Second Standing Committee on Delegated Legislation
Thursday 17 February 2000
[Mr. Eric Illsley in the Chair]
Draft Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2000
The Paymaster General (Dawn Primarolo): I beg to move,
That the Committee has considered the draft Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2000.
Good morning, Mr. Illsley, and welcome to the Committee. I believe this is the first of these Committees that you have chaired. I hope that you enjoy them and find them riveting, as I am sure that all members of the Committee will today.
Welcome also to the hon. Member for Croydon, South (Mr. Ottaway), who has recently been promoted to be Opposition spokesman on these issues. I understand that he will be shadowing me--not all the time; only in parliamentary matters. That is not an offer. I look forward to our debates, particularly over the coming months, after the Budget.
I am pleased to introduce this order, which deals with the class 2, 3 and 4 national insurance contribution rates and thresholds. In previous years, the re-rating order has been debated alongside the uprating of benefits, but with the transfer of contribution policy to the Treasury, the annual re-rating order will now be dealt with separately.
The Taylor report considered the rates for employees, employers and the self-employed as part of its wide-ranging review of contributions. It recommended several changes, many of which we have introduced over the past two years as part of the simplification of the contribution structure. The order will bring in some of those changes for the self-employed.
First, the order allows the class 2 rate for the year 2000-01 to be substantially reduced--from £6.55 to £2. That will benefit all the self-employed, but particularly those with lower profits. If profits are below the level of the small earnings exception, the self-employed may claim exemption from paying class 2 contributions. We are setting the exception at £3,825. However, class 2 contributions represent such good value for money that there may be an incentive for those on low earnings to choose not to exercise their right to exemption, but to pay the contribution out of choice.
Secondly, the order sets the profit levels between which class 4 contributions are paid. The lower limit at which contributions become due will match the income tax personal allowance of £4,385. At the other end of the scale, the upper profits limit will match the upper earnings limit for employees at £27,820. That simplifies the structure of contributions for the self-employed and makes the system easier to understand. The rate of contribution will be set at 7 per cent. on profits between those limits. That compares favourably with rates for employees and employers and, given the benefits to which they have access, the contributions paid by the self-employed provide them with very good value for money.
Finally, the order sets the weekly rate for voluntary class 3 contributions, increasing them by 10p to £6.55. That is a standard re-rating in line with prices.
The review of the thresholds and contribution rates is accompanied by the report on the effects of that review on the national insurance fund. I am pleased to say that this year, as last, there is no expectation that the fund will need a Treasury grant. However, a prudent minimal provision is made in line with the advice from the Government Actuary.
For the first time, there is a single re-rating order for both Great Britain and Northern Ireland. Northern Ireland has a separate national insurance scheme from Great Britain, but the two are closely co-ordinated and parity of contribution is maintained. Following the transfer of policy, the Social Security Administration (Northern Ireland) Act 1992 was amended last year to enable the re-rating order to include corresponding measures for Northern Ireland, including provision for a Treasury grant to the Northern Ireland national insurance fund. The changes continue the reform of national insurance contributions recommended in the Taylor report. They will continue the drive to improve work incentives, encourage job creation and build a fairer national insurance system.
Under the wider structural changes, more than 1 million employees on low earnings--of whom 770,000 are women--will pay no national insurance, and approximately 16 million people will pay less national insurance. I commend the order to the Committee.
Mr. Richard Ottaway (Croydon, South): First, I welcome you to the Chair, Mr. Illsley, I doubt whether this Committee will challenge you and I wish you well. I also thank the Minister for her opening remarks. I was born and brought up in Bristol and I note that we are both graduates of Bristol university: that old building might influence our debates to come.
At first blush, the proposals seem eminently sensible. As the Minister said, they implement the recommendations of the Taylor report, whose objectives were to make work more financially attractive to the non-employed. The report opens with the sentence
"The best way to improve work incentives is to increase the gain from work."
