Select Committee on Social Security Minutes of Evidence


TABLE 1

MAIN DIFFERENCES BETWEEN NATIONAL INSURANCE CONTRIBUTIONS (NICs) AND INCOME TAX
Area of difference Income taxNICs
Who paysAnyone resident in UK and others with income in UK people over 16 and under state pension age working in UK. (Employer still pays NICs when employee is over 60/65)
Base for chargeTotal income including savings and investment income, state/occupational pensions and earnings replacement benefits earnings from employment and self employment
Reliefs and rebatesWide range of allowances, exemptions and reliefs eg for pension contributions, married couples allowance No reliefs
Lower NICs rates paid by people contracted out of SERPs
& married women optants
Period of assessmentPAYE may be deducted each time an employee is paid but final income tax is based on total taxable income from all sources for the tax year NICs calculated fully and finally for each pay period—usually a week or a month—on the basis of earnings in that period
Structure of chargeCharged at graduated rates, without a ceiling on the income charged, on an individual's total income less allowances and reliefs. Each individual is entitled to a personal allowance but other allowances/reliefs mean that individuals' tax thresholds vary Employee NICs is charged at 10 per cent on any income between lower earnings limit (LEL)and upper earnings limit (UEL) (Entry fee of 2 per cent charged on earnings up to LEL once this threshold is crossed abolished from 4/99)
Employers NICS
single rate of 12.2 per cent on earnings from LEL (aligned with personal tax allowance from 1/4/99)—no UEL
Basis of deduction from payPAYE is deducted on a cumulative basis. Deduction in each pay period takes account of earnings and allowances that have accrued from the start of the year. NICs are paid on the basis of earnings in each pay period.

  33.  For 1999-2000, the single persons tax allowance and threshold for Employer NICs are aligned at £4,335 a year. For Employee NICs, the Lower Earnings Limit is £66 and the Upper Earnings Limit is £500.

  NATIONAL INSURANCE CREDITS

  34.  People who are normally liable for National Insurance contributions but who are temporarily not working due to a specified contingency, eg. they are unemployed and available for work or incapable of work due to sickness, may be eligible for credited contributions to assist them to maintain their insurance record during these periods.

  35.  Credits are not sufficient by themselves to earn entitlement to social security contributory benefits. It is necessary for some contributions to have been paid during the relevant tax years on which a benefit claim is based.

  36.  A full list of the contingencies for which credits may be awarded follows:

    —  Starting credits—for the tax year in which age 16 is reached and for each of the two following tax years to the level required to make those years reckonable for pension purposes.

    —  Approved training—for each week during any part of which a person was undergoing a course of full-time training or a course of training introductory to such a course provided that the course was not intended to continue for more than 12 months. The person must have attained the age of 18. More flexible conditions apply to disabled people.

    —  Invalid Care Allowance credits—for each week in which Invalid Care Allowance is paid or, in the case of a widow, would have been payable but for the provisions of the Social Security (Overlapping Benefits) Regulations.

    —  Unemployment—for each week for the whole of which a person is in receipt of Jobseeker's Allowance or satisfies certain conditions set down in Section 1(2) of the Jobseekers Act 1995. These include that s/he is available for, capable of, and actively seeking remunerative work. It is also possible to award unemployment credits, where required, to persons in receipt of certain compensatory payments following dismissal from employment.[1]

    —  Incapacity—for each week in which each of the days was a day of incapacity for work within the terms of the legislation or was a week in which an unemployability supplement or allowance was payable.[2]

    —  Persons approaching pensionable age—for the tax year in which a person attains the age of 60 and for each of the four succeeding years to the level required to make those years reckonable for contributory benefit purposes.

    —  Jury service—for each week for any part of which a person attended at Court for jury service provided that, if he was employed, his earnings that week were below the LEL.

