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Session 2005 - 06
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Standing Committee Debates

Draft Social Security (Contributions)
(Re-rating and National Insurance Funds Payments) Order 2006

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Fourth Standing Committee
on Delegated Legislation

The Committee consisted of the following Members:


Mr. Mike Hancock

Bacon, Mr. Richard (South Norfolk) (Con)
†Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Burt, Lorely (Solihull) (LD)
Fallon, Mr. Michael (Sevenoaks) (Con)
†Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
†Francois, Mr. Mark (Rayleigh) (Con)
†Gauke, Mr. David (South-West Hertfordshire) (Con)
Kramer, Susan (Richmond Park) (LD)
†McFadden, Mr. Pat (Wolverhampton, South-East) (Lab)
†Moon, Mrs. Madeleine (Bridgend) (Lab)
†Primarolo, Dawn (Paymaster General)
†Reed, Mr. Jamie (Copeland) (Lab)
Selous, Andrew (South-West Bedfordshire) (Con)
†Smith, Mr. Andrew (Oxford, East) (Lab)
†Tami, Mark (Alyn and Deeside) (Lab)
†Ussher, Kitty (Burnley) (Lab)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
Alan Sandall, Committee Clerk
† attended the Committee

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Thursday 2 March 2006

[Mr. Mike Hancock in the Chair]

Draft Social Security (Contributions)
(Re-rating and National Insurance Funds Payments) Order 2006

2.30 pm

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 2006.

I welcome you to the Chair, Mr. Hancock. Although I am committed to the order, I do not believe that our sitting is the most exciting event taking place this afternoon; I understand that there might be a result in respect of another event at about 3 o’clock. I hope that if we are still in the Room, we will receive notification of it; if we are not, we will be able to see it for ourselves.

The order deals with various national insurance contribution rates and thresholds. Its provisions are compatible with the European convention on human rights; I am required to confirm that each time. All the changes were announced at the time of the pre-Budget report in December 2005.

For the self-employed, the order raises the small earnings exception, below which, depending on the level of their profits, they may claim exemption from paying class 2 contributions. The exception will rise in April, from £4,345 to £4,465 a year, an increase that is broadly in line with prices. Many people choose to pay those contributions to protect their benefit entitlement. The rate of class 2 contributions for 2006-07 will stay at £2.10 a week.

Staying with the self-employed, the draft order also sets the profits limits between which main rate class 4 contributions are paid. The lower limit at which contributions become due and the upper limit will increase broadly in line with inflation. The lower limit will rise in line with the income tax personal allowance, from £4,895 to £5,035 a year. At the other end of the scale, the upper profits limit will continue to match the upper earnings limit for employees, which will go up to £33,540 for 2006-07. That ensures that the self-employed pay main rate class 4 contributions on much the same range of earnings as employees liable to class 1 contributions. It is an essential element in making the national insurance system fair for everyone.

The order also deals with the weekly rate of voluntary class 3 contributions, which help those with insufficient contribution records in any given tax year to make up a qualifying year for benefit purposes. The rate of class 3 will rise in April by 20p to £7.55 a week, a standard re-rating in line with prices.

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The review of contribution rates is accompanied by a report from the Government Actuary detailing the effects of the order and the uprating benefits laid down by my right hon. Friend the Secretary of State for Work and Pensions on the national insurance fund. I am pleased to say that, for the seventh year in a row, there is no expectation that the fund will need a Treasury grant. Nevertheless, a prudent provision of 2 per cent. of all benefit expenditure is made.

Northern Ireland has a separate national insurance scheme from Great Britain, but the two schemes are closely co-ordinated and maintain parity of contribution rates. The order covers both Great Britain and Northern Ireland.

2.34 pm

Mr. Mark Francois (Rayleigh) (Con): It is a pleasure to serve under your chairmanship, Mr. Hancock, and to be serving opposite the Paymaster General, particularly as I was also with her at Treasury questions earlier.

I have a feeling of déjà vu as I debated the same measure with the Paymaster General on 10 March last year. I also have a feeling of déjà vu because the Liberal Democrats did not turn up for that debate and they are not present today either. In fairness, I suppose we must say that they have other things on their mind.

The Chairman: We would hope so.

Mr. Francois: Indeed, although, to be fair, we are all quite interested in the outcome of the test match, but we are present anyway.

