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Written Ministerial Statements
Monday 5 December 2005
TREASURY
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.
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 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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The rate of Class 3 voluntary contributions will be increased by 20 pence to £7.55 a week.
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.
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.
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.
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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.
To increase the flexibility of the system, from April 2006 there will be an increase in the limit on the amount that family income can rise over the current tax year without affecting tax credit entitlement for that year. The current annual income disregard of £2,500 will increase to £25,000. This will mean that, for instance, a family where a non-working partner moves into work on average earnings will not see their increased income lead to a fall in their tax credit entitlement during that year. This will maintain the incentives for people to move into work, while removing a major cause of the overpayments seen in the first two years of the system's operation.
To provide greater certainty of award for claimants, from November 2006, automatic limits will be imposed on the extent to which tax credit payments can be reduced to recover higher payments in the earlier part of the year which could lead to an overpayment for the year as a whole. These limits will be set at the same levels at which overpayments from a previous tax year are currently recovered. This will guarantee that low- to middle-income families do not face large and sudden falls in their tax credit income, and reassure people who report changes promptly.
To tackle the problem of families overestimating falls in income, from April 2007, when claimants report a fall in expected income during the year, their tax credit payments will be adjusted for the rest of the year to reflect their new income level, but will no longer include a one-off payment for the earlier part of the year. At the end of the year, their award will be finalised when their actual income is known. If they have been underpaid, a further payment will then be made. This approach will provide a buffer against any overpayment accumulated by the family during the year, especially where their estimate of income proves to have been too low.
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.
In summer 2006 the deadline for providing information to finalise and renew tax credit awards will be brought forward by one month to shorten the period during which provisional payments may be made using out-of-date information.
From November 2006, the range of changes reducing entitlement that must be reported to HMRC within three months will be expanded to include changes in work status or in the number of children for which the family can claim support. From April 2007, the time allowed to report such changes will be reduced from three months to one.
In early 2007, towards the end of the tax year, HMRC will contact key groups of claimants to obtain more up-to-date income information on which to base the next year's payments while the finalisation process is completed. And from 2008–09, the income figure used in setting provisional payments will be uprated by average earnings where up to date information has not been provided.
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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