Draft Social Security (Contributions) (Amendment No. 2) Regulations 2011
Draft Social Security (Contributions) (Re-rating) Order 2011

The Committee consisted of the following Members:

Chair: †Mr Joe Benton 

† Binley, Mr Brian (Northampton South) (Con) 

† Bridgen, Andrew (North West Leicestershire) (Con) 

† Crouch, Tracey (Chatham and Aylesford) (Con) 

† Cunningham, Alex (Stockton North) (Lab) 

Davies, Geraint (Swansea West) (Lab/Co-op) 

† Dorries, Nadine (Mid Bedfordshire) (Con) 

† Esterson, Bill (Sefton Central) (Lab) 

† Gauke, Mr David (Exchequer Secretary to the Treasury)  

† Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

† Hemming, John (Birmingham, Yardley) (LD) 

† Heyes, David (Ashton-under-Lyne) (Lab) 

† Hopkins, Kris (Keighley) (Con) 

† Leslie, Chris (Nottingham East) (Lab/Co-op) 

† McClymont, Gregg (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab) 

† Roy, Mr Frank (Motherwell and Wishaw) (Lab) 

Wilson, Sammy (East Antrim) (DUP) 

† Wollaston, Dr Sarah (Totnes) (Con) 

† Wright, Simon (Norwich South) (LD) 

Ben Williams, Committee Clerk

† attended the Committee

Ninth Delegated Legislation Committee 

Thursday 10 March 2011  

[Mr Joe Benton in the Chair] 

Draft Social Security (Contributions) (Amendment No. 2) Regulations 2011 

8.55 am 

The Exchequer Secretary to the Treasury (Mr David Gauke):  I beg to move, 

That the Committee has considered the draft Social Security (Contributions) (Amendment No. 2) Regulations 20011. 

The Chair:  With this it will be convenient to consider the draft Social Security (Contributions) (Re-rating) Order 2011. 

Mr Gauke:  It is a great pleasure to serve under your chairmanship, Mr Benton. It is worth noting that all the changes covered by these two instruments were announced as part of a written ministerial statement last December. As the regulations and the order both deal with national insurance contributions, it seems only sensible that they should be debated together. As a matter of course, I can confirm that the provisions in the regulations and in the order are compatible with the European convention on human rights. 

I shall start with the social security regulations. The previous Government’s 2008 pre-Budget report announced an increase of 0.5% in class 1 and class 4 national insurance contribution rates—those rate rises were due to come into force from the start of the 2011-12 tax year—but some 12 months later, the former Chancellor of the Exchequer, the right hon. Member for Edinburgh South West (Mr Darling), declared his intention to double those increases. That would have placed additional burdens on businesses when they most need our support. 

The increase in employers’ NICs was widely known as the notorious jobs tax. Although this Government confirmed that those rate rises would be implemented, we are implementing them as part of a wider package of reforms that will reduce the overall costs of employment and support people on lower incomes in precisely the way we set out in the 2010 Conservative party manifesto. We will achieve that by increasing the income tax personal allowance, the primary threshold and the secondary threshold. The social security regulations before the Committee are a vital part of that process. 

John Hemming (Birmingham, Yardley) (LD):  May I ask the Minister to confirm that support for people on lower incomes was also called for in the Liberal Democrat manifesto and is part of the coalition agreement? 

Mr Gauke:  I am happy to confirm that point. As a coalition Government, we are happy to proceed with those increases in thresholds. 

The point at which employers have to start paying national insurance will increase from £110 to £136 per week from April this year. That is a weekly rise of £21 above indexation, which means that employers will not pay any national insurance on the first £7,072 of any workers’ earnings. 

From April this year, the class 1 primary threshold—the point at which employees start to pay class 1 NICs—will increase from £110 to £139 per week. That is an increase of £24 per week above indexation, which will help to mitigate the effects that a 1% increase in the employees’ rate of NICs would have had on the lower paid. 

