level of the basic retirement pension, so that the move from earnings to price indexation meant a steady reduction in the level of the LEL. Since 1980 it has fallen by more than a quarter of its value as a proportion of average earnings. If the LEL had continued to rise in line with earnings, it would be set at £86 per week instead of the current £62. This shift in the basis of indexation since 1980 already means that an additional 1.2 million low paid employees are paying NICs who would have fallen below an £86 threshold.

  10.  The fact that certain expenses (especially rent) varied so much from one part of the country to another that it was very difficult to set an affordable flat-rate benefit level which would meet subsistence needs.

  11.  If the structure of NICs is not changed in the intervening years the effect on NI benefits and pensions would be dramatic. The role of the basic pension is under review, and plans are at hand to ensure a total pension package which leaves retired people with a sufficient income. But if other NI benefits and the linked rights of SSP and SMP are not revalued in some way, entitlement to support during interruptions in employment will be minimal: SMP, for example, would fall to just 7 per cent of average earnings - hardly adequate support to protect the health of women.

  12.  There are special rules for share fishermen and people employed abroad.

  13.  For workers paying NICs in more than one job there is a maximum amount of contributions they can pay in any tax year. In 1999–2000 this limit is £2,300.20.

  14.  A "small earnings exception" is available where net earnings are expected to be less than a certain level (£3,770 in 1999–2000).

  15.  This description is very simplified. For more details, see the Child Poverty Action Group Rights Guide to Non-Means-Tested Benefits.

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Prepared 28 July 1999