|'(1) In subsection (1)(b) of section 4 of the Social Security Act 1975 (incidence of Class 1 contributions), the words "primary Class 1" shall be substituted for the word "such".|
|(2) The following subsections shall be substituted for subsection (6) of that section—|
|5||"(6) Subject to regulations under sections 128 to 132 below and to section 27 of the Pensions Act, the amount of a primary Class 1 contribution shall be the appropriate primary percentage of so much of the earnings paid in the week, in respect of the employment in question, as does not exceed the current upper earnings limit (or the prescribed equivalent in the case of earners paid otherwise than weekly).|
|10||(6A) The appropriate primary percentage is a percentage of the rate specified in subsection (6B) below as the appropriate rate for the primary earnings bracket (or the prescribed equivalent in the case of earners paid otherwise than weekly) into which the earner's earnings fall.|
|15||(6B) Subject to any order under this section or section 122 or 123A below, the 15 primary earnings brackets and their appropriate percentage rates shall be—|
|Weekly earnings||Percentage rate|
|Bracket 1:||current lower earnings limit to £54.99||5 per cent.|
|Bracket 2:||£55.00 to £89.99||7 per cent.|
|20||Bracket 3:||£90.00 or more||9 per cent.|
|6C) Subject to regulations under subsection (7) or sections 128 to 132 below and to section 27 of the Pensions Act, the amount of a secondary Class 1 contribution shall be the appropriate secondary percentage of the earnings paid in the week in respect of the employment in question.|
|25||(6D) The appropriate secondary percentage is a percentage of the rate specified in subsection (6E) below as the appropriate rate for secondary earnings bracket (or the prescribed equivalent in the case of earners paid otherwise than weekly) into which the earner's earnings fall.|
|30||(6E) Subject to any order under this section or section 122 or 123A below, the 30 secondary earnings brackets and their appropriate percentage rates shall be—|
|Weekly earnings||Percentage rate|
|Bracket 1:||current lower earnings limit to £54.99||5 per cent.|
|Bracket 2:||£55.00 to £89.99||7 per cent.|
|35||Bracket 3:||£90.00 to £129.99||9 per cent.|
|Bracket 4:||£130.00 or more||10.45 per cent.|
|(6F) The Secretary of State may by order alter the number of primary or secondary earnings brackets below the highest bracket.|
|40||(6G) An order under this section may make such amendments of any enactment as appear to the Secretary of State to be necessary or expedient in consequence of any such alteration made by it|
|(6H) No order shall be made under this section unless a draft of the order has been laid before, and approved by, a resolution of each House of Parliament.|
|(6J) An order under this section shall be made so as to come into force—|
|45||>(a) on a date in the tax year in which it received parliamentary approval; or|
|(b) on a date in the next tax year.|
|(6K) Such an order shall have effect for the remainder of the tax year in which it comes into force and for any subsequent tax year (subject to the effect of any subsequent order under this section); and for this purpose the order is to be taken as receiving parliamentary approval on the date on which the draft of it is approved by the second House to approve it.".|
|50||(3) In section 7(1) of that Act (weekly rate of Class 2 contributions), "£3.50" shall be substituted for "£4.75".|
|55||(4) In section 8(1) of that Act (amount of a Class 3 contribution), "£3.40" shall be 55 substituted for "£4.65".|
|(5) The following section shall be inserted after section 123 of that Act—|
|"Further power to alter certain contributions.|
|123A.—(1) For the purposes of adjusting amounts payable by way of primary Class 1 contributions, the Secretary of State may at any time make an order amending section 4(6B) of this Act by altering any one or more of the following figures—|
|(a) the upper weekly earnings figure specified in respect of Bracket 1;|
|(b) the weekly earnings figures specified in respect of Brackets 2 and 3; and|
|(c) the percentage rates specified as the appropriate rates for Brackets 1 and 2.|
|65||(2) For the purposes of adjusting amounts payable by way of secondary Class 1 contributions, the Secretary of State may at any time make an order amending section 4(6E) of this Act by altering any one or more of the following figures—|
|(a) the upper weekly earnings figure specified in respect of Bracket 1;|
|(b) the weekly earnings figures specified in respect of Brackets 2 to 4; and|
|(c) the percentage rates specified as the appropriate rates for Brackets 1 to 3.|
|70||(3) No order shall be made under this section so as—|
|(a) to alter either of the percentage rates specified as the appropriate rates for Brackets 1 and 2 in section 4(6B) above to a rate higher than the percentage rate which at the time the order comes into force is specified as the appropriate rate for Bracket 3 in that subsection; or|
§ Brought up, and read the First time.
§ The Minister for Social Security (Mr. Tony Newton)
I beg to move, That the clause be read a Second time.
§ Mr. Deputy Speaker
With this, it will be convenient to discuss the following:
Amendment (a) to the new clause, in line 36, leave out `or more' and insert `£481'.
Amendment (b) to the new clause, in line 63, at end insert
(d) the weekly earnings figures specified in respect of Bracket 4 .'.