As a result of the increases in thresholds included in the regulations, around 950,000 low earners will no longer pay NICs, while their contributory benefit entitlements will be protected. Employees earning under £35,000 a year will pay less in income tax and NICs. Employers will pay less NICs on all workers earning less than £20,000 a year. In relation to NICs thresholds, employers will be better off by £150 for every employee earning above the secondary threshold. 

Compared with the plans that the Government inherited, more than £3 billion a year is being returned to employers through the secondary threshold rise. Even more money will go straight into the pockets of hard-working families due to the changes in the primary threshold. Today’s regulations also set the lower earnings limit and take into account changes that we are making to the way the basic state pension will be uprated. 

As part of last year’s emergency Budget, the Chancellor announced that the basic state pension will be linked to earnings from April 2011, and not only that, but we included an added guarantee that it would rise in line with earnings, prices or 2.5%, depending on which is greater. Now that the earnings link has been restored, the lower earnings limit is no longer legislatively linked to the basic state pension. That means the Treasury can set its level independently of the basic state pension through affirmative resolution. As a result, large rises in the basic state pension will not result in lower earners being taken out of contributory benefit entitlement. That is fair and progressive, and it will support the poorest and most vulnerable in our society. 

For the upcoming tax year, the lower earnings limit will increase by RPI—retail prices index—to £102 per week, while the upper earnings limit will go down from £844 to £817 per week. That maintains the alignment with the point at which the higher rate of income tax is paid. It is also worth noting that the regulations will increase the main rate primary contributions paid by women who married before 6 April 1977, taking them up to 5.85% from this April. 

The social security order sets out the NICs rates and thresholds for the self- employed and those paying voluntary contributions. For the self-employed, it raises the small earnings exception for paying class 2 contributions. The exception will rise in April from £5,075 to £5,315 a year—an increase broadly in line with prices. The rate of class 2 contributions will increase from £2.40 to £2.50 a week, and the rate of voluntary class 3 contributions will also increase from £12.05 to £12.60 a week. Again, that is similar to the general increase in prices. 

The order sets the profit limits for which main rate class 4 contributions are paid. The lower limit at which these contributions are due will increase from £5,715 to £7,225 a year, in the same fashion as the class 1 primary threshold. 

At the other end of the scale, the upper profits limit will be reduced from £43,875 to £42,475. That maintains alignment with the upper earnings limit for employees, which, as I said, is being reduced to reflect the changes made to the higher rate of income tax. 

The changes to the class 4 limits will ensure that the self-employed pay contributions on a similar range of earnings as employees paying class 1 contributions. The increase in the lower profit limit will guarantee that the 1% increase in the class 4 NICs main rate is offset for the self-employed, in much the same way as the increase in the primary threshold offsets the 1% increase for employees. 

The legislation is an important part of the Government’s plans to reduce the taxation of labour. It will encourage employers to take on more workers, help those on the lowest incomes, and support private enterprise and employment across the country. That is important for the economy and the recovery, and I commend the legislation to the Committee. 

9.3 am 

Chris Leslie (Nottingham East) (Lab/Co-op):  Let me put on the record my appreciation for my colleague, my right hon. Friend the Member for Delyn (Mr Hanson), who has allowed me the opportunity to shadow on this simple set of regulations. I am grateful to him. 

I would like to ask the Minister a couple of specific questions, but first, perhaps he will clarify one or two points. He mentioned the various manifestos published by what were once known as the Conservative party and the Liberal Democrats—I am not sure what they will be known as in the future as they gradually conjoin—and the extent to which those manifestos mean anything in relation to the new-fangled creature called the coalition, otherwise known as the Tory-led Government. My understanding is that the coalition agreement pledged— 

The Chair:  Order. I ask the hon. Gentleman to keep to the regulations before the Committee. It could be argued that we have heard enough about coalitions. 

Chris Leslie:  I shall try not to use that phrase again, Mr Benton. However, it is relevant to the order in so far as the coalition agreement spoke of the 

“pledge to stop the rise in employer national insurance contributions from April 2011”. 

