Draft Social Security (Contributions) (Re-Rating and National Insurance Funds Payments) Order 2002

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The Chairman: Order. I would be grateful if the hon. Gentleman would remember that it is for the Chairman to decide what can be treated in isolation and what cannot. I ask him, very gently, to ensure that he confines his remarks to the order.

Mr. Boswell: I am anxious to do that, Mr. Chidgey. I was saying simply that the incentives that do or do not appear through the national insurance contribution regime are part of the Government's overall sweep of interests and their alleged wish to encourage employment. Those are what we are specifically discussing, but other aspects relate to the wider context of pension provision, including what individuals have to reserve through the state system or through the funding of future pension requirements.

It has been said to the Committee—and I remember the hon. Member for Northavon referring to this in last night's debate on the Floor of the House—that the Government Actuary's report suggests that the national insurance fund is currently healthy and does not need shoring up by the Treasury. He and I might draw different inferences about how that alleged windfall should be spent, and Chancellors have a way of wanting to use windfalls for yet other purposes. However, our concern, and the reason why I introduced the subject, is that with the current state of play on funded pensions, there is a danger that that healthy situation might unwind in future years.

Incentives being introduced into the system—through pension credits, for example—tend to discourage private provision. Offering guarantees makes it less attractive for people in the median earnings band to make their own contributions. Equally, and perhaps closer to the order, there is some concern about the likely effect of the new contracting-out rebates on the numbers who will actually remain contracted out of the state second pension scheme.

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Partly by inadvertence and partly because of some folly, the Government seem to be having some difficulty pushing their pensions policy in the intended direction. The Minister will well remember the extensive Committee debates on the 1997 Finance Bill, which withdrew payable tax credits not only from pension schemes but from other investment income. I distinctly remember asking her why the Treasury was prepared to compensate charities for any loss of income but not others, including pension schemes. We can now see part of the price to be paid for that. Only today the general secretary of Amicus, Sir Ken Jackson, said in an article in the Financial Times that he is worried and believes that the provision was a mistake that should now be reversed.

I do not want to trespass on your good will by expanding on that matter, Mr. Chidgey, but it really is difficult to examine separately contributions and what people are asked to pay for their state and private schemes. Another, wider matter needs consideration. Again, the Government Actuary's report is germane. My constituent, as I have already mentioned, perceptively noticed that if something looks like a duck and quacks like a duck, it probably is a duck. Transferring that to this context, if national insurance contributions look like a tax and function as a tax, they probably are a tax.

We all know that the Government have made a series of pledges, of greater or lesser plausibility, not to increase income tax. My final comment to the Committee is to invite the Paymaster General to indicate whether she will give equivalent pledges on behalf of the Government concerning the regime for national insurance contributions—and if not, why not?

4.49 pm

Mr. Steve Webb (Northavon): This is my first time under your chairmanship, Mr. Chidgey. I am sure that you, like other members of the Committee, woke up with joy in your heart at the thought of debating the matters before us this afternoon.

I shall not detain the Committee at any significant length. Hon. Members will not be surprised to learn that we shall not seek to divide the Committee on the order, but I should like to bring to their attention an issue relating to the rates and thresholds of class 2 contributions. I shall repeat to the Paymaster General a question of which I gave her notice 12 months ago when we debated an identical order on the rates of class 2 contributions in another Room just along the Corridor. I asked how much it cost to collect class 2 national insurance contributions. On that occasion I was charitable, because I did not expect an immediate answer. However, 12 months is probably enough to be going on with, and I hope that she will now be able the offer the Committee an insight into the cost of collecting class 2 contributions.

The Minister said that the rate of the contributions was £2 per week. One has a sneaking suspicion that it may cost something in the order of, say—picking a

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figure from the air—£2 per week to collect those contributions. I exaggerate for effect, but if the rate that we are setting for contributions means that a significant proportion of the money raised goes on collecting them, one starts to wonder what the point is. That issue is highlighted by the figures in the order, which contains two thresholds. In ball park terms, the small earnings exemption for class 2 is £80 a week, and the lower profits limit for class 4 is £90 a week.

Mr. Boswell: I do not want to interrupt the hon. Gentleman's flow on that important point, but it might help the Committee if, by way of giving notice, as part of her response to his comments about class 2 contributions, the Minister were to give us an indication of the cost of collecting class 3 contributions. I signal no disapprobation of those contributions, but it is only fair that we should know roughly what comparatively residual parts of the system cost in comparison with the main-line classes.

Mr. Webb: The Minister will have heard that intervention.

My point on class 2 is that we have a peculiar regime in terms of profits from self-employment. People with profits of less than £80—I am using the round figures of £80 and £90, which correspond to the annual figures in the order—pay nothing and get no national insurance rights, which principally means pension rights. People who earn more than £90 in profits have to pay both the flat rate £2 for class 2, and a percentage, which is currently 7 per cent., for class 4. People in that peculiar £80 to £90 band pay £2 a week, but not the percentage.