New clause 22—Upper Earnings Limit for Secondary Class I Contributions—'(1) At the end of section 4(1) of the Social Security Act 1975 (Class I contributions—incidence) and of section 1(1) of the Social Security Pensions Act 1975 (earnings limits) there shall be added the words "except that for the purpose only of determining the maximum amount of weekly earnings in respect of which secondary Class I contributions are payable the upper earnings limits shall be as follows:
- (a) £265 from 6th April 1985 to 5th October 1985
- (b) £285 from 6th October 1985 to 5th April 1986
- (c) £335 front 6th April 1986 to 5th April 1987
- (d) £385 from 6th April 1987 onwards"
(2) In regulation 7 of the Social Security (Contributions) Regulations 1979 for the words "the lower and upper earnings limit" there shall be substituted the words "the lower earnings and except for the purpose of determining the secondary Class I contributions payable the upper earnings limit".(3) Where by virtue of subsections (1) and (2) above secondary Class I contributions are payable on an amount which exceeds the amount of the upper earnings limits for the purpose of primary Class I contributions the secondary contributions on that excess shall be the normal percentage as defined in subsection (2) of the Social Security Pensions Act 1975 (contracted-out rates of contributions and benefits) of that excess and in cases to which that section applies shall be payable in addition to the contributions specified in subsection (1) of that section.'.New clause 23 —Changes in the Upper Earnings Limit During the Year—'After paragraph (5) of regulation 6A of the Social Security (Contributions) Regulations 1979 there shall be inserted the following paragraph—(6) Where:414Government amendments Nos. 92, 93, 167, 94, 95, 96, 168, 170, 97, 98, 102 and 104.
the earnings period in which the effective date would but for the provisions of this paragraph fall shall notwithstanding the provisions of paragraphs (2) and (4) above terminate on the day before the effective date and a new earnings period shall commence on the effective date .".'.
- (a) the upper earnings limit is changed in respect of secondary Class I contributions with effect from a date in the year ("the effective date") being a date other than 6th April, and
- (b) the earnings periods for a person fall to be determined in accordance with the provisions of paragraphs (2) to (4) above
§ Mr. Newton
I shall explain the Government's purpose in proposing the new clause and the amendments as succinctly as possible and then try to pick up as fully as possible points which hon. Members on both sides of the House may wish to make during the debate.
The purpose of the new clause and the associated amendments is to implement the changes announced in the Budget by my right hon. Friend the Chancellor of the Exchequer in respect of national insurance contributions. There are three main elements in the Government's proposal. First, there is a graduated system of contribution rates. At present, there are two uniform rates of contribution: 9 per cent. for employees and 10.5 per cent. for employers, payable on all earnings if they exceed the lower earnings limit, which at present is £35.50, up as far as the upper earnings limit, which at present is £265, above which no contributions are paid. From 6 October, we propose two brackets of lower contribution rates at 5 per cent. and 7 per cent. for employees with lower earnings, and three brackets of lower rates at 5 per cent., 7 per cent., and 9 per cent. for employers in respect of their lower-paid employees. The earnings levels at which those lower rates will operate are set out in the new clause, so I shall not elaborate them in my speech. They mean that, from October, employers will pay less in contributions on all earnings under £130 a week, and employees earning less than £90 a week will similarly pay less.
Secondly, we intend to abolish the upper earnings limit for employers' contributions. From 6 October, they will pay the 10.45 per cent. rate of contributions on all earnings that exceed £130.
§ Mr. Terence Higgins (Worthing)
Does my hon. Friend accept that the point he has just made raises a major issue of principle with regard to the contribution arrangements? By introducing such matters in a new clause on Report, it makes it difficult for the House to give full consideration to all the implications of what is undoubtedly a complex proposal. Had they been contained in the Finance Bill, they would have been debated in Committee. But to introduce it at this stage, when the rules of debate are extremely restricted—one can speak only once, for example—means that it is difficult to give proper consideration to what the Government propose.
§ Mr. Newton
I respect the view of my right hon. Friend, but several new clauses and amendments directed towards the aspect of the Government's proposals to which he referred have been tabled, and I believe that the debate will provide a proper and adequate opportunity for anxieties such as those that may be felt by my right hon. Friend to be expressed. I shall certainly try to respond to those anxieties if they are expressed. As my right hon. Friend will understand, with his long experience and distinguished service as a Treasury Minister, it is impossible, as I understand the rules of procedure, to make amendments affecting national insurance by the medium of a Finance Bill. Indeed, it would have been necessary to introduce a separate Bill had we not had the opportunity of incorporating those proposals in this Bill.
I hope that my right hon. Friend the Member for Worthing (Mr. Higgins) and the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) will not overlook the fact that the proposals, which we hope to introduce in October — it will be a significant administrative task for the Department to implement them in that time—will be of significant benefit to many millions of lower-paid employees. The Government, having decided upon this policy, would have been open to considerable criticism had they not taken the earliest practicable opportunity to ensure that those proposals were implemented and the substantial benefits that they confer on millions of people put into practice.
