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

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Mr. Boswell: I believe that I heard the Minister say that some 800,000 self-employed persons have had their contributions reduced by the changes. I do not have the figures with me, but I recollect that something

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like 3.5 million persons are self-employed, although, for various reasons, they may not all contribute. Can she say how many self-employed persons have had their contributions raised under this regime?

Dawn Primarolo: There are about 2.7 million self-employed people in the scheme contributing to national insurance. The hon. Gentleman must be very careful, because the earnings exemption operates, and he must see how that works in relation to those people. He said that he did not like the alignment with the tax thresholds—but that was precisely what his party argued for, asking why we needed all the different thresholds and suggesting that it would be simpler to align. It was for those reasons that we brought the Contributions Agency into the Inland Revenue.

The overall impact is that the self-employed continue to get a very good deal from the fund. In order not to mislead the hon. Gentleman, I remind him that the fund operates so that someone who earns more, pays more, whether that person is an employee or self-employed. That is how it works, and I make no apology for it. The whole point is that we have done exactly what the hon. Gentleman said we should—help starter businesses and self-employed people who were paying more than their income dictated that they should.

The hon. Member for Northavon asked why we did not just abolish class 2 charges and crank up class 4, which would be cheaper to operate. The lower profit limit of class 4 would then be reduced to the level of the class 1 lower earnings limit. We did not do that because it would have entailed greater increases. I think I gave him the same reasons for not doing so last time round. The step change in the value of class 4 would have been greater last April. I understand why he says that it is a rather messy system, but we were trying to avoid a dramatic impact in one year on the payments that individuals would have to make.

I listened carefully as the hon. Gentleman suggested that we could vary the 7 per cent. or the ratio of the 7 to the 7.5 per cent. I do not remember the exact figures on the occasion that we decided to leave class 2. We wanted to avoid a huge entry fee. However, my mind is not closed to future reform and I will consider carefully what he said and revisit the recommendations of the Taylor report.

We have always tried not to cause alarm. Having said that the self-employed are getting a good deal, we have always made those changes as reasonable and small as possible to cushion the impact of the modernisation of contributions to the fund. We thought at the time—and still do—that if the increase applied only to class 2, it would be higher than many of the self-employed would want. About 2.5 million of the 2.7 million self-employed earn above the small earnings exemption. I agree with the hon. Gentleman's point about the entry of people into employment, but the figures are not that great.

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Mr. Webb: The Minister has been charitable and encouraging. However, practically all the self-employed are paying class 2 and it is collected in a different way from class 4. Class 4, I think I am right in saying, is collected through the end-of-year tax assessment. Class 2 is collected weekly, although one could probably pay it in a year's lump. Everyone is paying the money anyway; we are merely suggesting that they pay it in a simpler way. I might have been over-optimistic in suggesting that 7.1 per cent. would do it—it might be nearer 8 per cent. We have had a couple of years for the system to settle down, and I hope that the Minister will consider the matter. The self-employed would probably welcome that.

Dawn Primarolo: I am grateful for the hon. Gentleman's intervention. He is always very thoughtful on such issues. I often find that there is plenty on which we can agree. That will finish his career completely.

Our view was that the change would have to be larger than would be easily recognised as sensible by the self-employed. That also relates to the hon. Gentleman's point about the costs. I am sorry that I do not have the figures, even though I had 12 months' notice. None the less, it is worth considering further whether the fund can try to tease out those figures.

Even if the hon. Gentleman accepted our rationale, I am sure that he would criticise the Government--the hon. Member for Daventry certainly would--if the rise in class 4 contributions was too great, even if it was sensible in terms of balance and rationalisation of the fund, and we would face considerable criticism from the self-employed. We must consider those issues. The hon. Member for Northavon has been active in politics for a long time and will understand that the right arguments and explanations and the logical way forward are not always appealing to those whom we want to help. I am sure that he will understand my caution and I hope that he and the hon. Member for Daventry will accept that the Government continue to consider the issues carefully, that the insurance fund should be properly balanced, and that contributions should be cost-effective, reasonably administered, streamlined and minimise confusion between the different classes of contributions. However, I shall bear in mind his comments about class 2 contributions.

Class 3 contributions are slightly different because they are unique in that they allow people without sufficient contributions for a qualifying year to provide themselves with one and to have access to benefits. Whatever the cost--it is not outrageous, because we would not allow it if it were--that is the right way forward when, for complicated reasons, people might otherwise be denied access to benefits because of insufficient contributions in a qualifying year.

Mr. Boswell: I am grateful to the Paymaster General for doing her best to explain the rationale behind the issues. We are always grateful for that. However, will she reinforce her argument by reflecting on the fact that very few class 3 contributions will be paid by the week, but will often be agreed at the end of a tax year

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to catch up following a period of absence or other inability to pay? I hope that she will examine the cost of collection more carefully, but it would be right not to be over-alarmed unless it is shown to be disproportionate.

Dawn Primarolo: I agree. I am convinced that the class 3 provision should remain, and I have no reason to believe that the cost and so on will be excessive or beyond what Parliament would want in this limited case. I confirm that arranging payment and settlement at the end of the year is already part of the procedure.

Despite the 12 months' notice of the question about the cost—and my still not being able to answer it—I hope that the Committee will accept that the order is modest but fair, and will accept it.

Mr. Boswell: Before the hon. Lady finishes her speech, will she at least undertake to bear in mind, if not in heart, the more general considerations that I floated before the Committee, because they matter to all of us?

Dawn Primarolo: The hon. Gentleman asked about payable tax credits and pension funds.The Government's policy is clear and I must correct him. There was no tax rebate, because pension funds did not

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pay tax. There was a substantial subsidy, which put pressure on companies to pay dividends instead of investing.

The hon. Gentleman touched on a number of issues that I was trying to avoid--[Laughter.]--only because they are not relevant to the Committee, Mr. Chidgey. He referred to the sort of pensions available, the regulation of pensions and the performance of some pension funds. Those matters are of great interest, but they are not relevant to national insurance. I did not mean to do a disservice to the hon. Gentleman in not returning to them, but thought that you would rule me out of order, Mr. Chidgey. However, the issues are important and should be subject to a wider debate.

I hope that the hon. Members for Northavon and for Daventry accept that I have tried to respond to their questions. I shall take on board the issues that they have raised when considering future decisions on uprating of national insurance contributions. I hope that the Committee will accept the order.

Question put and agreed to.


    That the Committee has considered the draft Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2002.

        Committee rose at seventeen minutes past Five o'clock.

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The following Members attended the Committee:
Chidgey, Mr. David (Chairman)
Baird, Vera
Bayley, Hugh
Boswell, Mr.
Luff, Mr.
MacDougall, Mr.
Mallaber, Judy

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Pond, Mr.
Primarolo, Dawn
Quin, Joyce
Rosindell, Mr.
Sarwar, Mr.
Sutcliffe, Mr.
Webb, Mr.

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