    —  Maternity—for each week during a Maternity Allowance period for which benefit was paid. Employees in receipt of Statutory Maternity Pay may apply for credits if they have a deficient NI record for the contribution year(s) in which SMP was paid.

    —  Termination of full-time education, training or apprenticeship—for the purposes of entitlement to unemployment and incapacity benefits only—for either one of the last two complete tax years before the beginning of the relevant benefit year if during any part of that year, the claimant was undergoing a course of full-time education, training or other full-time occupational/vocational course or was an apprentice. The course or apprenticeship must have terminated at the time the claim was made and must have commenced before the claimant was 21. More flexible conditions apply to disabled people.

    —  Termination of Widowed Mother's Allowance—for the purposes of entitlement to incapacity and unemployment benefits only, where entitlement to Widowed Mother's Allowance ends (other than by remarriage or cohabitation), a widow may receive sufficient credits to enable her to satisfy the second contribution condition for these benefits.

    —  Family Credit recipients—for the purposes of entitlement to a Category A or a Category B Retirement Pension, a Widowed Mother's Allowance or a Widow's Pension, where Family Credit is paid for any week in respect of an employed earner or a self-employed earner who has been excepted from liability to pay Class 2 contributions on the ground of small earnings, that person shall be credited with earnings equal to the lower earnings level in respect of that week. NB—this only applies where a person attains pension age after 5 April 1999 and in respect of weeks falling wholly or partly in the 1995-96 and subsequent tax years. Where a married/unmarried couple are involved, regulations set out who is entitled to the credit. The total of earnings and FC counts for SERPS.

    —  Disability Working Allowance Credits—recipients of Disability Working Allowance receive Class 1 credits. Total of earnings + DWA counts for SERPS.

HOME RESPONSIBILITIES PROTECTION

  37.  Home Responsibilities Protection was introduced as part of the New Pension Scheme in 1978. It is designed to protect the basic state Retirement Pension and Widow's Benefit position of certain categories of men and women who stay at home because of caring responsibilities. It is also available to those carers who may do some work but whose earnings are insufficient to achieve a qualifying year for basic state retirement pension purposes. A woman who has retained her right to pay reduced rate National Insurance Contributions is not entitled to Home Responsibilities Protection.

  38.  The working life of an individual is the number of years from the start of the tax year in which they enter the National Insurance system (usually the year they reach age 16) to the end of the tax year before the one in which they reach pensionable age. The working life of men is usually 49 years and for women 44 years. The working life of the individual is reduced by the number of years of relevant home responsibilities up to a maximum of 20 years reduction.

NUMBERS

  39.  In 1978-79 the number of people with National Insurance Credits recorded was 7.1 million, this rose sharply in the early eighties and was at a peak of 10.8 million in 1986-87. Since then the number had fluctuated downwards and then upwards and was 10.0 million in 1995-96. In each year between 1987-88 and 1995-96 over 55 per cent of people with National Insurance Credits recorded had 52 or more weeks awarded. In most years, 11 per cent to 12 per cent have less than nine weeks awarded.

  40.  When Home Responsibilities Protection was introduced in 1978-79 the number of people with Home Responsibilities Protection recorded was 4.9 million. This decreased to a low of 4.7 million in 1986-87 and has since increased year on year to 5.3 million in 1995-96.

SPECIAL GROUPS

  41.  There are a number of groups who are treated as exceptions to the current general rules eg married women/widows with non-paying elections, voluntary contributors and those receiving autocredits.

  42.   Married women/widows with non-paying elections. The married women's non-paying option was introduced in 1948 as an integral feature of the National Insurance scheme at a time when very few women worked or earned enough entitlement to their own pension. With the growth in women working in the 1970s and the requirement to ensure equal treatment, the married women's option was withdrawn from April 1977, but those who had already chosen to pay a reduced rate were allowed to retain the right. Arrangements were also made to allow a married woman to revoke her election so she could pay full-rate contributions if she wished. Taking into account those self-employed women who are not liable to pay Class 2 NICs and women temporarily between jobs, the total number of women retaining a valid election was roughly 560,000 in 1995-96[3]. In that year, some 340,000 married women and widows were paying reduced Class 1 NICs. Some 160,000 of these were contracted-out. The number actually paying reduced rate contributions at any given time is falling sharply: for example by 2003-04 only some 70,000 women are expected to be still paying reduced rate Class 1 contributions (although the number retaining a valid election would be higher).

