House of Lords - Explanatory Note
Child Support, Pensions And Social Security Bill - continued          House of Lords

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852. Currently, employees pay primary Class 1 National Insurance contributions (NICs) on all cash earnings they receive between the Lower Earnings Limit* (LEL) and the Upper Earnings Limit* (UEL). Employers pay secondary Class 1 NICs on all cash payments above the earnings threshold (equal to the Single Person's Tax Allowance) which they pay to employees with no UEL applying. Non-cash benefits are excluded in regulations from the computation of earnings subject to Class 1. But some, such as bonds and gemstones, are brought back into a Class 1 NICs charge. Employers also pay Class 1A NICs - at a rate equivalent to the Class 1 secondary rate - on the value of car and fuel benefits which are provided to their employers for their private use. Employees pay no NICs on such benefits.

Clause 73: Contributions in respect of benefits in kind (Great Britain)

853. This clause enables all taxable benefits not yet subject to NICs to be brought within a Class 1A NICs charge.

854. Subsection (1) makes a change to section 1(2)(b) of the Social Security Contributions and Benefits Act 1992* (the "Contributions and Benefits Act") to reflect the fact that the Class 1A charge will no longer apply to car and fuel benefits.

855. Subsection (2) replaces section 10 of the Contributions and Benefits Act, which sets out the existing Class 1A charge, with a new section 10.

New section 10: Class 1A contributions: benefits in kind etc.

856. New section 10(1) defines the circumstances when a Class 1A contribution is due. An earner receives an emolument which is chargeable to tax under Schedule E from employed earners' employment to which Chapter II, Part V ICTA applies - i.e. the earner is a director or earns £8,500 per year or more. As all or some of the emolument received is exempted from, or not liable to, Class 1 NICs, then Class 1A NICs are due.

857. New section 10(2) and (3) provides that the person liable to pay the Class 1A NICs (usually the employer) is also the person who is liable to pay secondary Class 1 NICs in that tax year - or would be if there were any earnings liable to Class 1 NICs.

858. New section 10(4) provides that the amount of Class 1A due is the amount of the emolument not subject to Class 1 - as per subsection (1) - multiplied by the Class 1A rate for the tax year.

859. New section 10(5) provides that the rate for Class 1A is the same as that for secondary Class 1 NICs.

860. New section 10(6) provides that Class 1A is not due on any emoluments which have been included in a PAYE Settlement Agreement for tax and NICs purposes.

861. New section 10(7) provides that, for section 10 only, the emolument subject to Class 1A shall amount to the valuation of the benefit for tax purposes.

New section 10(7)(a) disapplies reliefs or allowances which, for income tax purposes, the employee may be able to claim against their tax under ICTA sections 198, 201, 201AA or 332(3), which allow deductions for certain types of expenses. These will not affect the valuation for Class 1A NICs purposes where the benefit is provided partly for business and partly for private use.

New section 10(7)(b) excludes from Class 1A charge those benefits where the whole amount of the emolument would be deductible for tax because it has been provided wholly for business purposes. An example would be a fax machine provided only for use when engaged in the employed earner's employment.

862. New section 10(8) provides regulation-making powers for the Treasury to amend the effect of 10(7). It will allow, should this be needed, the matching by regulations of any alterations to relevant tax legislation. For example, if a new ICTA section introduced a new relieving provision which needed to be included for the coherence of the Class 1A NICs scheme this could be done in regulations.

863. New section 10(9) provides regulation-making powers for the Treasury to exempt certain persons or types of emolument from Class 1A liability or reduce Class 1A liability. The Government anticipates using these powers, for example, to mirror items already exempted from Class 1 NICs, such as certain forms of training; or to reduce liability where the cost of providing a benefit is split between more than one company.

864. Subsection (3) of clause 73 introduces new subsection 4(6) of the Contributions and Benefits Act. This provides regulation-making powers for the Treasury to treat any amount, which is the value of a benefit subject to Schedule E tax, as earnings from employed earner's employment. As such, it will maintain the existing use of the power in subsection 4(6) in relation to the provision of conditional and convertible shares. It further allows the Treasury to prescribe the time and manner in which the earnings are to be treated as being paid.