§ Mr. Higgins
Of course, I accept the point of substance made by my hon. Friend, and I also accept his technical point about the difficulties of incorporating the proposals into the Finance Bill. In that case, the right course of action should be a separate Bill with a Committee stage, or the Bill should be recommitted so that the new clauses can be given detailed consideration.
§ Mr. Newton
I understand why my right hon. Friend and the hon. Member for Roxburgh and Berwickshire have raised the matter, but I believe that it is appropriate to proceed in this way. The debate this afternoon will provide an adequate opportunity for hon. Members to raise the points that they wish to raise about the upper earnings limit. I shall do my best to respond to any points that my right hon. Friend wishes to make.
I had mentioned two aspects of the changes that we propose in contribution rates. The third is that, from 6 October, the class 2 flat rate contribution paid by the self-employed will be reduced by more than one quarter from £4.75 to £3.50 a week. There will be comparable reductions in the voluntary class 3 contributions available to those who, for a variety of reasons, wish to improve their contributions record.
416 Taken together, these are significant changes in the structure of national insurance contributions—possibly the most significant since the introduction of full earnings-related contributions. Despite the increased income from the abolition of the upper earnings limit on employers' contributions, the changes will have an overall cost in a full year of £450 million, made up of an £80 million net reduction in employers' contributions, a £270 million reduction in employees' contributions, and a £100 million reduction in contributions by the self-employed.
In proposing the changes, we are seeking to advance, and I believe we shall move successfully further towards, two important economic and social objectives. The first, which I mentioned in passing, is to foster the creation of new jobs as part of what my right hon. Friend the Chancellor rightly described as a Budget for jobs. As a direct result of the changes, the cost of employing about 8.5 million workers earning up to £130 a week will fall by up to £3 a week. For the lowest paid—those earning up to £55 a week—employers' contributions will be cut by more than half. That will make existing jobs more secure, and at the same time give important encouragement to create new jobs in this part of the job market, with special advantage to the job prospects for youngsters, to which great importance is rightly attached on both sides of the House.
The change will also reduce, for employers and employees, the distorting effect of the present lower earnings limit, which currently takes people from no national insurance contributions to national insurance contributions on their entire earnings if they pass the present £35.50 a week lower earnings limit. I accept, of course, that the proposed changes involve the acceptance of such edges at the margins between the new bands, but they are significantly less steep cliffs than the cliff edge involved in the present system. There is no doubt that the overall effect, taking account of the broad reduction in national insurance contributions as a whole, for this area of the labour market will leave us with a more sensible and rational system than the present one.
If one of the Government's objectives is to increase employment, the other —no less important—is to improve incentives by increasing the rewards of employment at modest earnings, and to give additional help to the lower paid. The proposed national insurance changes alone will mean increases in net income ranging from £1.10 to £2.18 a week for nearly 3.5 million workers earning less than £90 a week. The effect becomes even more significant when combined with the increase in tax allowances announced by my right hon. Friend the Chancellor in his Budget statement.
For a young person earning £50 a week the national insurance change alone will increase take-home pay by £2 a week, and there will be a further gain of £1.15 a week from lower income tax. That combined saving of £3.15 a week from tax and national insurance contribution changes is equivalent to an increase in take-home pay for that young person on £50 a week of 7.5 per cent. For a married man earning £80 a week there will be savings of £1.60 a week in national insurance contributions and £1.73 a week in income tax, giving a total gain of £3.33, or 5 per cent., in take-home pay. To give another example, which is especially striking in cash terms, although I do not pretend there will be many such examples, for a couple where the man earns £80 a week and the wife earns £50 a week, as a result of the national insurance and tax measures, their 417 combined take-home pay will increase by no less than £6.48 a week. I know most hon. Members in the House at the moment well enough to know that they will very much welcome the increased income which this provides to many of the low paid. It is a significant gain from these proposals.
Alongside these changes for those who are employed, self-employed class 2 contributions fall from £4.75 to £3.50 a week, with a total benefit to the self-employed as a whole of £100 million. In addition, there is another tax measure—namely, the introduction of tax relief on that half of the class 4 national insurance contributions of the self-employed which can be roughly equated to the employer aspect of national insurance contributions. That has been very widely welcomed in all parts of the political spectrum, and certainly by the self-employed. That is a recognition of the important role that the self-employed already play in our economy and of the important part that self-employment can play in job creation, and it shows the value that the Government place on the contribution of the self-employed to economic activity in Britain.
Lastly, I want to turn briefly to the collection of Government amendments associated with this new clause, most of which are technical or consequential on the major change. but some of which are concerned with the Government's proposals to ensure protection of the benefit rights of people which might otherwise have been affected by the changes in contributions which we are proposing.