It was not a pledge slightly to ameliorate them or reverse them by two-thirds, as seems to be the case under the arrangements enunciated by the Minister and published in the spending review and the Budget, but a pledge to stop that rise altogether. 

Will the Minister confirm that there is a shortfall of about £1.3 billion between the rise in national insurance and what he is giving back to employers through the threshold changes to class 1 secondary contributions? The pre-election rhetoric was all about reversing the jobs tax or stopping it and so forth. Although the Minister said that he is increasing percentage to 13.8%, employers will naturally be under the impression that all the increase is to be given back to them. That was their expectation. Will he confirm that he is giving back not all that money, but only about two-thirds of it? If so, it is still a tax rise, albeit a net tax rise, for employers on class 1 employer contributions of, cumulatively, about £1 billion? 

These are detailed matters, but it is important to make it clear that the Minister is presiding over a tax rise, albeit, I accept, the changes were highlighted under

previous Administrations. We are talking about the need to be clear about manifesto commitments and the coalition agreement, and— 

Bill Esterson (Sefton Central) (Lab):  Another broken promise. 

Chris Leslie:  As my hon. Friend prompts, it would not be very good if the electorate had the sense of another broken promise from this Conservative-led Government. 

The Minister spoke of indexation in respect of many threshold arrangements, but will he confirm that that refers to the RPI, not the consumer prices index? He said that they were broadly in line with prices. I do not know why they are not in line with prices or in line with the RPI. He said “broadly”. Why does he use that word? It is because the arrangements are more generous than RPI or, as I suspect, less generous? I would be grateful if he made that clear. 

Will the Minister explain to me, a simple soul, the difference between class 2 and class 4 contributions? Both relate to national insurance arrangements for the self-employed, but they have different applications. Changes are being made to the uprating of those two contributions, and it would be help to know why we still split arrangements between them. 

Will the Minister say a little more about the choice of his uprating strategy? He is raising the bottom threshold and reducing the top. He said that that is partly because he is aligning the changes to reflect the higher rate of income tax. Does that arrangement echo bringing a greater number of taxpayers into the higher rate of income tax? In other words, many taxpayers who might otherwise have expected to pay the basic rate are now being brought into the higher rate. How many people will be affected by that? In other words, how many more people will pay the higher rate of income tax? That will also tell us, I suppose, the number affected as a consequence within the national insurance arrangements that those threshold changes and these measures are making. 

Will the Minister confirm that the amendment regulations also change the married women’s and widows’ national insurance pension contributions? I am quite surprised that the reduced rate of primary class 1 contributions for married women and widows can be changed by secondary legislation. We are talking about an increase in their rate from 4.8% to 5.8%, which is quite a significant change in those contributions. Why is it that that significant change can be made by secondary rather than primary legislation? 

Why is the Minister making that change to the married women’s and widows’ rate? My understanding is that there has been quite a bit of criticism of the married women’s and widows’ rate of national insurance contribution, not least on programmes such as “Money Box Live”. Paul Lewis at the BBC and others have raised it as recently as last week. If married women were making contributions before 1977, they were allowed to make reduced payments, and about 100,000 married women are still paying that reduced rate. However, that does not qualify them for any entitlements. The reduced rate earns, essentially, not a lot for those married women. There are a significant number of women who, perhaps

unwittingly, will be making higher payments as a result of the tax rise that the Minister is implementing today in exchange for very little. 

Will the Minister set out exactly what the women who pay the higher married women’s and widows’ rate will get in exchange for that contribution? There is a feeling—a sense—among married women and widows of that generation that the national insurance system involved paying a stamp in exchange for something, but I am not clear exactly what they get in exchange. As I understand it, they have no right to a retirement pension in their own right, no right to jobseeker’s allowance and no right to sickness benefits. All that may be covered are industrial injuries benefit and the maternity allowance, which for older women will not exactly be a frequently claimed benefit, although technology is changing apace. 