We are debating a relatively straightforward measure, as the Paymaster General said. Given that, I can say in all seriousness that I do not intend to delay the Committee for long. I have joked with you before about “Hancock’s Half-Hour”, Mr. Hancock, but I suspect that we may not even need that long. However, I have a few technical questions on points of detail and a slightly broader point to make about national insurance contributions, plus—I am giving the Minister a little notice—a question about the national insurance treatment of orchestras, which are in a slightly anomalous situation. Perhaps she can update the Committee on any progress that has been made.

The order has direct implications for three classes of national insurance payments—classes 2, 3 and 4. As the Paymaster General outlined, class 2 contributions are paid by self-employed people once their profits reach a certain level. The payments are normally a fixed weekly amount and are usually paid in arrears. The order proposes no change to the weekly rate but increases the so-called small earnings exception from £4,345 to £4,465—an increase of about 2.8 per cent. The percentages are important.

Class 3 contributions are paid voluntarily by non-employed people who want to fill in gaps in their record. In most cases that relates to contributions towards a retirement pension. The order increases the prescribed amount of class 3 contributions from £7.35 to £7.55. That is a 2.7 per cent. rise. Class 4 contributions are paid by self-employed people and are a percentage of their profits or gains. They are
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normally paid together with income tax at the end of the year. The order increases the lower limit at which those payments will apply from £4,895 to £5,035—a rise of 2.9 per cent. The order also increases the upper limit for such payments from £32,760 to £33,540 respectively. That is a rise of 2.4 per cent.

A curious fact about the increases is that they represent slightly different percentages in each case—namely 2.8, 2.7, 2.9 and 2.4 per cent. respectively. Are those differences purely due to rounding—I seem to recall that that was the Treasury’s rationale last time—or are there alternative factors at work as well? Also, the Minister states that the upratings are broadly in line with prices. For the avoidance of doubt, can she tell the Committee on which price index those adjustments are based? It would be helpful to have that on the record.

When we debated the measure a year ago, we touched briefly on the hoary old chestnut of whether the Government had any plans to merge the tax and national insurance system in the run-up to the Budget. The Paymaster General assured the Committee that the Government had no such plans and, indeed, none appeared in the Budget shortly thereafter. This year’s Budget is nearby—we now know that it will be on 22 March—so it would be helpful if she could reiterate that assurance. We do not need to dwell on the issue for long, but perhaps she could reassure the Committee that there is no massive scheme to merge tax and national insurance; we will see that confirmed in the Budget fairly shortly.

The proposals to adjust national insurance contribution rates have to be seen in the context of the run up to the Budget. We will watch closely on 22 March to hear the Chancellor’s revised borrowing projections in his statement. Given that we are agreeing to increase national insurance contribution rates, will the Paymaster General rule out further increases to national insurance contributions in a few weeks’ time? In particular, can she confirm that the Government have no plans to scrap the upper earnings limit on national insurance contributions? That would raise a considerable amount of revenue but, as I am sure she is aware, would be highly unpopular. It would reassure my constituents and those of all other right hon. and hon. Members if she laid that to rest here and now.

Finally, having given the Paymaster General a little notice, I shall raise my point about the national insurance treatment of orchestras. The background to the problem, of which I believe she is well aware, is that in autumn last year it became apparent that a number of Britain’s orchestras had for several years been underpaying their employer contributions, in terms of NI payments, and Her Majesty’s Revenue and Customs were seeking to recover it from the orchestras concerned.

On one level it is right that that revenue is protected, so we do not object in principle, but in reality many orchestras operate on particularly tight budgets. They do not tend to have a great deal of cash to spare. There
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is also the practical point that for many of them, staffing—the cost of employing their musicians—is overwhelmingly their major cost.

In a parliamentary written answer on 8 December, the Paymaster General explained that HMRC was holding discussions with the Association of British Orchestras, the Musicians Union, the Arts Council and the Department for Culture, Media and Sport to resolve the problem with a reasonable compromise. Can the Minister update the Committee on whether the negotiations have made any material progress? That will clearly be of concern to the orchestras in question and also to the public who enjoy the music that they play. Perhaps she could throw a little light on that in her final remarks. I await her reply.

2.41 pm

Dawn Primarolo: I shall deal first with the question of variations in inflation—2.8, 2.7, 2.9 and then 2.4 per cent. The increase is in line with and is always based on the retail prices index. The hon. Gentleman is right that the variations as we see them—2.8, 2.7 and 2.9 per cent.—are the result of rounding. He raised the point about the upper limit with me last year, and the answer is the same: the upper limit is a multiple of 52, and that is how it comes out. That is how it has always been done, so I always say that it is broadly in line with prices.