We intend, where the annual total of contributions notified to the Department is low enough to indicate that reduced rate contributions have clearly been paid or, indeed, are likely to have been paid, to enhance the benefit entitlement flowing from those contributions by a varying formula, depending on the contributions recorded. That will be done by regulations under powers which already exist relating to earnings factors. We shall ensure, first, that the record for flat rate benefits will not suffer at all, and, secondly, that the record for earnings-related benefits will not suffer where earnings have been at a uniform rate. Thirdly, where earnings have fluctuated, low earners will be fully protected, though a few higher earners who have had short periods on low earnings may lose very small —I emphasise "very small" —amounts of earnings-related rights. The main point that I want to make is that no one will lose rights by comparison with the contributions that they have paid. In this respect, the enhancement can only add extra benefit rights whenever they apply.
The other very important point is that, even by comparison with earnings received, the extent to which earnings-related benefits will be enhanced will outweigh the extent of the very small losses that will occasionally be sustained by those who pay the reduced rates for short periods.
I hope that I have said enough to enable the House to form some view on the merits of the Government's proposals. The changes incorporated in this new clause and the associated amendments constitute a major plank in our programme to promote employment, not least for young people, and to focus additional help on the less-well-off in work. I hope that the House will give them a fair wind.
§ Mrs. Margaret Beckett (Derby, South)
As is so often the case with this Government, the initial reaction to the proposal to change the national insurance contribution 418 system was perhaps two cheers—certainly one cheer—since it has been a very regressive system and one which penalises the lower paid far more than the higher paid. Unfortunately, even though the time for debate and consideration of these changes has been extremely limited, it has become clear that there are more problems than might at first have been imagined.
One of the major problems is the extent to which the existing rather severe trap that is sprung when a person moves from one level of earnings to another has been replaced by several traps, perhaps slightly less severe in their effect but nevertheless just as real. It is the effect of these traps that is of particular concern to the Opposition.
Although the Minister dwelt very much in his remarks —as indeed did the Chancellor in his Budget statement —on the effects that it is hoped will flow from these changes in terms of increased employment, most commentators have made it plain that any such effect, should it take place at all, will be very marginal and that the major effect will be to add an extra incentive to keep wages down. The Minister touched on this in his remarks but laid very little emphasis on it.
This is a matter of very considerable concern to us because it is as dishonest as it is damaging to keep wages down at a time when there is a 12 per cent. increase in water rates owing to a Government-imposed tax, when gas and electricity bills are increasing because the Government have imposed charges on those industries, when national health prescriptions have gone up again and are, I think, 900 per cent. higher than they were when the Government came to power, and perhaps most of all when the Government are constantly talking in connection with every provision of the welfare state about people standing on their own feet, taking on themselves a greater part of the burden of their pensions, providing for themselves through more private education, more private health care, and so on.
The Minister referred particularly to the young employed and said how much benefit they would derive from the changes that are being made in this Bill. He drew attention to the fact that it might amount to a few pounds a week. For those young employed who are in families receiving housing benefit, that might be a very small return for the almost £9 which the Government decided to take off them last year in the non-dependent deduction. They will still be paying a very severe penalty for the privilege of being in work.
I note from the various comments on these proposals that the Institute of Directors is extremely concerned—and it appears to me that some of the amendments and other new clauses that have been tabled by hon. Members on the Government Benches also show concern—about the highest earners and the effect of these changes on them and their employers. We understand the point that they are making, but it always seems to me to be somewhat strange and certainly rather illogical that those in the Institute of Directors and hon. Members on the Tory side of the House feel so strongly that the higher earners must be allowed to earn more if they are to retain incentive, and talk about the disincentive to them of raising taxation, but believe that the lower earners must get lower wages—as will be the effect of these changes—if incentives are to be kept going. That is not an argument that I understand and it is one that the lower paid in this country find increasing difficulty in understanding.
419 The Minister also mentioned the effect of these changes on the self-employed. We recognise, of course, that these are welcome changes for that group. What greatly concerns us—particularly in the context of his and the Chancellor's speeches—is that it appears that the extent and nature of the changes for the self-employed go back to the myth, which the Government are always peddling, that that is the way to get new jobs. The present situation has nothing to do with the Government, nothing to do with the problems that the Government have created, and there is nothing that they can do to solve them. The best thing to do, it is said, is to have, like the Americans, lots more small businesses, and encourage people to become self-employed, because that is where employment will come from.
We often hear members of the Conservative party quoting the number of new jobs in small companies in, for example, the United States. What they do not quote, however, is the number of those companies and jobs that disappear within a year or two, or the net effect on job creation, which is extremely small. I seem to recall that in his Budget statement the Chancellor referred to the self-employed asa sector of the economy where an increasing proportion of the jobs of the future is likely to be found."—[Official Report, 19 March 1985; Vol. 75, c. 798.]That may have more to do with where all the other jobs are going than with the net increase in the self-employed.
We are concerned that in giving this assistance to the self-employed the Chancellor has chosen to be extraordinarily generous to the better-off self-employed. If I understand correctly the changes that the Government are making—and that is no mean feat—it appears to me that even self-employed people, who are perhaps quite wealthy and certainly earn substantial sums, will pay only £3.50 a week to retain their entitlement to the basic pension. That is good value in anybody's terms and certainly a lot better value than is got by many people who are employed but earning substantially lower incomes. That means, as does this reduction, that to some extent the state is subsidising this improvement for the self-employed.