I am concerned that many married women will be stuck with a set of pension contributions that they have been making—sometimes hundreds of pounds—when they should have been advised not to make those payments, or should have those payments taken away. 

I also understand—I ask the Minister to confirm it—that there is a looming deadline in the national insurance system, coming at the end of this month, for many people to make extra, top-up contributions to improve their contributions history, but that women who come under the married women’s and widows’ arrangements will be prohibited from repairing their incomplete record at that date. I would be grateful if he clarified that point. 

We understand entirely the need to make those threshold changes and indexations—broadly speaking, they are often uncontroversial—but it would be useful if the Minister clarified a number of specific points. 

9.13 am 

John Hemming:  I am pleased because this is a movement in the direction that both parties in the Liberal-Conservative coalition have been calling for us to go in. We are trying to protect people on lower incomes and to ensure that working is worth while for people on low pay, because much of what was done under the previous Government made things harder for people on lower incomes. I am therefore pleased to see these measures being brought into effect and I thank the Minister for his efforts. 

9.14 am 

Mr Gauke:  I thank my hon. Friend for his support for the measures. I also thank the hon. Member for Nottingham East for his questions. I think he said that there may have been a broken promise to the electorate. Let me read to him the relevant extract from the 2010 Conservative party manifesto. It said: 

“We will make the following changes in April 2011, relative to Labour’s plans: 

• raise the primary threshold for National Insurance by £24 a week and raise the Upper Earnings Limit by £29 a week; and, 

• raise the secondary threshold at which employers start paying National Insurance by £21 a week.” 

And that is what we have here: something which raises by £21 and £24 a week the secondary and primary thresholds respectively. It is a very precise implementation of the proposals set out in our manifesto. Relative to

the plans we inherited, we are reducing the burden by £3 billion. As we argued at the time of the general election, and as we do so now, resources were very tight because of the ghastly inheritance we received. Consequently, we have targeted our support towards lower pay, as my hon. Friend the Member for Birmingham, Yardley, points out, which has meant that we have proceeded in the way we have, benefiting the lowest paid, and their employers, the most. It is somewhat strange to be accused of breaking a promise to the electorate when in fact we have done precisely what we said. 

Chris Leslie:  Will the Minister give way on that point? 

Mr Gauke:  I will give way to the hon. Member, but I would like to know, when he intervenes on me, whether his party still holds to its manifesto position that national insurance contribution rates should rise without any increase in the threshold above indexation. 

Chris Leslie:  The manifestos make these comments, as the hon. Gentleman has said. I do not know what the financial situation will be after this dreadful Government leave office in 2015, or possibly before that. So it is difficult to say at this stage what our position should be as the Opposition. 

The Minister has read the manifesto, and I accept that what he has said is in the manifesto, albeit in its small print. But the coalition agreement statement, which superseded the manifesto, talked about 

“our pledge to stop the rise in employer national insurance contributions from April 2011”. 

That was a very precise phrase in the coalition agreement. The Minister has surely to acknowledge that these orders do not stop the rise in employer national insurance contributions. 

Mr Gauke:  We are doing exactly as we said we would do when we went to the electorate. We have been able to reverse the most dangerous and damaging effects of the very substantial tax increase we inherited—one of the small, though somewhat wrong-headed, contributions the previous Government made to deficit reduction—in a way that particularly protects the lowest paid, those who are the most vulnerable and in jeopardy of losing their jobs. I am still curious to know whether the Opposition think that what they thought was a good idea 10 months ago still is. 

John Hemming:  Does the Minister not share my mystification about why the Opposition are against us protecting the low-paid and calling us instead to stick by something said after and not before the election? 