865. An example of how this power could be used is to prescribe that where an employee buys or obtains goods or services by use of a company credit card which are immediately transferred from the company to that individual the amount involved in the purchase shall be liable to Class 1 NICs. Also, it would permit future alignment of the tax and NIC treatment of payments to employed earners. For example, it is possible that this power may be used to mirror in NIC legislation the tax provisions relating to the new all-employee share plan, proposed in the 1999 Budget.

866. Subsections (4) to (6) make consequential changes to existing legislation.

867. Subsection (7) provides that the Class 1A charge shall come into effect from 6 April 2000 to match the beginning of the tax year 2000-2001.

868. Subsection (8) provides that statutory instruments made under any of the powers in the new section 10 may be backdated to the beginning of the tax year in which they are made. This will allow the details of the Class 1A charge to become operative from the beginning of the tax year. This provision is likely only to be used in future years to mirror a change in tax legislation in a Finance Bill for that year.

Clause 74: Third party providers of benefits in kind: Great Britain

869. Clause 70 concerns the provision of benefits in kind (BIKs) to employees by somebody other than their own employer - a third party. The new measure only operates where the employer has not arranged or facilitated the provision of the BIKs.

870. In the case of a third party provider, the term "benefits in kind" includes non-cash vouchers, which will be moved from a Class 1 to a Class 1A NICs liability in regulations.

871. The clause moves the liability for Class 1A NICs on third party provided BIKs from the employer to the third party.

872. On Royal Assent this provision takes retrospective effect to 6 April 2000. In the first year the third party may choose to meet the Class 1A liability on BIKs he provides. From 6 April 2001 the Class 1A liability becomes compulsory on the third party provider.

873. Subsection (1) introduces new sections 10ZA and 10ZB into the Contributions and Benefits Act.

New section 10ZA: Liability of third party provider of benefits in kind

874. New section 10ZA(1) lists the elements necessary for this measure to take effect. The employee or a member of his family must receive a taxable emolument that attracts a Class 1A charge under the new section 10; the BIK is provided by someone other than the employer; and the employer has not arranged or facilitated the provision.

875. New section 10ZA(2) provides that where the third party also pays a sum to meet the employee's tax liability on the BIK, that payment also is subject to Class 1A NICs, rather than Class 1 as it would be if he employer had paid it.

876. New section 10ZA(3) moves the liability for the Class 1A NICs on the relevant benefit and any associated tax from the employer and onto the third party, except in the circumstances in subsection (4).

877. New section 10ZA(4) provides that for the tax year commencing 6 April 2000 the third party needs to elect to pay the Class 1A NICs and notify the Revenue in writing.

878. New section 10ZA(5) gives the Treasury power to prescribe in regulations the exact meaning of "arranged or facilitated".

879. New section 10ZA(6) defines members of an employee's family as carrying the same meaning as in s.168(4) ICTA.

New section 10ZB: Non-cash vouchers provided by third parties

880. This section applies where the third party provider is awarding non-cash vouchers, as defined in section 141 of the Income and Corporation Taxes Act 1988 (ICTA).

881. New section 10ZB(2) provides that a Class 1A NICs charge is liable on all vouchers provided to employees by third parties no matter whether they earn over the £8,500 limit set for other benefits or below that level.

882. Subsection (2) of clause 74 inserts a new subsection 3A into 110ZA of the Social Security Administration Act 1992. This includes the premises of third party providers in the list of premises liable to inspection by Revenue officers.

883. Subsection (3) brings new section 10ZA into force from 6 April 2000 on Royal Assent.

884. Subsection (4) allows any regulations made under the power in new section 10ZA to be retrospective back to the commencement of the tax year in which they are made.

Clause 75: Collection etc. of NICs: Great Britain

885. Currently the payment of Class 1A National Insurance contributions may be made by one of two methods - via the Inland Revenue Pay As You Earn (PAYE) system, or direct to the Inland Revenue National Insurance Contributions Office. With the extension of Class 1A to all taxable benefits, there will be a new single payment and collection method. Employers will make one annual return for their Class 1A to the Accounts Office where they already send their PAYE payments, accompanied by a separate payment slip.

886. This clause makes minor amendments to current legislation to support the operation of the new method. The detail of the new payment method will be in regulations.