I have one or two questions for the Minister about the proposed changes. One of the effects of these changes is that more people will be pushed into part-time employment, and perhaps into more than one part-time job. What will be the effect on them? At present, if both of those part-time jobs are below the lower earnings limit, the person does not have to pay any contribution. Will this apply in the future? What will happen if the sum of the earnings in the two jobs adds up to the level that brings them into a different contribution band? What will be the position of an individual with more than one job to which different contribution rates apply?
We looked with interest at amendments Nos. 94 and 95 and wondered what the Government had in mind. Both the Minister and the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) spoke about the difficulties in debating these things. The Minister then said casually that much of this will be done through regulations, so that the Government will have to come back to the House with the regulations, so that we can see what they have in mind. That is a bit of a cheek.
420 The Minister referred to the earnings factor. This was something on which I wanted to question him. I did not understand much more after his remarks. As I understand it, the theory is that entitlement to benefit is set by the earnings that occur between the existing lower and upper earnings limit and not by the rates of contribution that are paid. Entitlement also relates to earnings over the whole year. We recognise that there is not always a simple and clear relationship between contributions paid and earnings, but as a general rule the differences have been comparatively slight. With the new, much more complicated and wide-ranging changes, we wonder what the effect on benefit entitlement will be.
We suspect—and if the Government feel injured by this they have only themselves to blame because this is wholly characteristic of their behaviour—that amendment No. 95(b) which says:The Secretary of State may prescribe circumstances in which pensioners' earnings factors for any relevant year may be calculated in such manner as may be prescribed.is the Department giving itself a get-out. It does not have the faintest idea how this will work and does not know what people's entitlement to benefit will be and how it will be assured. Which genius will devise a computer programme to work it all out and throw out the cases that do not look correct?
Someone could pay different rates of contribution during the year—the Minister referred to that possibility —for the same total level of earnings, or he could have different earnings during the year and still end up having paid the same rate of contribution. How will this work and what will it do to benefit entitlement? The Labour party is left with the unworthy feeling that a decision was taken in the Treasury to make a change in the basis of national insurance contributions because the Chancellor thought that it would look good in terms of job creation and particularly because he hoped that it would help to keep wages down. However, nobody thought through what the effect of the entitlement to benefits would be. The amendment has been drafted to catch up with the fact that later on somebody will have to work out what all this will mean for benefit entitlement.
The Minister suggested that there would be opportunities for enhancement and that nobody would really lose. We have heard these assurances from Ministers and the Department before, but things have not always worked out as they have suggested. Overall, we are looking at a complicated package of changes. The Labour party suspects that even the Government do not understand how it will work out or what problems it will cause. Most of all, we fear that the disadvantageous effects of these changes will keep wages down, whereas the job creation advantages that the Minister has sought to present will not materialise.
In the shadow Budget, the Opposition proposed that there was a need to look at the changes in the national insurance contribution system and we suggested a variety of ways in which such changes might be carried out. We did not go for any one particular formula because such changes need extremely careful working out, consideration and thorough debate. That is precisely what these changes are not having.
§ Mr. Roy Galley (Halifax)
All Conservative Members will no doubt welcome the basic principles of new clause 12 and the fact that we are to have a more graduated system of national insurance contribution, with a considerable 421 reduction at the lower end of the scale which will ease unemployment problems for many people, particularly younger people. Therefore, it is exceedingly surprising that it should have had such a cool reception from the hon. Member for Derby, South (Mrs. Beckett). The Labour party is constantly bleating about unemployment, but when specific proposals to improve employment prospects are put forward it simply pours cold water on such constructive ideas. That is amazing.
I took particular exception to the hon. Lady's statements about the self-employed. She gave the impression that all the self-employed are rolling in money and do not make a great contribution to our society. She did not recognise the levy without benefit that was placed on them by the Labour Government in the late 1960s that we are seeking to mitigate. In many parts of Yorkshire and in my constituency, the self-employed are a vital part of our employment scene and of the growth and revival of new industries.
A number of problems on one or two specific matters arise out of new clause 12, and I should be grateful if my hon. Friend the Minister would give sympathetic consideration to them. The fact that there is no longer an upper earnings limit for employers' secondary contributions is one of them. Setting such a limit is the basic principle in amendment (a) tabled by my hon. Friend the Member for Northampton, South (Mr. Morris) and myself. It is causing growing concern to many sectors of industry. That concern has escalated in the past few days, when minds have been concentrated, so rapidly after the Budget statement, by the legislation that is to put it into effect. There will be an increased pay bill for certain types of firm, and no doubt other hon. Members who may catch your eye later, Mr. Deputy Speaker, will elaborate on different sectors of the economy where this will be a problem.
