Draft Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014
Draft Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2014
The Committee consisted of the following Members:
† Bray, Angie (Ealing Central and Acton) (Con)
† Bruce, Fiona (Congleton) (Con)
Champion, Sarah (Rotherham) (Lab)
† Dakin, Nic (Scunthorpe) (Lab)
† Djanogly, Mr Jonathan (Huntingdon) (Con)
Dobson, Frank (Holborn and St Pancras) (Lab)
† Field, Mark (Cities of London and Westminster) (Con)
Flynn, Paul (Newport West) (Lab)
† Gauke, Mr David (Exchequer Secretary to the Treasury)
† Hames, Duncan (Chippenham) (LD)
† Hemming, John (Birmingham, Yardley) (LD)
† Jackson, Mr Stewart (Peterborough) (Con)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Jowell, Dame Tessa (Dulwich and West Norwood) (Lab)
Mitchell, Austin (Great Grimsby) (Lab)
† Rudd, Amber (Hastings and Rye) (Con)
† Stewart, Rory (Penrith and The Border) (Con)
Wilson, Sammy (East Antrim) (DUP)
Anne-Marie Griffiths, Committee Clerk
† attended the Committee
Seventh Delegated Legislation Committee
Thursday 27 February 2014
[Sir Edward Leigh in the Chair]
Draft Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014
11.30 am
The Exchequer Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the draft Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014.
The Chair: With this it will be convenient to consider the draft Social Security (Contributions) (Re-Rating and National Insurance Funds Payments) Order 2014.
Mr Gauke: It is a great pleasure to serve under your chairmanship today, Sir Edward, and to move the draft regulations and speak to the draft order. Both statutory instruments relate to national insurance contributions, and I am grateful for the opportunity to debate them together. As a matter of course, I confirm that their provisions are compatible with the European convention on human rights.
The changes to the NICs rates and thresholds covered by the two draft statutory instruments were announced as part of the Chancellor’s autumn statement on 5 December last year. It is worth confirming from the start that the basis of indexation that has been used to calculate the changes is the same as that used for the 2012-13 tax year. In the Budget of 23 March 2011, we announced that from the 2012-13 tax year, the basis for indexation for most NICs rates, limits and thresholds would be the consumer prices index—rather than retail prices index—rate of inflation. That is because the Government believe that the CPI is the most appropriate measure of the general level of prices. The exceptions are the secondary threshold and the upper earnings and upper profits limits.
As the Committee is aware, the statutory instruments contain a level of technical detail, so I shall try to explain them as briefly as I can. The draft Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014 are necessary in order to set the class 1 NICs lower earnings limit, the primary and secondary thresholds and the upper earnings limit for the 2014-15 tax year.
The class 1 lower earnings limit will be increased from £109 to £111 per week from 6 April 2014. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. NICs, however, do not need to be paid by the employee until earnings reach the primary threshold.
The class 1 primary threshold will be increased from £149 per week to £153 per week from 6 April 2014. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment in Budget 2011, this is being increased by RPI from £148 to £153 per week.
From this April, the income tax personal allowance for people born after 5 April 1948 will be increased above indexation by £560 from £9,440 to £10,000. The point at which the higher rate is payable will be increased to £41,865 in the 2014-15 tax year. As I mentioned, the upper earnings limit is not subject to CPI indexation, which is to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid. The upper earnings limit will be increased from £797 to £805 per week from 6 April 2014.
The draft regulations also set the prescribed equivalence of the primary and secondary thresholds for employees paid monthly or annually. There will be no changes to NICs rates in 2014-15. Employees will continue to pay 12% on earnings between the primary threshold and the upper earnings limit and 2% on earnings above that. Employers will continue to pay contributions at 13.8% on all earnings above the secondary threshold.
The draft social security order sets out the NICs rates and thresholds for the self-employed and for those paying voluntary contributions, as well as providing for a Treasury grant. For the self-employed, the order increases the small earnings exception below which the self-employed may claim an exemption from paying class 2 contributions. The exception will rise in April from £5,725 to £5,885 a year.
Many self-employed people choose to pay the contributions in order to protect their benefit entitlement, even though they may claim exemption from paying class 2 contributions. The rate of class 2 contributions for the 2014-15 tax year will rise from £2.70 to £2.75 a week. The rate of voluntary class 3 contributions will also rise from £13.55 to £13.90 a week from the 2014-15 tax year.
The order will also set the profits limits for class 4 contributions. The annual lower profits limit on which those contributions are due will increase from £7,755 to £7,956, in line with the increase to the class 1 primary threshold. At the other end of the scale, the upper profits limit will increase from £41,450 to £41,865 for the 2014-15 tax year. That is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to the class 4 limits will ensure that the self-employed pay contributions at the main rate of 9% on a similar range of earnings as employees paying class 1 contributions at the main rate of 12%. Profits above the upper profits limit are subject to the additional rate of 2%, in line with the 2% paid by employees on earnings above the upper earnings limit.
Finally, we need to ensure that the national insurance fund can maintain a prudent working balance throughout the coming year, which the Government actuary recommends should be one sixth, or two months, of benefit expenditure. The reweighting order provides for a Treasury grant of 5% of benefit expenditure to be made available to the fund in the 2014-15 tax year. Similar provision will be made for the Northern Ireland national insurance fund.
