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Written Ministerial Statements

Monday 5 December 2005


Regulatory Reform Order

The Economic Secretary to the Treasury (Mr. Ivan Lewis): The Treasury has today issued a consultation paper on a Regulatory Reform Order which proposes to cut unnecessary consultation by the Financial Services Authority (FSA), to make it easier for the FSA to tailor regulation to industry's needs and to improve the FSA's operational efficiency in other areas. Copies of the consultation paper have been placed in both Libraries of the House and it is accessible at www.hm-treasury._gov.uk.

Review of National Insurance Contributions

The Paymaster General (Dawn Primarolo): I have completed the annual review under section 141 of the Social Security Administration Act 1992. I propose the following changes to take effect from 6 April 2006. These rates and limits will also apply to national insurance contributions in Northern Ireland.

Employers and Employees

In line with the Social Security Contributions and Benefits Act 1992, the lower earnings limit for primary Class 1 contributions is to be raised to £84 a week. It is set at the level of the basic state pension for a single person from April 2006 and rounded down to the nearest pound.

The primary and secondary thresholds for Class 1 contributions will continue to be aligned with the weekly amount of the income tax personal allowance, which will be increased to £5,035 from April 2006. The primary and secondary thresholds will therefore be increased to £97 a week. This means that no tax or Class 1 contributions will actually be paid on earnings below this level.

The upper earnings limit for primary Class 1 contributions will be raised to £645.

The self-employed

The rate of Class 2 contributions will be frozen at £2.10 a week.

Self-employed people with earnings below the annual small earnings exception can apply to be exempted from paying Class 2 contributions. This limit will be raised by £120 to £4,465 in line with inflation.

The annual lower profits limit for liability to Class 4 contributions will increase to £5,035 a year (in line with the income tax personal allowance). The upper profits limit will increase by £780 to £33,540, to maintain the link with employees' earnings liable to Class 1 contributions.
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Class 3

The rate of Class 3 voluntary contributions will be increased by 20 pence to £7.55 a week.

Share fishermen

The special rate of Class 2 contributions for share fishermen, which allows them to build entitlement to contributory Jobseeker's Allowance in addition to the other contributory benefits available to the self-employed, will be frozen at £2.75 a week.

Volunteer Development Workers

The special rate of Class 2 contributions for volunteer development workers, which entitles them to the full range of contributory benefits, will be increased by 10 pence to £4.20 in line with the statutory formula of 5 per cent. of the primary Class 1 lower earnings limit.

Treasury Grant

I need to ensure that the Fund can maintain a prudent working balance throughout the coming year. In accordance with section 2 (2) of the Social Security Act 1993, I propose to do so by prescribing that the maximum Treasury Grant which may be made available to the Fund in 2006–07 shall not exceed 2 per cent. of the estimated benefit expenditure for that year. Similar provision will be made in respect of the Northern Ireland National Insurance Fund.

I shall be laying a draft re-rating order before Parliament in due course. This will accompany a report by the Government Actuary to myself and my right hon. Friend the Secretary of State for Work and Pensions which we shall jointly present to Parliament.

The following table sets out the rates, earnings limits and thresholds for National Insurance Contributions proposed for 2006–07.
National insurance contributions, proposed re-rating, April 2006

Lower earnings limit, primary Class 1£84
Upper earnings limit, primary Class 1£645
Primary threshold£97
Secondary threshold£97
Employees' primary Class 1 rate11 per cent. from £97.01 to £645 plus 1 per cent. above £645
Employees' contracted out rebate1.6 per cent.
Married women's reduced rate4.85 per cent. from £97.01 to £645 plus 1 per cent. above £645
Employers' secondary Class 1 rate12.8 per cent, on earnings above £97
Employers'contracted-out rebate, salary-related schemes3.5 per cent.
Employers contracted-out rebate, money-purchase schemes1 per cent.
Class 2 rate£2.10
Class 2 Small earnings exception£4,465
Special Class 2 rate for share fishermen£2.75
Special Class 2 rate for volunteer development workers£4.20
Class 3 rate£7.55
Class 4 Lower profits limit£5,035
Class 4 Upper profits limit£33,540
Class 4 rate8 per cent. from £5,035 to £33,540 plus 1 per cent. above £33,540

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HM Revenue and Customs

The Paymaster General (Dawn Primarolo): The Child and Working Tax Credits are today benefiting over 6 million families and 10 million children. Tax credits tailor support to families' specific circumstances, providing more support when their need is greatest. They represent a more generous and inclusive system of income-based financial support than any previous system.