  43.  There are also those paying voluntary contributions. Voluntary contributions are helpful to the wider objective of enabling people to build up pension entitlements.

  44.  It is impossible to know exactly how many people will pay Class 3 with respect to the current year. This is because of the long time lag—generally[4] up to the end of the sixth year following the year for which the contributions are paid—that arises in practice between the year in question and the payment of the contributions[5]. Assuming that everything else is equal, between 250,000 and 275,000 people will pay Class 3 in respect the current tax year. Fewer than 100,000, however, are likely to do so before the end of that tax year, with most paying later (eg, following a NI "Deficiency Notice"[6]).

    —  Class 3 contributors tend to be in the upper age ranges, peaking at age 59. There is a sharp drop in the number of male contributors between ages 60 and 64, due to the availability of autocredits[7] to that group.

    —  Some 50,000 people abroad pay Class 3 each year[8]. It is not possible to tell how many of these are temporarily out of the country and how many are expatriates living permanently abroad.

    —  Mostly contributors opt to pay Class 3 for either an entire tax year or—less usually—for just a handful of weeks[9].

    —  Current receipts from Class 3 contributions are estimated at £60 million pa.

  45.  Since 1983, autocredits have been awarded automatically to people for the tax year in which they reach age 60 and for each of the four succeeding tax years to the extent necessary to make each year a reckonable one for contributory benefits. This provision was introduced to remove the necessity for the many men who retired at age 60 to attend the Employment Service Jobcentre and declare their availability for work when, in practice, few had any real intention of resuming employment. Autocredits are not available for any tax year in which the individual is abroad for more than 182 days. Around 1.3 million people received autocredits during 1995-96.

  46.  There are a number of other special groups, including share fishermen (who pay a higher rate of Class 2 contribution in return for entitlement to JSA (Contribution-based)); Volunteer Development Workers overseas (who are eligible to pay voluntary Class 2 contributions at a reduced rate, in order to retain an ongoing link with the UK benefit system); and employees who are responsible for paying their own primary contributions because no legal liability falls on the employer (eg, locally recruited staff of foreign embassies).

  47.  Certain other groups not necessarily treated as exceptions, but their position is sometimes problematic, and must also be kept in view. They include actors and musicians, and UK workers temporarily working abroad (particularly those covered by the EC Regulations on social security for migrant workers or reciprocal agreements with non-EC countries).

NATIONAL INSURANCE FUND

  48.  The National Insurance Fund (NIF) is separate from all other revenue raised via taxation which is payable to the Consolidated Fund. Revenue from contributions is paid into the Fund after an allocation to the National Health Service. The NIF operates on a pay-as-you-go basis, in which current contribution income finances current outgoings on contributory benefits. It does not have borrowing powers and thus keeps a safe working balance of about a sixth of annual benefit expenditure as a protection against unexpected demands. The National Investments and Loans Office manage the investment of balances. The responsibility for policy on the Fund and its control and management was transferred from the DSS to the Treasury and the Inland Revenue through the Social Security (Transfer of Functions etc) Act 1999.

  49.  The National Insurance Fund was established in 1911, reformed in 1948 and assumed broadly its current form in 1975, when the separate National Insurance (Industrial Injuries) and National Insurance (Reserve) Funds were merged with it. From 1948 its income came from three sources—

    —  the National Insurance contributions paid by individual contributors;

    —  employers' National Insurance contributions;

    —  the state (in the form of the Treasury Supplement, which accounted for just under a quarter).