Mr Gauke:  I assume the Opposition will be opposing the order, which will raise the threshold. That would be consistent with their policy at the last general election. I am glad that I have a fair number of parliamentary colleagues here to push this controversial order through in the teeth of opposition from the Labour party. It was not long ago that the previous shadow Chancellor was suggesting that the employers’ NICs rate should be around 20%, and goodness knows what impact that would have. Perhaps I misunderstood him, but certainly

his successor, the right hon. Member for Morley and Outwood (Ed Balls), has made it clear that he prefers employers’ national insurance contributions to VAT. If employers’ national insurance contributions were to increase in order to fund the VAT increase, the rate would go up by about another 2%, 3% or 4%—I am not quite sure of the figure, but it is fairly substantial. I assume that that is what the Opposition believe in. As I say, I hope that the Committee will be persuaded by my arguments today to increase the threshold, even if the Opposition are not persuaded. 

May I turn to some of the more detailed technical questions that the hon. Member for Nottingham East raised? He asked whether the increases were in line with RPI or CPI. They are in line with RPI. He asked, “Are they exactly in line?” The answer is, no, not necessarily. We are following the practice of previous Governments in that, for example, we round to the nearest 5p or £1 depending on the nature of the particular threshold. I can talk him through the details of each one if he would like. 

Chris Leslie:  I am grateful to the hon. Gentleman. Obviously, we accept the rounding arrangements; it would be churlish not to. However, can he give a commitment—or at least a sense—that he has no plans to move away from the pegging of these indexation arrangements from RPI? It would be very helpful for the Committee to know whether the Government have any intention to move away from RPI as the indexation touchstone. 

Mr Gauke:  I am keen in this debate to focus on the proposals we have here. The hon. Gentleman will be aware that, given we are in early March, wider discussions of tax matters are perhaps best left to another day. Let me assure him that we continued the usual practice with regard to rounding with RPI. When sitting on the Opposition Benches myself, I asked many times exactly how it was done and so on. We have proceeded as per normal. 

The hon. Gentleman raised the point about there being two different types of self-employed NICs classes. Class 2 is based on weekly contributions, whereas class 4 is based much more on an annual basis, as is the rest of the system. Again, that is a long-standing practice. Some of the contributory benefits exist as a consequence of the class 2 NICs. It is a complicated arrangement of very long standing, and it is perfectly reasonable for him to draw attention to that. 

Chris Leslie:  I understand that there is a possible definitional difference between class 2 and class 4, in that one is defined as a weekly amount and the other seems to be talked about as an annual amount. That surely is not reason enough to have a particular separation between class 2 and class 4 arrangements. If the Minister could write to the Committee to elaborate why those arrangements are necessarily separate in that way and mention whether there would be, for example, a class 4A or class 4B to address those particular weekly versus monthly versus annual arrangements, I would be grateful. It is a very confusing arrangement that is not easy for people to understand. However, I would be happy for him to write to the Committee on that. 

Mr Gauke:  I am happy to write to the hon. Gentleman; it would be an interesting history lesson in national insurance contributions. This has been a long-standing pattern. He might well be—I do not know—making a case for a simplification in this area. We might have the first line on the blank sheet of Labour party policy in this area. I welcome that and look forward to reading his detailed proposals on these points. If I can assist him in the development of his policy in this area by providing some further information, I am happy to do so. 

The hon. Gentleman raised the point about the impact of the increase in the thresholds of the personal allowance—the point at which people start paying income tax and the point at which people start paying employees’ NICs—and the impact on higher rates. That is a consequence of ensuring that the benefit of the personal allowance is focused on the low-paid. If those rates—the points at which people start paying income tax and start paying higher-rate income tax—increase together as we increase the personal allowance, those paying the higher rate would get twice the benefit of those paying the standard rate. To ensure that the increase in the personal allowance is properly targeted, we have reduced the point at which the higher rate starts to be paid and at which the equivalence regime applies to national insurance contributions. 

Most of those people will not pay any more tax as a result because they will benefit from the increase in the personal allowance. Although they start paying the higher rate earlier, they will have paid less on their other income because of the personal allowance. Particularly for those who are under 65 and in work, the aim is that it should be a neutral package. I hope that is clear. 