There are two separate national insurance regimes for the self-employed, one of which applies to only a tiny fraction of the self-employed, neither of which applies to those with low profits, and both of which apply to practically everybody else. I would guess that 90 to 95 per cent. of the all the self-employed with profits of more than £80 a week are paying both class 2 and class 4 contributions. There must presumably be some sort of separate mechanism for collecting class 2 and class 4 contributions—although I am open to correction on that. If there is no such mechanism, what is the point of collecting the contributions? Class 2 has an insurance content, but class 4 does not, which is why it is a tax.

Why do we need two separate systems? Instead of having a threshold of £80 for class 2 and £90 for class 4, why not scrap class 2 altogether and save the administrative costs by having one threshold? When I put that to the Minister 12 months ago, she said, ''You might exclude people in the £80 to £90 bracket from their future pension rights.'' My response to that would be to change the lower profits limit in the order to £80, and tweak the contribution rate from 7 per cent. to something like 7.1 per cent., which would ensure that that change was revenue-neutral. One would save the administrative costs of levying a separate, pitiful, £2 a week class 2 contribution. Nobody would lose out on their insurance rights, because we would give class 4 contributions the same

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status as class 2 contributions have now, so that they would convey entitlement rights to the basic state pension and nothing else.

There would not be a serious cost to the Exchequer in terms of national insurance entitlements because anyone with profits of more than £80 gets their national insurance entitlement through class 2. There would be no expenditure and entitlement effects, but it would save the people who must pay for such things the administrative cost of two separate forms of national insurance.

Rather than have two separate, but almost identical, thresholds and systems, why not just merge them and tweak the rates to make sure that the revenue is the same? That would make practically no difference to anyone's national insurance burden, and would save bureaucracy for the Government and businesses. For future orders, we would then need just one set of self-employment contribution rates and thresholds, which would be simpler for everyone. The Government have already gone most of the way by cutting the class 2 rate to £2 a week. Why did they stop there and not got rid of it all? Although we will accept the order today, I hope that when corresponding orders are introduced next year, either class 2 or class 4 will have disappeared.

5 pm

Dawn Primarolo: The hon. Member for Daventry (Mr. Boswell) has made some interesting points about national insurance funds and the running of national insurance by the Inland Revenue. I will begin by reminding him of his party's policy and what it supported when this Government undertook the transfer of the Contributions Agency from the then Department of Social Security to the Inland Revenue.

The argument for making that transfer, which his party advanced, although we enacted the change, makes sense. It was that there would be a huge advantage in considering the ability to simplify and clarify the national insurance scheme alongside tax obligations, particularly for small businesses, the self-employed and businesses generally. A large number of gains could be made by putting it all in one Department and finding changes, administrative or otherwise, that would reduce burdens. Since 1999, when the transfer occurred, several changes for such streamlining have followed consultation.

Some people ask for complete assimilation of national insurance into the tax system. The Government are not persuaded of the case for that, mainly because the flag for the contributory principle would be lost, and because the administrative requirements for employers to provide other methods of indicating national insurance contributions would be greater than what the current system requires. The barriers are considerable.

Once the transfer to the Inland Revenue had occurred, Martin Taylor completed his report into further simplifications in the operation of national insurance contributions. I will return later to the

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question of class 2 and the £2. Martin Taylor suggested that we should abolish the £2, so I will explain why the Government have not done so.

In respect of the general contribution that the self-employed make, it would be highly inappropriate to address in Committee the case of the constituent of the hon. Member for Daventry. However, I would be happy for him to write to me and I will respond as quickly as possible. The class 4 contribution mentioned seems extraordinarily high if it is 7 per cent. of the profit that he quoted, but I will not go down that route now.

I will be clear about what goes on in the national insurance system. The self-employed do not pay the equivalent contributions that employees pay to get similar benefits. To put it another way, employees in class 1 are, in effect, subsidising the self-employed because what the self-employed receive out of the fund, in return for what they are paying in, is more generous than their contributions would merit. Let me put it that way. I can tell the hon. Member for Daventry the figure. I shall check it, but I understand that it is in the region of £2 billion to £2.5 billion in benefits, using the word ''benefits'' in the widest sense of accruing financial benefits as a self-employed person.

I am sure that the hon. Gentleman would not want to suggest that the self-employed should pay the same in class 1 as employees in order to get the same benefits. That might be the fairest thing, but I think that his constituent would scream a little more loudly. In my reply, I shall be at great pains to explain through the hon. Gentleman to his constituent that he is getting an extremely good deal. The combination of class 2, the exemption limit and the 7 per cent. lower and upper profits limit provides an extremely good deal for the self-employed.

Following the changes in the systems and the introduction of thresholds, more than 800,000 self-employed will pay lower contributions as part of our policy of rebalancing contribution rates across the national insurance fund. There was a drift over a number of years, so that those earning more were proportionately paying less, and a slide towards the bottom so that those on the lowest incomes were paying more. We therefore set up the ratio to which the hon. Member for Northavon referred, so that the point at which someone becomes liable to pay national insurance and the upper limit move in precise relationship to each other. Because the national insurance fund is a pay-as-you-go fund, changes to benefits elsewhere trigger that.

The changes that the Government have made and are continuing to make through this order are producing the exact opposite effects for the self-employed. They are reducing burdens and costs on the self-employed and employers, for example, by administrative measures such as bringing the Contributions Agency into the Inland Revenue.

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Prepared 26 February 2002