The problem will affect not only firms of highly paid solicitors, people in the City and so on, or high technology firms. It will affect many firms with a high proportion of skilled manual labour, with people who are earning now, even in the supposedly depressed north, more than £265 a week. A particular point of concern is that often part of those earnings is bonus and productivity payments. The fact that there is no upper earnings limit for employers makes such deals less attractive to the employer. There will be some problems, many of which could affect a certain number of firms across the board in the economy. Most other countries, particularly in western Europe, that have an insurance contribution system have an upper limit. In West Germany, which in Bismarck's day was the pioneer of the insurance system, has a limit of about £20,000 on employers' contributions.
Another concern is that the contributory system is such that benefits depend on the amount of national insurance contribution paid in the appropriate year, but there is a ceiling on the benefit paid. As I understand it, this applies to all contributory benefits. My hon. Friend may argue that that does not matter because the Government are retaining an upper earning limit for employees. However, employers will be paying substantially higher contributions and the employees to whom those contributions relate will receive no improvement benefit. That will add to the gradual erosion of the contributory principle that we have experienced in recent years. Increasingly there is less relationship between what one pays into the system and the benefit one receives from it.
422 It is to be welcomed that national insurance contributions are becoming a less regressive tax, but we are simply replacing a regressive employment tax with a progressive employment tax. It is becoming more and more an employment tax and little else.
§ Mr. Higgins
Unfortunately, because of the timing of the debate, it has not been possible for many hon. Members to see the evidence which the Chancellor of the Exchequer gave to the Select Committee on the Treasury and Civil Service on this very point or, indeed, the note that was provided by the Treasury on it. The fact is that the evidence given to the Select Committee suggests clearly that the employers' contribution will confer no benefit right whatsoever.
§ Mr. Galley
My right hon. Friend is right. The changes will make it more and more a taxation system. We perhaps should avoid the hypocrisy of saying that the contributory principle is important and must be retained because it has some relationship with benefits, because in this case it has not.
§ Mr. Frank Field (Birkenhead)
Does the hon. Gentleman realise where his argument is leading him in regard to the whole principle of graduated contributions? The argument seems to be that, because we are abolishing the ceiling in respect of employers' contributions and giving no extra rights to employees, it is a bad system. One could argue equally that it is wrong to have graduated contributions because as one moves through the salary scale and pays a greater sum, although only the same percentage, in national insurance contributions, one is only getting the right to certain specific benefits. The much more interesting point is the one made by my hon. Friend the Member for Derby, South (Mrs. Beckett) about the right to benefit. The hon. Member for Halifax (Mr. Galley) is putting forward a totally misleading argument.
§ Mr. Galley
I do not accept the hon. Gentleman's point. It is still valid to say that this is becoming increasingly a tax which goes further from the contributory principle which has been held as important by Governments of all shades for many years.
Another important point relates to people who are contracted out of the state earnings-related pension scheme and who enjoy a rebate on their contributions between the lower earnings limit and the upper earnings limit because their occupational pensions will provide their earnings-related pension. There is an abatement for employees of 2.15 per cent. and for employers of 4.1 per cent. As I understand it, that abatement will cease for employees above the upper earnings Employers will be paying more and employees will receive no additional benefit through contracting out.
When firms decided to provide their own scheme, it was a factor that there would be a rebate on employers' contributions. That may have been an important consideration in the financial equation that they had to consider. Surely it is fair that the rebate system should be extended to apply to all earnings, including those above the upper earnings limit, for contracted-out employees.
§ Mr. Frank Field
I support new clause 12, but for somewhat different reasons from those put forward by the Minister. His first reason for commending the clause to the House was that it would have an important effect on job creation. There is a real danger of hon. Members on both 423 sides of the House taking up unreal positions. Hon. Members on the Government side may say that certain costs are all-important in determining whether jobs are created, while Opposition Members may ignore those costs completely. I should be surprised if many jobs were created by these changes. The Minister was on somewhat safer ground when he said that the changes may protect jobs already in existence. That is the first, though not the major, point that I wish to make.
I join the Minister in the other reason that he put forward for commending the new clause to the House. He said that it is an important reform for lower-paid workers. The reform will be paid for by lifting the ceiling on employers' contributions. As someone who has said for many years that the ceiling should be raised, it would be churlish of me not to welcome that change. Although I tried to pay careful attention to the arguments put forward by the hon. Member for Halifax (Mr. Galley), I do not think they carry much weight.
In opposition to this change some people have said that instead of having one poverty trap we shall have three poverty traps as a result of the change. We have to accept that, but we must remind those people who put this argument of two major changes that will be brought about by the Bill. Surely it is better to pay a 5 per cent. or a 7 per cent. contribution and then a 9 per cent. contribution rather than a 9 per cent. contribution from the beginning. It seems better, too, to have that tiered system at the higher income thresholds laid down by the Government.
I welcome the proposed changes. They are not perfect and there will be difficulties, but the new clause should be supported by the Opposition for two reasons. First, the new system will be better than the present one. It will reduce the contribution made to the national insurance scheme by lower-paid workers. Opposition Members have often called attention to the regressive nature of the national insurance scheme.