The hon. Gentleman asked how many more people would pay the higher rate. I do not have those numbers to hand, but I will happily provide them. I think those numbers are in the public domain, but I am sure he would look forward to receiving them. I will set out a bit more about that. 

The hon. Gentleman asked about the increase for married women who are paying national insurance contributions at the reduced rate. Such people elected to pay a reduced rate of contributions in return for a reduced benefit entitlement. The rate has been increased to maintain parity with the increase that applies to everybody else paying main rate, class 1 national insurance contributions. The increase, as we all know and has been recognised, was proposed by the previous Government. 

It is only fair that the reduced rate is also increased, even though those women do not receive contributory benefits in their own right. The changes can be made through regulations and do not need to be made through primary legislation. That is why we have been able to do that in this way, which is entirely consistent with the rate increases that were put forward by the previous Government. 

Chris Leslie:  It is very useful to have this debate, but the Minister has to accept that many people paying that lower arrangement and seeing it increase to 5.8% will feel particularly aggrieved. There is a sense of unfairness because they are not getting anything back in exchange. Is he absolutely content with that arrangement? Is there a possibility that he will look at it again? I think it would be reasonable to look at this particular arrangement. 

It may be a small number, but I do not think he has set out quite how many married women and widows are paying the reduced rate. It would be useful to know the quantum we are talking about. Obviously, as time goes on, that number will diminish, but, nevertheless, there are women who have been making these payments—sometimes hundreds of pounds, and possibly over £1,000, a year—for a long period of time and getting absolutely nothing in exchange. I worry a little about the fairness of that, and surely the Minister does, too. 

Mr Gauke:  First, to answer the hon. Gentleman’s factual point, some 5,000 to 10,000 married women have a reduced rate election. Those numbers are falling because only women married or widowed before 1977 are still entitled to pay at the reduced rate. If I understand the logic of his argument, the hon. Gentleman is saying, “Isn’t it outrageous that the rate of national insurance contributions is going up, but the contributory benefits that people are receiving are not?” I have to remind him that the previous Government increased national insurance contribution rates for millions and millions of people, but there was no commensurate increase in the benefits that they received as a consequence. 

Chris Leslie:  Yes there was. The NHS. 

Mr Gauke:  He talks about the NHS, but one would seriously question the extent to which that is genuine hypothecation. I would be interested to know what his argument is for the increase that we have recently implemented and comes into force in April. It was simply national insurance contributions being used as another tax. It was a tax increase raised by the previous Government without there being any increase in contributory benefits. Our proposals are entirely consistent with that. 

Chris Leslie:  I have to defend my honour. The Minister will recall that we tried our best to amend the Bill in Committee so that some of that increase would be

hypothecated towards the NHS because the Government are breaking their other promise in the coalition agreement to raise NHS investment in real terms. Because of the shortfall in real terms, and because they have failed to peg it to prices in the spending review, we tried our best to keep them to their promise. That is why we wanted some of the revenue to go in that direction. 

Mr Gauke:  Mr Benton, I am sure you would not want me to be overly distracted by Labour party policy, but let us remember it was the Labour party that increased national insurance contribution rates, and it was the previous Chancellor of the Exchequer and the previous Health Secretary who opposed increases in health spending above the rate of inflation. So there is no particular coherence coming from the Labour party. Let us not be overly detained by such matters. 

This is a set of increases and thresholds that, compared with the plans inherited by the Government, will mean that £3 billion a year is being returned to employers through the employers’ threshold rise and even more is being returned to individuals through the increase in the primary threshold. Although I suspect that those threshold increases will not have the support of the Labour party, I commend the regulations and the order to the Committee. 

Question put and agreed to.  

Resolved,  

That the Committee has considered the draft Social Security (Contributions) (Amendment No. 2) Regulations 2011. 

Draft Social Security (Contributions) (Re-rating) Order 2011

Resolved,  

That the Committee has considered the draft Social Security (Contributions) (Re-rating) Order 2011.—(Mr Gauke.)  

9.32 am 

Committee rose.