887. Subsection (1) explains that the following subsections (2) to (5) make amendments to Schedule 1 to the Contributions and Benefits Act.

888. Subsection (2) amends paragraph 7(2)(b) to include the application of section 5 of the Taxes Management Act 1970 (evidence in cases of fraudulent conduct), in relation to certain penalties. This brings the PAYE payment method (for payment mostly of Class 1 contributions) and the new Class 1A payment method into alignment.

889. Subsection (3) substitutes a new paragraph 7B(2)(e) to provide for regulations to determine the date from which interest is to be calculated, in cases where a Class 1A contribution is not paid by the due date. This aligns with the wording in paragraph 6, which relates to NICs collected with PAYE tax.

890. Subsection (4) inserts a new sub-paragraph (5A) into paragraph 7B, which provides for regulations to be made which may apply provisions contained in Part X (Penalties, etc.) of the Taxes Management Act 1970.

891. Subsection (5) inserts a new paragraph 7BA which provides for regulation-making powers to prescribe the circumstances under which a payment or repayment of contributions or interest due to a person under Schedule 1 may be offset against any other contributions liabilities which the person may have. For example, a Class 1A overpayment might be offset from a secondary Class 1 liability.

892. Subsection (6) removes paragraph (1)(j) from section 8 of the Social Security Contributions (Transfer of Functions etc.) Act 1999. This removes from the list of decisions by officers of the Board of Inland Revenue the question of liability to pay interest under paragraph 7B(2)(e) of Schedule 1. The application of interest to late paid Class 1A contributions will apply automatically, as it does for tax and Class 1 contributions collected with PAYE tax.

893. Subsection (7) provides that the effect of subsection (6) is only in relation to interest which accrues on Class 1A contributions due in respect of the tax year beginning 6th April 2000 and subsequent years (meaning, therefore, Class 1A contributions due under provisions in the new section 10 of the Contributions and Benefits Act (see clause 73(2) above).

Clause 76: Contributions in respect of benefits in kind (Northern Ireland).

894. This clause mirrors the provisions in clause 73 for Northern Ireland.

Clause 77: Third party providers of benefits in kind: Northern Ireland

895. This clause mirrors the provisions of clause 74 for Northern Ireland

Clause 78: Collection of NICs (Northern Ireland)

896. This clause mirrors the provisions in clause 75 for Northern Ireland.



Clause 79: Tests for determining parentage and Clause 80: Declarations of status are described in Part 1 of these notes covering the Child Support measures.


Clause 81: Expenses

897. This clause authorises expenditure incurred under this Bill and any increase in expenditure incurred under any Act in so far as that increase is attributable to any provision of this Bill.

Clause 82: Repeals

898. This clause gives effect to Schedule 9, which repeals certain existing legislation as a consequence of the measures in the Bill.

  • Part I of the Schedule (Child Support): see commentary on Part I of the Bill;

  • Part II of the Schedule (occupational and personal pension schemes): see commentary on Part II, Chapter II of the Bill;

  • Part III of the Schedule (War Pensions): see commentary on Part II, Chapter III of the Bill;

  • Part IV of the Schedule (loss of benefit): see commentary on clauses 61 to 65 (loss of benefit for breach of community service order);

  • Part V of the Schedule (Investigation Powers): see commentary on Schedule 6 (Investigation Powers);

  • Part VI of the Schedule (Housing Benefit and Council Tax Benefit): see commentary on clauses 67 to 69;

  • Part VII of the Schedule (NICs in respect of benefits in kind: Great Britain (1) and Northern Ireland (2)): see commentary on Part IV of the Bill;

  • Part VIII of the Schedule (Tests for determining parentage and declarations of status): see commentary on clauses 79 and 80 (following clause 15).

Clause 83: Commencement and transitional provisions

Commencement provisions

899. This Bill introduces a large number of measures, not all of which will come into force at the same time. Subsections (2) and (3) provide for the provisions listed in subsection (1) to be brought into force, possibly on different days and for different purposes, by order made by the Secretary of State or, in the case of provisions specified in subsection (3)(b), by the Lord Chancellor. Subsection (4) provides that for the measures relating to Child Support, other than clause 24 (which removes the requirement for the CSA to complete periodical reviews), and the reduction and withdrawal of benefit (clauses 61 to 65) this power also includes the power to pilot the measures by bringing the provisions into force on different days in different areas. Those measures which are not specified in, or excepted from, subsection (1) will come into force on Royal Assent.