Secondly, it is terribly difficult to make major changes in the national insurance scheme because of the costs involved. My guess is that if a Labour Government were proposing changes, they would have come up with a similar scheme.
§ Mr. Neil Hamilton (Tatton)
wish to give qualified support to new clause 12. Of course, every hon. Member will applaud the reduction in the national insurance burden on the low-paid. Indeed, it was a matter to which I devoted some attention in a speech in the little debate that we had on 1 March on the tax and benefits system. It is rare that the Government are so swift to respond to suggestions made in debate. I am grateful to them for taking on board the points that I made and for transplanting them into legislative form.
However, certain difficulties will be created by the clause in its present form. It is for that reason that I have tabled two new clauses. New clause 22 proposes, instead of abolishing the upper earnings limit, to increase substantially the limit on the employers' contribution and to phase in that increase over three years. The effect would be that for the six months from 6 April 1985 the limit would be £265 per week or £13,780 per annum; from 6 October it would be £285 per week or about £15,000 per annum; from April next year it would be increased fairly 424 substantially to £335 per week or £17,500 per annum; and, finally, from 6 April 1987 it would be increased to a maximum of £385 per week, which is equivalent to about £20,000 per annum.
There are several reasons for taking that approach rather than completely abolishing the limit, as the Government propose. It would seem that the limit is being abolished purely to pay for the reductions in the national insurance contributions at the lower end of the scale. Thus, the reason must be one of expediency. It is unfortunate that this way of doing things has been chosen, because a question of principle is involved. I naturally bear in mind what my right hon. Friend the Member for Worthing (Mr. Higgins) and my hon. Friend the Member for Halifax (Mr. Galley) have said about the lack of any benefit attaching to the employers' contribution. However fraudulent the system is—and it is a fraud, because it is a tax and it is not greatly related to the benefits that employees will ultimately derive—the fiction has been perpetuated by Governments over the years.
We are seeing a change of principle under the guise of expediency, but I think that the wrong way has been chosen for bringing about such changes in the social security system. Therefore, we must consider the scheme as a method of funding and discuss whether there are better ways of doing it. The beneficial effects of reducing the national insurance contributions at the lower end of the scale will, to some extent, be diminished by the disincentives to wealth creation that the abolition of the upper earnings limit will bring in its train. In the long term, I believe that some jobs may be sacrificed in order to increase the number of jobs at the lower end of the scale. Therefore, the net effect may not appear to be as great as the Government claim.
I understand that the national insurance burden overall is to be reduced by about £350 million through these changes. We all applaud that, and it is very good, but it disguises the massive redistribution of the national insurance burden among companies in different industries. Of course, some companies, such as those in the retail and textile trades, and those involved in local government will be better off and will welcome that. However, some firms will be much worse off as a result of the changes. Not all of them will be able to bear easily the burden placed upon them. Reference has already been made to high technology companies, and one could also mention North sea oil operators, those involved in financial services, and exporters as well as much of manufacturing industry.
I shall point out, in particular, the disproportionate effects that will be experienced by small companies with few employees who are, on the whole, well remunerated. Jobs will undoubtedly be lost in some areas. The London Business School has estimated that although 250,000 jobs will probably be gained at the bottom end of the scale —it differs from the hon. Member for Birkenhead (Mr. Field), who claims that the effect will be negligible—100,000 jobs will be lost at the top end. That represents a significant diminution in the real value of the changes.
Large high technology companies must be tempted to cut the number of unskilled staff in order to pay for the extra cost of the national insurance contribution on skilled staff, whilst at the same time they must maintain their capital investment and research and development programmes to protect their profitability. That is to be deplored. Many small high technology companies probably do not employ any unskilled staff. As a result of 425 these changes, those companies may fail or face a great disincentive to continue in business. In many cases that disincentive will correspond to a 10 per cent. increase in the major part of one of their biggest costs, and could, at the margin, wipe out their profits altogether. In this rapidly growing area of the economy, salaries are competitive on a worldwide basis. Thus, we are also looking at salary scales and costs in the United States, Germany, Japan and in the countries of all our major competitors.
The abolition of the upper earnings limit will have a very deleterious effect as a result. Small North sea companies will be particularly hard hit, and that is to be deplored. Indeed, I believe that the abolition of the upper earnings limit represents a tax on business leadership. It reduces a company's ability to increase salaries at the top of the scale. Senior executives, who are in charge of hiring and firing and who know about the costs that arise in addition to salaries, are bound to know that, and to that extent it is bound to be demotivating in so far as they look to increased profitability to bring about increased remuneration for themselves.
