National Insurance Contributions Bill

Written evidence submitted by the Low Incomes Tax Reform Group (NI 01)

1. Who we are

1.1 The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes. Everything we do is aimed at improving the tax and benefits experience of low income workers, pensioners, migrants, students, disabled people and carers.

1.2 LITRG works extensively with HM Revenue & Customs and other government departments, commenting on proposals and putting forward our own ideas for improving the system. Too often the tax and related welfare laws and administrative systems are not designed with the low-income user in mind and this often makes life difficult for those we try to help.

1.3 The CIOT is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

2 Executive summary

2.1 Because of the nature of the taxpayers we represent, our comments relate solely to the Class 2 NI aspects of the Bill.

2.2 There are six aspects of the changes to the regime applying to Class 2 NI to which we wish to draw the Committee’s attention.

· The payment of Class 2 NI liabilities. Currently many taxpayers choose to pay these charges monthly: for the lower paid this enables strict budgeting to take place. We consider it essential that a proper budgeting arrangement is put in place before this legislation is implemented, co-ordinated with an improved budget plan for paying self-assessment income tax.

· Building up entitlement to state benefits (including the state pension, in particular) for lower paid workers. The proposed change to the way a taxpayer "elects" out of paying Class 2 NI contributions, due to low profits, may lead to more taxpayers opting out of these contributions and so reducing their entitlement to state benefits. Ultimately this is likely to create a greater dependence on state benefits in the future. We are anxious to ensure that the effect of not paying these contributions is properly communicated.

· Protecting the rights of foster carers and shared lives carers. At the moment, these individuals, who play a crucial role in our society, are able to pay Class 2 NI contributions in order to build up entitlement to state benefits while for income tax purposes they are accorded generous allowances which generally leave them with no taxable profit from their caring activities. We are concerned that the definition of "worker" is not sufficiently wide to enable them to continue making Class 2 NI contributions on the same basis.

· Interaction with Universal Credit. The number of self-employed people has increased markedly since 2008 and now stands at around 4.5 million [1] . For many of these individuals, the profits from their self employment will be inadequate for their families’ needs and claims to Universal Credit will follow. There is a danger that aggregating Class 2 NI payments into the self assessment payments regime may increase the number of taxpayers falling foul of the Minimum Income Floor – a device that assumes a minimum income for Universal Credit purposes and so restricts payment of that credit. Since there is a higher proportion of disabled people in the self employed population as opposed to the population as a whole, so we are concerned that they will be disproportionately affected.

· Entitlement to other benefits. Some benefits are payable based on Class 2 NI contributions paid within the previous few years. This proposal defers the payment date of these Class 2 NI contributions so that many more taxpayers would have to pay "catch up" contributions in order to be eligible to claim benefit – this at a time when many of them may be facing financial hardship in any case.

· Communication and transitional arrangements. With the new system being due to commence from April 2015, communication to the self employed population is crucial in order to avoid further confusion.

2.3 Our colleagues at the Chartered Institute of Taxation are responding separately and in detail about other aspects of this Bill.

3 The payment of Class 2 liabilities

3.1 We note that more than one half of self-employed individuals were paying their Class 2 NI contributions by direct debit, either monthly or quarterly. Approximately 1.4 million taxpayers paid these liabilities by way of a monthly direct debit – possibly for many of whom monthly budgeting is easier and essential.

3.2 The Bill proposes that Class 2 contributions be payable at the same time as the final instalment of income tax and Class 4 NI contributions for a tax year on 31 January following the end of that tax year. While we appreciate that this may be easier to understand, since payments of Class 2 NI will be made at the same time as other liabilities, for those with a tight budget making a larger payment might prove difficult. Monthly contributions are approximately £11, but a payment of over £100 would be required at the end of January under these proposals – on top of the other liabilities due at that time. For those on the lowest incomes, making such a large payment after Christmas may prove impossible. There are also implications for interactions with Universal Credit, as discussed below.

3.3 We note that paragraph 24 of Annex A of the Explanatory Notes to the Bill makes reference to an ability to "make in year payments". With respect, this is not the same as the current system that collects a large proportion of Class 2 NI by direct debit.

3.4 We consider it essential that a structured, well-publicised, monthly payment system is fully functional before these changes are implemented to protect both the lower paid and vulnerable, but also the Exchequer. It is also essential (see point 4.5 below) that both the taxpayer and HMRC can establish precisely whether a payment is towards a liability of Class 2 NI or payment of another tax/NI liability. This will be the case, in particular, where a taxpayer has a tax debt. Under the current system where Class 2 NI contributions were paid by direct debit, it would be clear what the payments were.

