Fifth Standing Committee on
Tuesday 26 February 2002
[Mr. David Chidgey in the Chair]
Draft Social Security (Contributions)
(Re-rating and National Insurance Funds Payments) Order 2002
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 2002.
Good afternoon, Mr. Chidgey, and welcome to the Committee. This is the first Committee that you have chaired at which I have spoken as the Minister and I look forward to swift progress in our discussion.
I am pleased to introduce the order, which deals with various national insurance contribution rates and thresholds. The provisions are compatible with the European convention on human rights.
First, the order reduces from 11.9 per cent. to 11.8 per cent. the rate of secondary class 1 contributions payable by all employers from April 2002 to recycle revenues arising from the introduction of the aggregates levy, which will thereby help to protect United Kingdom competitiveness.
Secondly, for the self-employed, the order raises the small earnings exemption below which, depending on the level of profits, they may claim exemption from class 2 contributions. Next April, the exemption will rise broadly in line with prices from £3,955 to £4,025 a year. The rate of class 2 contributions for 2002-03 will remain at £2 a week, which is a reduction in real terms, and many people may choose to pay the contributions to protect their benefit entitlement.
The order also sets the profits limits between which class 4 contributions are paid. The lower and upper limits will increase broadly in line with inflation. The lower limit at which contributions become due will rise in line with the income tax personal allowance from £4,535 to £4,615 a year. At the other end of the scale, the upper profits limit will continue to match the upper earnings limit for employees at £30,420 for 2002-03. That will ensure that the self-employed pay class 4 contributions on much the same range of earnings as employees liable to class 1 contributions, and is an essential element in making the national insurance system fairer for everyone. The class 1 contributions paid by employees will be balanced with the contributions paid by the self-employed.
Thirdly, the order deals with the weekly rate of voluntary class 3 contributions, which help those with insufficient contribution records in any tax year to make up a qualifying year for benefit purposes. The
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rate of class 3 contributions will rise by 10p next April to £6.85 a week. That is a standard re-rating in line with prices.
The review of contribution rates was accompanied by a report from the Government Actuary detailing the effects of the order before us and the order up-rating benefits which was laid by my right hon. Friend the Secretary of State for Work and Pensions, and the impact on the national insurance fund. I am pleased to say that for the fifth year running we do not expect that the fund will need a Treasury grant. Nevertheless, prudent minimal provision is made in line with advice from the Government Actuary.
As happened last year, there is a single order for Great Britain and Northern Ireland. Northern Ireland has a separate national insurance scheme, but the two schemes are closely co-ordinated and maintain parity of contribution rates. Following the transfer of policy, Northern Ireland social security legislation was amended to enable the draft re-rating order to include corresponding measures for Northern Ireland. I commend the order to the Committee.
Mr. Tim Boswell (Daventry): May I say again, Mr. Chidgey, what a pleasure it is to serve under your chairmanship? I know that with your impartiality and sense of fairness, the fact that we have enjoyed long and cordial relations on matters connected to employment law and education and skills will not be prayed in aid to seek any advantage.
It is important that we debate seriously a subject of great importance, even though it might not hit the headlines in the way that other matters today might. However, it might, dare I say, be of equal or greater importance to some of our constituents.
Before I proceed, I make a declaration of interest for those who choose to study the Register of Members' Interests. I retain a small family business that employs one full-time employee who will, presumably, occasionally experience the modest decrease in employer contributions to which the Minister referred. Of course, we are all treated as self-employed in one way or another: I am, in relation to that business, so it will affect me also. Although I will draw one concern to the Committee's attention in a moment, it would be fair to say that that does not make a huge difference and will not colour the way that we approach the orders.
It is a great pleasure to return to a debate with the Paymaster General: we crossed swords when I was on the Opposition Treasury team four or five years ago. She has retained service in the salt mines and I have gone off and done other things. I find myself in the parallel activity of work and pensions. From the way that the Minister set up her remarks, it is self-evident that the order is on the cusp of departmental responsibilities between her Department and the Department for Work and Pensions, which I now have the privilege of shadowing.
Ultimately, power speaks from the barrel of a gun, and the fact that the Treasury is introducing and responding to the debate tells us something about the
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role of national insurance contributions in functioning as a quasi-tax. That is a matter to which I will return briefly. I am, as ever, grateful to the Minister for explaining the detailed provisions of the order. Most of it is, as she suggested, largely technical or makes comparatively minor changes at the margin. It is characteristically well-informed by the objective report of the Government Actuary's Department, for which we are grateful.
As the Minister said, the order is marginally helpful in relation to class 1 secondary contributions, which will fall by a touch. Class 3 contributions will rise in line with the retail price index. The flat rateclass 2will remain unchanged at a rate lower than it was historically. We have greater difficulty with class 4 contributions: the lower profit limit follows the income tax personal allowance and the upper limit rises in parallel with that of class 1 contributions. As it happens, through a fortunate contingency, I have had correspondence with the Paymaster General on behalf of a constituent about precisely that point. Without anticipating my participation in the debate today, my constituent rejoined with a letter that I received at mid-day today, upon which I shall draw in a moment.
It is clear from the Paymaster General's letterand she said as much todaythat she believes that the changes in class 4 contributions are designed to
''make the national insurance system fairer by ensuring that contributions by the self-employed overall more closely match benefit entitlement.''
The hon. Lady must give the Committee evidence which more precisely substantiates that. I am not saying that she is wrong but, although Martin Taylor has commented on the matter and the objective of equality is appropriate, I am not sure that she has made the case clearly.
Certainly, my constituent does not consider the comment to be entirely appropriate. He would not wish me to suggest that his is necessarily a voice from the right in these matters; he is a self-employed person who has an intriguing profile of interests and activities. In his earlier letter, which I shared with the Minister, he writes:
''In some years I do not even attain the status of being a tax-payer. When I do better I am very ready to pay my fair share.''
That is fair enough, but he does not feel that the new provisions are fair. He states:
''The impact of Class 4 National Insurance is severe on a self-employed person making a modest income. My latest accounts show a profit of some £11,875 and on this I face making a payment of £2,000 in round figures. A rate of 17 per cent.
In relation to my earlier point, he comments:
The Class 4 element is a quarter of that sum. It used to be imposed at 5 per cent. on income over about £7,000, but is now charged at 7 per cent. on everything over the personal allowance of £4,535.''
''The impost is calculated like a tax, relates to taxable income bands, is administered by the tax authorities and paid as part of the tax bill. The likelihood that, in the same way as the proverbial duck, this thing is a tax thus seems very great.''
He has sussed that one out.
There is one last point that I shall share with the Committee from my constituent's earlier correspondence. He asks:
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''How does the Chancellor justify this penalty on self-employment? When he speaks of getting people back into work, does this activity of mine not count?''
He makes a strong point. As a self-employed person, he feels uncomfortable with the burden. He believes that it is inconsistent with the avowed intentions of the Government to strengthen the economy and to assist employment, and that it may be counter-productive. My inferenceI am not speaking for my constituent in saying thisis that the Government do not like self-employment. The Minister must answer that by sharing with the Committee any detailed, objective evidence that shows why the new regime is justifiable.
I shall touch briefly on two wider issues; of course, I am mindful of the need to ensure that they are relevant to the order. The hon. Member for Northavon (Mr. Webb) will recall that we spent some time discussing them last night, and we can reasonably claim that we woke up in the morning thinking about them. They form part of a piece, because it is impossible to isolate the changes being made in state pension provision and, by this order, in the contributions regime for benefits, including pensions, without examining other contexts. In relation to the Government's declared efforts as part of a general wish