The hon. Gentleman asked me about alignment before; I am not complaining about that, because it is important. The Government first took national insurance into the Revenue, which is now HMRC, and we have progressively made some big steps, particularly towards aligning national insurance benefits in kind. We discussed it last time, so I am going to be more careful now. Discussions with employers continue all the time about whether further alignment might be done. The hon. Gentleman rebuked me last time, suggesting that I was saying that we were never going to look for other improvements. That is where I shall be cautious, because whatever I say, he will misinterpret me. [Hon. Members: “Oh!”] Or there is a danger of him misinterpreting me. I hope that the Committee forgives me for suggesting such a thing, but there is the possibility that if I do not choose my words carefully, another interpretation might be put on them.

In day-to-day discussions and meetings, we still seek further alignment and proposals on it. We consider them in exactly the same way to determine whether they are practical. We have discussed national insurance contributions being a flag for the contributory system. We have gone a long way, but we run into serious difficulties with increased costs to employers if we move away from that flag.

The same applies to the hon. Gentleman’s question about the upper earnings limit. I feel that I am snookered, because we are close to a Budget and I am required as a Minister to give the answer that Ministers always give: we keep everything under review while reflecting on where improvements can or cannot be made, and that is a matter for the Chancellor to decide
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at the Budget. The hon. Gentleman knows full well that that is the answer, and he should not read too much into it.

The hon. Gentleman then asked about orchestras, something that has concerned many hon. Members. Forgive me, Mr. Hancock, for dealing with that, but it is within the subject of the order because it deals with the self-employed. In 1998, the policy with regard to payment for musicians was aligned with that for actors, at the request of musicians and their representatives, and negotiated by the Department for Health and Social Security. It came to light that some orchestras may not have applied the rules and they feared that they would face a large figure with regard to liability. I stress that the figure comes from the orchestras, not the Department. This is not us saying, “You owe us this much national insurance.” There is an interaction because they would have paid something—perhaps under class 2 and class 4—but it is not clear cut and it is not for the Department to determine how that was organised.

Let me set out what happened because I am trying to be helpful. Officials from HMRC have discussed the matter with the Arts Council, the Musicians Union, the Department for Culture, Media and Sport and the Association of British Orchestras to find a way of resolving things as quickly and fairly as possible. The Arts Council has engaged Berwin, Leighton and Paisner as legal advisers—they are separate from us; they will just tell us the outcome—and the intention is for that firm to represent as many orchestras as possible to minimise the expense and accountancy fees, and to ensure consistency of treatment on how musicians are engaged, what has been paid and what happened. That is the first stage, during which the orchestras will establish for themselves what they think their liability is, or whether there is any.

The process will start with BLP planning to provide information on the contractual terms on which soloists and conductors are engaged so that HMRC can decide whether there is a liability for those groups. It is complex. When that process is completed and there is agreement on it, the next stage is to quantify whether there is a liability—it is still not clear whether there is one or how much it will be. The normal processes go from that stage and will consider when to pay and the ability to pay.

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I feel relaxed and confident that we will find a satisfactory resolution. I am keen on orchestras. The situation goes to show that having class 2 and class 4, and allowing exceptions, introduces a complexity into the national insurance system. Although there is no way forward at the moment, we need, when we have settled the case, to reflect on what that means.

Mr. Francois: I thank the Paymaster General for her detailed answer. She has laid out a way of trying to resolve what is, as she rightly said, a complex issue. Will she give a broad indication of how long that might take? Are there any indicative timings for a final resolution, one way or the other?

Dawn Primarolo: A timing has not been given to the Department and passed on to me, as far as I know. The orchestras are keen to get the problem resolved as quickly as possible. The solution is in their hands, and that of the Arts Council, and depends on how quickly their legal advisers can settle things. It is a case of how quickly the orchestras collaborate and provide information with their appointed legal advisers. That is the most important stage, which can go as quickly or as slowly as the orchestras choose to supply the information to their advisers. Once that has happened, we should be able to resolve the rest quite quickly.

The orchestras want the situation resolved quickly, because potentially it is a liability sitting on their books. My officials are doing everything they can—at least on the Department’s side—to ensure that our business is expedited as quickly as possible, once the orchestras’ legal advisers are ready to give us all the details.

I am more than happy to keep the hon. Gentleman informed, when we are at the stage of moving into the negotiations. I hope that the Committee is happy with the order.

The Chairman: I thank the Minister on behalf of all hon. Members for the clarity of her response on musicians and orchestras in particular. It would be useful for all hon. Members to be kept informed.

Question put and agreed to.


    That the Committee has considered the draft Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2006.

Committee rose at ten minutes to Three o’clock.


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