3.5 There are two methods available to taxpayers at the moment who struggle to pay their tax bills in lump sums: Time to Pay arrangements and Budget Payment Plans, the main features of which are noted below.

3.6 Time to Pay arrangements are available on a discretionary basis (subject to satisfying various conditions) where a taxpayer recognizes, before a debt falls due, that he will be unable to pay the full amount by the due date. The full liability is paid over a number of months while all other tax liabilities are paid as they fall due.

3.7 Budget Payment Plans are available to self assessment taxpayers, but again where the taxpayer recognizes in advance that he will be unable to pay the full liability. A direct debit is normally set up from the taxpayer’s account. We are aware that some taxpayers use this facility to pay their liabilities "in advance" so that they are fully paid by the due date. A more flexible extension of this facility would be welcome, enabling self-employed people to set aside larger sums, say, on completion of a contract.

3.8 The HMRC website publicizes these arrangements as facilities for taxpayers who will be unable to pay their full liability on the due date, possibly resulting in a temptation to delay contacting HMRC as long as possible. Instead, what we would like to see is a facility whereby taxpayers are encouraged to pay "on account" of their liability on a regular basis – without being tied into a fixed amount each month. Those who already pay by direct debit could then continue – and top up when they were able.

3.9 Further, we strongly recommend that any new budget plan is available to all taxpayers, irrespective of whether they already have tax debt, although we accept that separate arrangements may be put in place to collect tax debt. By enabling regular "saving" towards tax liabilities, so tax debt might be reduced.

3.10 A final thought is that these proposals defer payment of Class 2 liabilities from the current position. In our response [2] to the Consultation Document: Simplifying National Insurance Processes for the Self-Employed, we suggested that instead the contributions were collected in two instalments – at 31 January in the tax year and 31 July following the tax year. Any adjustments could then be made by 31 January following the tax year or when the individual’s tax return was lodged.

4 Building up entitlement to state benefits

4.1 Payment of Class 2 NI contributions counts towards several state benefits including the state pension, maternity allowance and employment support allowance (ESA).

4.2 In order to qualify for the state pension, for example, an individual needs to have paid (or been credited with) sufficient NI contributions in a tax year – 52 weekly contributions for Class 2 NI purposes. That tax year then becomes a year that can be counted to establish the quantum of the pension upon retirement. Eligibility for both maternity allowance and ESA is dependent upon contributions paid almost immediately prior to the claim being made.

4.3 This requirement causes problems, not least because the "year of claim" is effectively based on a calendar year, whereas a tax year runs from 6 April to 5 April. Thus in order to claim ESA in January 2017, the Class 2 NI for the tax year 2015/16 would not be due to be paid until 31 January 2017 – so a claim would not be allowed, if the Class 2 NI had not been paid. In this case the individual would be given the opportunity (at a time when he was not working, just after Christmas) to pay the contributions early (see further at point 4.5 below).

4.4 The position for a woman claiming Maternity Allowance has similar, but more significant issues. In order to claim benefit, she needs to have paid Class 2 NI contributions for at least 13 weeks of the last 66 weeks before the due date of birth. For a baby due in July 2016, her 66 week period takes her back to the tax year 2015/16. Under these proposals, Class 2 NI contributions for that year would not be due until 31 January 2017. Again, in this situation she would be given the opportunity to pay the contributions early.

4.5 In both the case of ESA and maternity allowance under these proposals, the ability to pay contributions earlier via a proper budgeting facility that distinguishes between Class 2 NI and other liabilities would ease the burden at a time when these individuals are financially (if not otherwise) vulnerable.

4.6 The Small Earnings Exception (SEE) applies to earners with profits of less than £5,885 for the tax year 2014/15. This relieves workers of the need to pay Class 2 NI contributions for that year, although to do so might deprive them of certain state benefits. While we accept that the SEE is poorly understood and may cause significant administration work for HMRC, we believe much of the confusion is the result of inadequate communication.

4.7 We understand that at the moment, of those with profits less than the SEE limit, and who are paying Class 2 NI contributions, around 40% would not otherwise be paying or be credited with NI contributions. This is a sizeable minority who must be given a clear way to opt in to paying contributions, as they do now.