I commend the draft statutory instruments to the Committee.
11.37 am
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Sir Edward.
I shall start with a couple of points in relation to the draft Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. The Minister
has thoroughly explained the technical detail, as we would expect him to do, on how the regulations give legislative effect to the announcement made in last year’s autumn statement on the annual re-rating of class 1 national insurance contributions limits and thresholds.I took the opportunity to look through the debate in the corresponding Committee this time last year to see what words of wisdom were espoused by the Minister and by my hon. Friend the Member for Nottingham East (Chris Leslie). My hon. Friend mentioned last year that an impact note had not been produced for the regulations—indeed since the change in indexation from the retail prices index to the consumer prices index. There was a bit of an exchange and some politicking, which sometimes comes into such debates.
In light of the fact that that question was raised last year, is the Minister able to update the Committee today on the number of additional employees who have been brought into NI contributions since the change? Does he have anything further to say on the impacts of the change from RPI to CPI as they accumulate over time? What assessment has been made of the number of individuals in small firms affected since the change?
The Minister will undoubtedly be aware of the proposal made by the shadow Secretary of State for Work and Pensions’ to pay a higher rate of jobseeker’s allowance paid in the first six weeks of unemployment to people who have paid NI contributions for four or five years. That proposal is currently being explored and further examined by the Institute for Public Policy Research to ensure that it would be cost-neutral and not result in an overall increase in the benefits bill. Does the Minister agree that the contributory social security system should be reinforced? Has he taken any steps to look into that issue?
I have a couple of questions for the Minister regarding the draft Social Security (Contributions) (Re-Rating and National Insurance Funds Payments) Order. The Minister explained that the order gives legislative effect to the announcement made in last year’s autumn statement on the annual re-rating of class 2, class 3 and class 4 NICs, limits and thresholds. That allows for the payment of a Treasury grant not exceeding 5% of the estimated benefit expenditure for the coming tax year to be paid into the national insurance fund. As he said, the regulations make corresponding provision for Northern Ireland.
I was particularly interested to note that the accompanying report from the Government Actuary’s Department said:
“I estimate that the balance in the Fund at 31 March 2015, allowing for the measures proposed in the draft Up-rating and Re-rating and National Insurance Fund Payments Orders, the draft Limits and Thresholds Regulations and the Welfare Orders will be £14.1 billion. As this is lower than one-sixth of estimated benefit payments including redundancy payments…I expect that a Treasury Grant will be needed in 2014-15.”
The last year in which a Treasury grant was required was 1999-2000. Does the Minister expect a Treasury grant to be needed in future years? Are there any plans to have an additional actuarial assessment on the fund’s viability? Is the Treasury making contingency plans for a need to continue the Treasury grant?
11.41 am
Mr Gauke: I thank the hon. Lady for her questions. First, on the consequences of the change to uprating by CPI rather than by RPI, I will provide the numbers. If
the primary threshold had increased by RPI, it would be £156 instead of £153. As a result, an additional 134,000 additional employees will have to pay class 1 NICs in 2014-15. Had the small earnings exception increased by RPI, it would have been £5,955 instead of £5,885. As a result, some 17,000 additional self-employed workers will have to pay class 2 NICs in 2014-15. If the lower profits limit had increased by RPI, it would have been £8,112 instead of £7,956. As a result, some 48,000 additional self-employed workers will have to pay class 4 NICs in 2014-15.It is worth pointing out that the entitlement to contributory benefits has increased as a consequence of moving to uprating by CPI, so there are two sides to that coin, but it is worth reiterating that CPI better reflects the underlying rate of inflation. If the Opposition intend to change the uprating proposals for future years, I am more than willing to listen to those proposals, but I do not believe that such a proposal is on the cards.
The hon. Lady asked for my views on whether the system should be changed to include a greater contributory element and a higher rate of jobseeker’s allowance. I would make the point that if there was an intention to pay a higher rate of JSA for those with a particular contributory pattern, that cost would have to be paid for. That should be borne in mind given the challenge of reducing the deficit. I look forward to hearing fuller proposals from the Labour party as to how such a measure would be paid for.
The hon. Lady also asked about the Treasury grant. Making provision for such a grant has no overall impact on the Government’s finances. It is done primarily for accounting purposes to ensure that the national insurance fund complies with the Government Actuary’s recommendation of maintaining a working balance of one sixth of expected benefit expenditure in the 2014-15 tax year—or, indeed, in future years.
It is worth pointing out the reasons why a grant is required this year, and some of the factors that can apply pressure. For example, the Government have the triple-lock guarantee that ensures that the state pension increases at a faster rate than had we not put it in place. We have also introduced the employment allowance, which is reducing employer NICs receipts but providing a £2,000 boost to small businesses up and down the country. In addition, we are introducing a measure, which will come into effect in 2015-16, such that no employers’ national insurance contributions will need to be paid for under-21s. All those measures are sensible in helping to ensure a job-creating recovery, as well as to protect our elderly. We must consider those policies when looking at the need for a grant for the national insurance fund.
I hope that those points are helpful to the Committee and that it will support the draft regulations unanimously.
Draft Social Security (Contributions) (RE-rating and national insurance funds payments) Order 2014
That the Committee has considered the draft Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2014.—(Mr Gauke.)