Transitional provisions

900. Subsection (5) provides the power to make any necessary transitional arrangements in relation to the measures on selection of trustees and of directors of corporate trustees, and on Housing Benefit and Council Tax Benefit revisions and appeals and discretionary housing payments. Subsection (6) provides that regulations made under subsection (5) are to be made by negative instrument, and subsection (7) enables the regulations to (among other things) make different provision for different classes of cases, impose conditions or create exceptions.

Clause 84: Short title and extent

901. The measures in the Bill will apply throughout Great Britain. This clause sets out which of the provisions of the Bill will extend to Northern Ireland. The provisions specified in subsection (2) are concerned with

    (a) an amendment of a provision about member nominated trustees which itself extends to Northern Ireland;

    (b) War Pensions;

    (c) consultation with the Social Security Advisory Committee about regulations relating to disclosure of state pension information, loss of benefits, Housing Benefit and Council Tax Benefit revisions and appeals and discretionary housing payments;

    (d) liability for Class 1A National Insurance Contributions in Northern Ireland, and collection of contributions there;

    (e) consequential amendments made in Schedule 3 in Acts which extend to Northern Ireland;

    (f) calculation of the contributions equivalent premium in Northern Ireland; and

    (g) this clause, and the provision for expenses and commencement etc. in this Part of the Bill, and repeals in Acts which apply in, or extend to, Northern Ireland.


902. The Schedules are described in the main commentary after the introducing clause, where explanation is required.





Substituted Part 1 of Schedule 1 to the Child Support Act 1991(calculation of child support maintenance)

Clause 1


Substituted Schedules 4A and 4B to the Child Support 1991 Act (variations)

Clause 6


Amendment of enactments relating to child support

Clause 26


Additional pension

Clause 31


Pensions: miscellaneous amendments and alternative to anti-franking rules

Clause 55


Social Security investigation powers

Clause 66


Housing Benefit and Council Tax Benefit: revisions and appeals

Clause 67


Declarations of status: consequential amendments

Clause 80



Clause 82



903. The financial effects of the measures in this Bill are set out below. They are in April 1999 prices and represent current best estimates. In some cases these are inevitably broad, indicative figures only.

904. The measures which have the most significant financial effects are:

  • Child Support reform;

  • the introduction of the State Second Pension;

  • the change in the rules for "inherited" SERPS;

  • the provision of combined pension forecasts (with respect to administrative costs); and

  • the extension of Class 1A National Insurance Contributions to benefits in kind not already subject to a charge.

905. The impact of the remaining measures is relatively minor.

Start-up costs

906. Overall start-up costs are estimated to be approximately £138m in total. Of this total, around £100m is for reform of the Child Support scheme (excluding the cost of payments made under the Private Finance Initiative in respect of a new computer system), approximately £32m is for preparing for the introduction of State Second Pension and £6m is for setting up the combined pension forecasting service.

Ongoing administration costs

907. Ongoing running costs will increase by an estimated £24.5m per year in total. This breaks down between the individual measures as follows:

  • Child Support £4.2m

  • National Insurance Contributions £4.5m

  • State Second Pension £5m

  • Combined pension forecasting £9.25m

  • War Pensions £1m

  • Community Sentences (when rolled-out nationally) £0.6m.

908. In the case of Child Support, it is anticipated that in the medium to longer term there will be a reduction in administrative running costs, on a case-by-case basis as a result of the simpler system. No significant increase in running costs as a result of the remaining measures has been identified.

Benefit expenditure

909. In the initial years (2000-01 to 2003-04) it is estimated there will be a cumulative increase in benefit expenditure of around £730m. The increase is due to the measure to defer implementation of the change to inherited SERPS to October 2002, offset by a decrease in expenditure of around £20m in 2000-02 to 2002-03 due to the Child Support reforms. None of the other measures are expected to have a significant impact on programme expenditure in the short term.