  50.  Over time, the level of the Treasury Supplement was gradually reduced. It was abolished after 1988-89. Thereafter the Fund's expenditure was met wholly from workers' and employers' contributions and a small amount of investment income. This arrangement did not prove flexible enough to meet unexpected demands and from 1993-94 an Exchequer subsidy for the Fund was therefore established in the form of the Treasury Grant.

  51.  The Grant is paid out of the Consolidated Fund into the National Insurance Fund. The maximum Grant available in any tax year is set by primary legislation at 17 per cent of the National Insurance Fund's annual benefit expenditure. The maximum amount of Grant available—but not, necessarily, taken up—for each tax year is set by the annual contributions re-rating order.

  52.  The amounts of Grant voted in the main Supply Estimates and paid into the Fund each year are those estimated in the Government Actuary's report on the annual Social Security benefits up-rating and National Insurance contributions re-rating Orders. But the maximum level of Grant which can be made available to the Fund in a year is prescribed at a prudently higher level (by the contributions re-rating order). The maximum Grant is set so that, if in that year the Fund's income from contributions is lower than expected or its expenditure is higher than forecast, additional amounts of Grant may be paid into the Fund, subject to Parliament approving the necessary Supplementary Estimate. This might arise when, for example, the level of unemployment is markedly higher than expected.

  53.  The actual amount of Grant drawn by the Fund each year is usually well below the maximum that may be made available. For example, the maximum Grant for 1998-99 was set at 2 per cent of benefit expenditure in that year (£900 million); the actual Grant required by the Fund for that year was nil. Similarly, the Government Actuary currently estimates that the Fund will not need a Grant for 1999-00, although the maximum Grant that may be made available to the Fund for 1999-00 is again set at 2 per cent of the estimated benefit expenditure from the Fund in that year (£930 million).

  54.  Tables 2.1 and 2.2 show the way National Insurance benefits have been funded and the share of expenditure met by the taxpayer. A small proportion of income from contributions is not paid into the Fund, but to the National Health Service, meeting between 6 per cent and 17 per cent of NHS costs at various times.


1   Additional conditions have to be satisfied for unemployment and incapacity credits to count for Incapacity Benefit. Back

2   Additional conditions have to be satisfied for unemployment and incapacity credits to count for Incapacity Benefit. Back

3   The last year for which accurate data is available. Back

4   Students and prisoners, however, may pay Class 3 contributions for any year which includes a period of at least six months throughout which the contributor was undergoing full-time education, training or apprenticeship (where any earnings are below the LEL) or has been undergoing imprisonment or detention in legal custody, up to the end of the sixth year following the year in which the education/training or imprisonment ended. In addition, there is discretion-in respect of any contributor-to accept voluntary contributions for periods even further back. Back

5   For example, voluntary contribution payments for 1998-99 will still be arriving in 2005. Back

6   A "Deficiency Notice" is produced some 18 months after the end of the tax year to notify contributors of any shortfall in the contribution record and to advise what further action may be taken, This will include a calculation of the amount of Class 3 payable to make the tax year in question a qualifying year for RP purposes. Not all contributors, however, receive Deificiency Notices. Back

7   By virtue of which men may be credited with Class 1 contributions for the tax year in which they reach age 60 and the four succeeding years where they have no liability for Class 1 or 2 NICs. Back

8   It is reasonable to assume that a high proportion of Class 3 payers age 60 or above live abroad. This is because autocredits are not available for any tax year where the person is abroad for more than six months, so this category would have to rely on Class 3 to maintain pension entitlements. Back

9   For example, out of the 262,600 known to have paid for 1993-94: 116,200 (44 per cent) paid all 52 weeks; 66,600 (26 per cent) paid for 1-4 weeks and 79,800 (30 per cent) paid for all other periods. (Of the latter, 19,600 (7 per cent of the total) paid for between 5-8 weeks.) Back


 
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