National Insurance Contributions Bill

Memorandum submitted by HM Treasury (NI 03)

Information on the measures included in the National Insurance Contributions Bill, and related measures

1. Consistent with the Government’s objectives to improve transparency with regard to the rationale and impact of tax policy changes, this memorandum summarises information about the measures included in the National Insurance Contributions Bill, and related measures. The Government believes that for these measures, the information provided will aid effective scrutiny of the proposed legislation.

2. The National Insurance Contributions Bill provides for:

· increases in National Insurance Contributions rates of 1% from April 2011 as part of a package of measures to make National Insurance Contributions more progressive (the rises were announced by the previous government at the Pre Budget Reports of 2008 and 2009 with accompanying package announced at the June Budget 2010);

· an employer National Insurance Contributions holiday for new businesses in specified countries and regions, and meeting certain other criteria (announced at the June Budget 2010 and benefiting those meeting the criteria who set up a business from that point until the end of the holiday).

3. Because the rate rises are part of a wider package of measures, this memorandum also covers the other measures in the package (which are covered by other legislation). These are:

· increases in National Insurance Contributions thresholds;

· an increase in the income tax personal allowance, with reductions in the basic rate limit and National Insurance Contributions Upper Earnings/Profits Limit to focus gains on the low and middle income taxpayers.

Changes to rates and thresholds

Exchequer Yield

4. Information on the estimated costs to the Exchequer of the rise in the National Insurance Contributions secondary (employer) threshold, and the income tax personal allowance, and how these were calculated, was published at the June Budget [1] . The assessment of direct costs was scrutinised and certified by the Office for Budgetary Responsibility. Similar methods were used to estimate the yield from increasing National Insurance Contributions rates, and the cost of increasing the primary (employee) National Insurance Contributions threshold.

5. These estimates of future costs are subject to some uncertainty.

6. The estimated direct yields from these measures are summarised in the following table (policy costings do not include indirect behavioural effects, which are captured in the Office for Budgetary Responsibility’s economic forecast).

Administrative Impact

7. Systems are in place to cope with annual changes to rates and thresholds. We do not expect any significant administrative costs to arise, either for employers or for HM Revenue and Customs, as a result of these changes. Employers have had more than a year’s notice of the rate rises.

Numbers affected

8. Associated estimates of impacts of the package are:

· about 880,000 individuals with income below £7,475 will no longer pay any income tax;

· about 950,000 low earners will no longer pay any National Insurance Contributions;

· the number of employees for whom employers pay no National Insurance Contributions will rise by about 650,000;

· about 12m individuals earning under £20,000 will see their National Insurance Contributions bills reduced;

· about 22m basic rate taxpaying individuals will see the amount they pay overall in income tax and National Insurance Contributions reduced, whereas for around 5m individuals, this amount will increase.

Impact by salary level

9. The estimated direct impact of changes in National Insurance Contributions and income tax on employees by salary level in 2011-12 is shown in the table below (for the case where the employee pays the standard rate of National Insurance Contributions and receives all income from a single employment). The comparison is with what the position would have been in 2011-12 without the increases in National Insurance Contributions rates and wider package of measures described at paragraphs 2 and 3 above. Relative to the plans for 2011-12 inherited by the Government, basic rate taxpayers would be better off as a result of the increase in the personal allowance.

10. The direct impact of the package on employers by salary level of the employee in 2011-12 is shown in the table following. Relative to the plans for 2011-12 inherited by the Government, employers are better off by £150 for every employee earning above the threshold.

Other Impacts

11. Analysis of the distributional impacts show that the NICs rate increases and wider measures will not have a negative impact on gender inequality. For those affected by the changes, female taxpayers have a higher average benefit and total tax liabilities for women will be reduced (as proportionally more female taxpayers fall in the lower end of the income distribution). Our analysis suggests that the measures also do not impact disproportionately on those above the State Pension Age.