Over the past seven years the Government have reformed Britain's tax and benefit system to achieve three over-arching aims: to provide adequate financial incentives to work; to reduce child poverty; and to recognise the responsibilities of parenthood by supporting families with children. These reforms have helped make work pay and reduce the numbers of children in absolute poverty by one and a half million. Tax Credits have been an important part of this success and they represent the best way to continue it in the future.

In my statement of May 26 I outlined six measures to improve the administration of tax credits. These aimed to improve HMRC's communications with tax credit recipients, reduce the risk of errors and improve the procedures for recovering overpayments. Significant progress has been made in each of these areas.

Building on these improvements to the administration of the system, the Government are today announcing a package of further improvements most of which will come into effect over the next 18 months. The measures reflect the experience of the first years of operating the tax credit system and strike a balance between providing more certainty and stability of financial support for families, while maintaining flexibility to respond to changes in their income and circumstances. The measures also include clear responsibilities for claimants to report changes affecting their award.

The tax credits system is an annual one—integrated with the tax system—within which payments can be adjusted to reflect changes in a family's circumstances and income. Under an annual system, given a family's final entitlement cannot be known until the end of the year, some level of end-year adjustment will be necessary. However, for some families, especially those on lower incomes, downward adjustments to tax credit payments—to reflect changes in circumstances reported within the year or when awards are renewed—can sometimes cause difficulties. This is a particular problem where claimants had not realised their payments were too high. Better communications, which is a key part of the measures announced on 26 May, will help by improving claimants' understanding of the system.

Today's measures will improve matters further, providing greater certainty for claimants, especially those on lower incomes, through measures to reduce the need for adjustments caused by rising income and to limit the effects of adjustments. These are supported by measures to reduce the likelihood of unexpected downward adjustments resulting from inaccurate or out of date information about a family's income or circumstances.

Analysis of overpayments suggests that they result from a number of factors: income rises from one year to the next; families overestimating the extent to which
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their income has fallen when they seek extra support during the year; provisional payments made at the start of the tax year, which are based on out-of-date information that is subsequently updated when the award is renewed; and delays in reporting changes in families' personal circumstances to HMRC.

The improvements announced today will provide greater certainty for claimants, particularly those on lower incomes, while maintaining flexibility to respond to falls in income and changes in circumstances.

Today's measures will also give claimants clear responsibilities to report changes promptly and more regularly. They will be helped to keep their records up to date, including through more proactive contact by HMRC, allowing HMRC to base tax credit awards on the best possible information.

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In line with its commitment when tax credits were announced in 2002, the Government have looked to learn from the early operation of the system and will continue to do so. Together these measures, and the six measures currently being implemented by HMRC, will lead to steady and ongoing improvements in the tax credits system, allowing it to deliver support even more effectively to millions of families. Without the changes announced today, initial estimates suggest that subsequent years' overpayments would be of broadly the same level as in 2003–04. When fully implemented, it is anticipated that today's changes will reduce the value of overpayments by around one third. I am still considering whether there is more that can be done to alert claimants about the recovery of an overpayment before HMRC starts to collect it but the scale of changes to the computer system that would be needed mean that this could not be done quickly.

I believe that these further measures will help to ensure that tax credits strike the right balance between flexibility and certainty for claimants and give clear messages about the need to report changes to HMRC. They are a positive response to the issues raised by the Ombudsman and others and will go a long way to meet the concerns they have expressed.

A case has been made for a system of fixed awards, which within the framework of the annual tax credits system, would need to be based on the previous year's income. The Government will continue to listen to the case, but believe on balance that it is preferable to maintain the current system that flexibly responds to changing circumstances.

The PBR sets out the actions the Government are taking to continue improving compliance in the tax credit system. As announced on 2 December, as part of their ongoing compliance work, HMRC have identified and stopped attempts to defraud the tax credits system by making claims through the tax credits e-portal. HMRC has closed the e-portal while it develops new checks to ensure the system remains secure. A criminal investigation is also being undertaken into the apparent false use of a number of DWP staff identities in fraudulent tax credit claims. It would not be appropriate to make any further public statement at this stage.

DWP and HMRC are carrying out an in-depth investigation into how this happened. They are also working quickly to identify the records concerned and to ensure they are corrected.

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