Later in the first paragraph, it says:
"National insurance contributions...are in many respects a tax on labour. Changes in their structure offer the scope to improve work incentives and encourage job creation."
We submit that the order must be assessed in the light of the Taylor report's self-imposed criteria.
A second test is whether the order meets the Labour party's general election manifesto. Page 12 of that manifesto states
"We will examine the interaction of the tax and benefits systems so they can be streamlined and modernised, so as to fulfil our objectives of promoting work incentives".
Unfortunately, the order fails both tests for the self-employed.
On paper, the underlying principles of the report look worthy--as one would expect from a business man of Mr. Taylor's pedigree. However, a curious feature of his report is that provisions for the self-employed seem to be almost an afterthought. The position of employees is analysed in detail, but the self-employed are dealt with in just four short paragraphs at the end and there is no evaluation of the proposals' impact on them.
In paragraph 2.12, Taylor states:
"There is a strong case for reforming the structure of NICs, so as to improve work incentives, cut red tape and encourage job creation."
However, the changes to the contributions of the higher-earning self-employed announced by the Minister this morning meet none of those criteria. They will not improve work incentives, they will add to red tape and they will discourage job creation. It goes without saying that they also lamentably fail to meet the Government's manifesto commitments.
We have no quarrel with changes to class 2 contributions or with the provisions on exemptions. However, the changes are presented as a job lot, so we have to treat them as such. Those making a profit of less than £69 will not have to pay national insurance contributions.
The Chancellor has not been so kind to higher earners. In his Budget statement last year, which was the forerunner of these changes, he said that everyone would benefit from the Budget. However, the changes to the class 4 contributions are a flat contradiction of that statement and of the tests set out in the Taylor report and the Labour party manifesto. Under the orders, those paying class 4 contributions will have to start paying them much earlier. The combination of broadening the bands--lowering the lower limit and raising the upper limit--and raising the contribution from 6 to 7 per cent. means that the annual liability of those earning up to £27,820 a year is increased by £564 to £1,638. An extra £564 a year just in national insurance contributions to someone earning £27,000 is a substantial sum of money.
That is a blow for the self-employed. As the Federation of Small Businesses has said
"The real entrepreneurs are the self-employed who cannot hide behind limited liability companies, people who invest their homes and savings in their enterprises; the wealth creators of tomorrow. There is very little for them in the budget."
The federation also pointed out that the change would tend to unbalance the relationship between the self-employed and small companies. It gave as an example a company that makes £10,000 a year profit. That will be taxed at 10 per cent., where as a small business man will pay income tax at 22 per cent. It goes on:
"A swathe of self-employed people in middle England are going to be rushing to their accountants asking whether they should incorporate."
That is hardly in the spirit of encouraging enterprise. Self-employed people will now be looking keenly at incorporation. It will be far more attractive to set up a limited company than it has been for years.
Some have likened the Chancellor's role in these proposals to that of Robin Hood--robbing the rich to pay the poor. In modern Labour party language, that is better known as redistribution. The Labour party cannot avoid that fact. The burden has shifted quite substantially to higher earners and the change will have a redistributional effect, whether the Government like it or not.
There will be a switch to limited companies, but that will require the appointment of directors and a secretary, the compilation of financial reports and the submission of annual accounts. A one-member limited company then risks a barrage of VAT paperwork from Customs and Excise and possible fines if a VAT return is late. It is not difficult to imagine how the transition to a limited company could prove a massive hindrance to the business of a sole trader. The red tape test will be failed miserably.
We shall oppose the regulations primarily because of our objections to the changes to the class 4 rather than class 2 contributions.
Will the Paymaster General set out a little further her views on the national insurance contribution fund? She has alluded to the fact that it is running at a surplus. Perhaps she will enlighten us as to what she intends to do with that surplus. I should also be interested in her reaction to the comments of the right hon. Member for Birkenhead (Mr. Field), who has suggested that an extra £15 a week for the over 80s should be paid out of that fund.