Holiday

Exchequer Yield

12. Information on the estimated cost to the Exchequer of the regional employer NICs holiday and how it was calculated was published at the June Budget [2] and is reproduced for convenience in the Annex to this memorandum. The assessment of direct costs was scrutinised and certified by the Office for Budgetary Responsibility (policy costings do not include indirect behavioural effects, which are captured in the Office for Budgetary Responsibility’s economic forecast).

13. There are no direct precedents for targeting National Insurance Contributions in this way. The estimates of impact, which include some behavioural effects, are subject to some uncertainty. They are being reviewed in the light of early information on how the scheme is operating.

Administrative Impact

14. Information on the impact of the measure on the administrative costs of business and government appears in the Impact Assessment. This estimates the present value of total costs to benefiting businesses as £70m over the period of the measure; since it is temporary there is no long term impact. Bearing in mind the scale of administrative costs relative to the level of benefit enjoyed by qualifying businesses, these costs are not expected to inhibit take up of the scheme materially. The Impact Assessment estimates costs to HM Revenue and Customs of administering the scheme over its lifetime at £12m.

Estimated number of potentially eligible businesses by country and region

15. The table below shows the estimated distribution of costs between qualifying countries and regions, plus illustrative distributions of the potential numbers of new businesses eligible and employees affected by country and region based on the estimated cost shares.

Other Impacts

16. An initial screening of the race, disability and gender equality tests showed there would be no significant negative impacts. The scheme will not impact negatively on any communities or groups, and the policy will not contribute to equality or inequality.

Annex: Employer NICs holiday for new businesses in targeted regions policy costing

Measure description

The measure will mean that new businesses set up in certain regions in a three year period will be eligible for a holiday from Employer National Insurance Contributions. The costings assume the regions included are Scotland, Wales, Northern Ireland, the North East, Yorkshire and The Humber, the North West, the East Midlands, the West Midlands and the South West, and that the scheme will run from September 2010. The holiday applies to the first ten employees hired in the first 12 months of the business and for a maximum of 12 months from the time the individual is hired. A cap of £5,000 per employee is placed on employer relief available through the holiday.

The tax base

The primary data sources for estimating the size of the tax base the measure applies to relate to new business volumes and wages:

· the latest complete Corporation Tax returns data (2007-08) showing the number of companies incorporating and active in 2006-07, and IDBR data showing the numbers of sole traders and partnerships with employees who set up PAYE schemes in 2007-08;

· IDBR data showing the number of employees associated with new businesses for the above periods; and

· estimates of mean salaries paid to employees in new businesses informed by Annual Survey of Hours and Earnings data and analysis of PAYE year end data for new PAYE schemes in 2006-07.

To estimate the size of the tax base over the costings period, numbers of new businesses and employees are assumed to grow in line with recent trends in Companies House incorporation statistics, with a separate adjustment to exclude incorporations of existing businesses. Salaries of employees are assumed to grow in line with the June Budget economic forecasts for average earnings.

Static costing

The static Exchequer impact is calculated by estimating new UK business employer NICs that would have been due under the pre measure tax regime to the tax base data described above. The share of such costs relating to the countries and regions included in the holiday is estimated using Survey of Personal Incomes data for 2007-08, projected using June Budget economic forecasts. A separate adjustment is made to take account of estimated pre measure per employee liabilities above the £5,000 cap. This results in the following costing which is presented on a National Accounts basis:

Table 1 – Pre-behavioural Exchequer impact (£m)

Post-behavioural costing

The only behavioural effects included in the costing relate to possible general changes to the microstructure of businesses in response to the measure.

These behavioural responses are difficult to quantify, but the costing allows for additional Exchequer costs of around £40 million across the scorecard period.

Table 2 – Post-behavioural Exchequer impact (£m)

The policy costings do not include indirect behavioural effects, which are captured in the OBR’s economic forecast.

November 2010