5 Interaction with Universal Credit (UC)

5.1 A taxpayer (or couple, but we will simplify and deal with a single taxpayer) may be entitled to UC for a month, depending on his income for that month. Leaving aside issues of inconsistencies between how that income might be determined for income tax and UC purposes, the "income" figure that is used for UC purposes is calculated broadly taking profits for that period less any income tax, Class2 or Class 4 NI paid in the period as well as pension contributions paid.

5.2 If the resultant income figure falls below a figure known as the Minimum Income Floor (MIF), then the individual’s income is instead deemed to be the MIF. Broadly the MIF is a set amount of income, dependent on the individual’s circumstances, less "an amount that the Secretary of State considers appropriate to take account of any income tax or national insurance contributions for which the person would be liable in respect of the assessment period if they had earned income of that amount." [3]

5.3 Placing the full liability for Class2 NI into one month does two things – it means that an individual’s UC income will be higher for those months when no Class 2 is paid, but considerably less for the month when the Class 2 contributions are paid, potentially bringing the MIF into play in January when the Class 2 NI is paid – thus receiving little or no deduction for the whole year in respect of their Class 2 NI liability since any "loss" may not be carried forward.

6 Protecting the rights of foster carers and shared lives carers

6.1 Foster carers, kinship carers and shared lives carers (after this we shall refer to qualifying carers) provide a service for some of the most vulnerable members of society.

6.2 Such carers are paid an allowance and are generally treated as self employed for tax purposes. Accordingly, they are liable to pay Class 2 NI contributions – that in turn builds up their entitlement to certain state benefits. For income tax purposes there are special provisions that mean, in many cases, that no tax falls due on the qualifying care receipts.

6.3 The Bill proposes a change to the definition of self-employed. The new legislation (Schedule 1, para 3) reads "This section applies if an earner is in employment as a self-employed earner in a tax year (the "relevant tax year")." It would appear that the intention was to include all earners who are liable (subject to profits limits) to Class 4 NI contributions to be included as self-employed for these purposes, but this is not explicit.

6.4 The previous definition was (see Social Security Contributions & Benefits Act 2002, section 11(1)) "Every self-employed earner who is over the age of 16 shall be liable to pay Class 2 contributions at the rate of [£2.75] a week, subject to the provisions of this section and sections 12 and 19(4)(b) below."

6.5 The difference is that the new definition requires the earner to be "in employment as a self-employed earner" rather than simply a self-employed earner.

6.6 The new legislation does allow "voluntary" Class 2 contributions to be made but still requires the contributor to be in employment.

6.7 We seek assurance that this new wording will not prevent qualifying carers from being classified as self-employed earners and suggest that this is made explicit. Although carers could instead pay Class 3 NI contributions, those contributions are considerably more expensive – currently £13.90 per week as opposed to £2.75 for Class 2 NI.

7 Communication and Transitional Arrangements

7.1 The new legislation is due to be implemented from April 2015 (the start of the 2015/16 tax year).

7.2 HMRC recognized in its Consultation Document: Simplifying the National Insurance Processes for the Self-Employed [4] that "the current system can be confusing for some customers and knowledge about how the current rules and processes operate is patchy." Any change in a system that affects over 4 million taxpayers needs to be properly communicated, especially where it will affect existing direct debit arrangements for many taxpayers.

7.3 Again, we would emphasise that those taxpayers with direct debit arrangements may well be pleased to leave them in place: what is required is a system for dealing with that properly. Leaving these direct debits in place would improve cashflow for the Government as well as reducing the later burden on taxpayers.

7.4 The media of communication also require to be carefully considered. Many low income taxpayers, as well as other vulnerable groups, are digitally excluded [5] . Thus digital communication alone is insufficient. Further, leaflets sent without any prior warning may well be ignored. For such a wholesale change, a bespoke publicity campaign needs to take place. We have already offered our services to HMRC in drafting any such "documents".

7.5 Above, in section 4 above we mentioned the effect of the SEE. Given the importance of the state pension to many people, and the fact that eligibility for a full pension is shortly to be changed so that more "contribution years" will be required to qualify for a full state pension, it is essential that communication on this point is clear. In our opinion referring to a note in another document is insufficient: the effect of claiming the SEE needs to be clearly explained on the face of the tax return.

7.6 No mention has been made of the transitional arrangements and proper communication of these needs to start as soon as possible.

8 Other comments

8.1 We were invited by HMRC to take part in discussions in relation to these proposals and would like to record our thanks for being included in this process.

8.2 HMRC’s officials appear to have listened to many of our concerns and we look forward to working with them further on any implementation issues.

October 2014

Prepared 22nd October 2014