910. In the long run, the benefit expenditure costs of the Bill are estimated to rise overall, due to the additional benefit costs of the State Second Pension, estimated at £6.2 bn a year. The cost of other measures is expected to be negligible by comparison (the cost of the deferral element of the inherited SERPS measure is expected to peak in 2003-04 and will have declined to around £2m by 2050).

911. The reduction in benefit expenditure attributable to the Child Support reforms will fall to the Consolidated Fund, while the costs of the SERPS change and the State Second Pension falls on the National Insurance Fund (NIF).

Revenue effects

912. In addition to the benefit expenditure effects falling on the NIF, the measures in this Bill also cause a net reduction in the NIF revenue. The National Insurance Contributions measures are estimated to increase revenue by £225m. Most of this will go to the NIF, but a small part is allocated to the National Health Service. However, the increase in contribution income to the NIF is more than offset by additional rebate costs from the introduction of State Second Pension. It is estimated that in 2002-03 there will be a net reduction in National Insurance Contribution revenue, including that part allocated to the NHS, in the order of £0.1bn and around £11.8bn by 2050.

Child Support

913. The new child support arrangements introduced by this Bill are expected to begin to operate by April 2002. This allows time to implement the changes to the operating procedures and the Department's computer systems that the arrangements will require. The new rules will apply first to new cases. Parents with an existing liability will be transferred at a later date, when it is clear that the new system is operating effectively, and there will be a five-year transition period as liabilities are phased to the new rates.

914. It is estimated that the proportion of lone parent families receiving maintenance while on Income Support (IS) will at least double by 2006-07, and the proportion of maintenance due which is collected will increase from around two-thirds to three-quarters or more by 2003-04. Overall, the reforms are expected to result in reduced IS and Jobseeker's Allowance (JSA) expenditure over the first five years of the scheme by approximately £370m. Annual savings are expected to reach £110m in the fifth year.

915. The introduction of the child maintenance premium for existing cases will, however, increase benefit expenditure during the same period by £65m in a full year. The simpler system of rates is also expected to result in lower average liabilities (for example, a non-resident parent currently liable to pay £38 a week on average could expect to pay an average of £30.50 if the system were in place today). This will result in an additional cost of around £5m in 2006-07 for existing cases.

916. Taking account of these factors, the overall effects of the reform are expected to result in cumulative programme savings of approximately £100m during the first five years. Annual savings are expected to reach £40m in the fifth year (2006-07).

917. The reduction in spending over the first five years is broadly expected to cover the expenditure needed to pave the way for reform, restructuring the Child Support Agency (CSA) and investing in staffing - estimated at around £100m by 2002. The estimated increase in ongoing running costs, previously around £3.5m, has risen to £4.2m following a re-examination of the cost of administering the Child Support premium.

918. There will be additional costs associated with the modernisation of the child support system. These will arise both from introducing a new computer system and other infrastructure improvements designed to support better customer service. The contract to provide the new system will be let under Private Finance Initiative terms. The Department is currently in talks with the preferred supplier, the Affinity Consortium.

State Second Pension

919. In the first two years after implementation, the State Second Pension is not expected to increase existing estimates of expenditure for the State Earnings Related Pension Scheme (SERPS). In the third year, 2004-05, it will result in a negligible increase to estimates of expenditure. Entitlement to additional pension under the State Second Pension will take some time to build up from when it is introduced (for example, assuming a start date of 2002, very few carers of pre-school age children who will benefit from the State Second Pension will reach state pension age before 2020). Assuming that everyone earning over £9,500 has contracted-out of the State Second Pension by 2030, the additional benefit expenditure, including the top-ups, is estimated at £6.2bn a year by 2050. This takes account of savings on income-related benefits as more people are lifted off means-tested benefits in retirement. The increase in benefit costs falls on the National Insurance Fund (NIF).

920. The increase in rebates will also fall on the NIF. The additional revenue forgone in rebate terms for the first three years is £0.4/£1.1/£1.4 bn, rising to £12.1 bn in 2050.

921. The administrative set up costs are estimated to be £25m by the end of 2001-02. In 2002-03, it is estimated that there will be further set-up costs of £7m and initial running costs of £5m. The set up costs are mainly due to IT development costs, in particular, changes to the National Insurance Recording System (NIRS2), with additional expenditure going on items such as staff training, publishing and helpline costs.

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Prepared: 6 April 2000