Higher rate thresholds were increased in the Budget this year, but only by the rate of inflation. However, the increase in personal allowances went beyond the amount needed to account for inflation. Thus, although we may not be hitting those parts of the economy upon which we depend for increasing the national income and for wealth creation, we are not greatly benefiting them. We are also allowing a tax on exports. The cost of employing exporters has increased substantially during the past two years, because the phasing out of the 25 per cent. income tax deduction for days worked overseas contained in the Finance Act 1984, combined with the proposed national insurance changes, will increase the cost of employing an exporter by 20 per cent. if he spends a quarter of his year abroad and by 30 per cent. if he spends half of his year abroad. That cannot be ignored, and the Government should address themselves to that point.
The measure is also a tax on invisible exports, such as financial services and advertising. One thinks, perhaps, of Saatchi and Saatchi and of its incursions into the American market—to pluck just one example out of the air. But it makes things more difficult for those exporting such services. One agency that has come to my attention supplies British managers, consultants and engineers for United Kingdom and overseas projects. It calculates that it must increase its base charging rate to the client by more than £2 an hour, thereby making it uncompetitive with German and American companies. At present, the contracting industry is in the doldrums. Although United Kingdom engineers should be encouraged to earn some foreign exchange and to pick up know-how and experience abroad, they will not be led in that direction.
We are also seeing a tax on performance-related pay. The Government have rightly encouraged remuneration by way of share option and incentive schemes. That is an excellent development, but in some instances cash bonuses are the most appropriate incentives, either in conjunction with option schemes or on their own.
Some firms cannot offer incentives by means of option schemes. I think, for example, of unincorporated businesses and of non-profit-making bodies. Indeed, there is no more typical non-profit-making body than the Government. Why penalise these firms at the expense of those that can offer incentive schemes in other ways?
426 One of the most disturbing effects of the changes is that they will encourage remuneration through perks. In successive Finance Acts the Government have rightly set their face against benefits in kind. But the changes proposed will go against the whole trend of Government policy in that respect. The administrative costs of the Department and of businesses will be increased, although that is contrary to the Government's intentions as manifested in the recent paper entitled "Burdens on Business", which proposes major reductions in such burdens.
I wish to refer to the complications which will result from the change to the rules in October. Under the post-1975 system, there is no established procedure or precedent for making such a change, because the system is geared to the annual cycle of the tax year. It will create a major complication both for companies and for the Department. It will create particular hardship for companies which entered into contracts before Budget day and which will extend beyond 6 October 1985. Those companies cannot, for competitive reasons, readily change their prices at short notice, even if their contractual arrangements do not extend beyond 6 October. Contracts for high-paid personnel will be particularly adversely affected.
My conclusion, therefore, is that, while the changes to the national insurance contributions rightly concentrate upon job creation, this method of bringing them about is calculated to damage the wealth-creating capacity of the economy. Although the overall net effect will be beneficial, I wish that other means could have been found to finance the changes so as to maximise rather than minimise their effect.
New clause 23 affects, in particular, company directors. This is a technical point rather than one which relates to general policy. Since 1983 the rules relating to company directors have provided that national insurance contributions should be levied on the first earnings of directors—first in a chronological sense—up tc the annual maximum, which is 53 times the upper earnings limit. Consequently, no special provision is made for what happens when the upper earnings limit is changed with effect from a date during the tax year, because in the past this has never been contemplated by any Government. The abolition of the upper earnings limit could mean that if a director is on a monthly salary of twice the annual maximum, his national insurance contribution will be paid on the full £14,000 in the six months to 5 October and also on the full £14,000 in the remaining six months of the year. That will be a particularly penal provision.
Even if my hon. Friend the Minister is not minded to accept the more radical proposals contained in new clause 23, I hope that he will take on board the points that have been put to him in this respect. This new clause would override the relevant part of the existing regulations. Instead, it would provide for a new earnings period to commence on the effective date for the upper earnings limit change. Therefore, it divides the year into two, with the annual maximum apportioned pro rata to each period. If the upper earnings limit is abolished on 6 October, it will mean that the employers' national insurance contribution in the first earnings period to 5 October will be payable only on the earnings in that period up to half the annual maximum. I believe this to be an equitable solution. I 427 cannot believe that the Government intended the inequitable way in which new clause 12, as drafted, will apply. Therefore, I hope that my hon. Friend will be able to provide some relief.
§ Mr. Charles Kennedy (Ross, Cromarty and Skye)
I find myself in the uncharacteristic and curious position, after the extremely well-informed and well-argued speech of the hon. Member for Tatton (Mr. Hamilton), of giving, on behalf of my right hon. and hon. Friends and myself, a slightly greater welcome to this set of proposals than did he. The restructuring of the thresholds is a positive step forward, although, as my hon. Friend the Member for Roxburgh and Berwickshire (Mr. Kirkwood) and the hon. Member for Tatton have pointed out, it is not altogether ideal that something which is just as much a political as a practical issue should be tacked on to the front of a significant piece of legislation. However, I appreciate the reason for this, as was outlined by the Minister in his speech.
The Government's approach is surely right. They are trying to reduce the distortion and to ease the burden upon the encouragement of employment. Any step that will encourage new employment, including youth employment, is to be welcomed. However, to be fair, this must be set in context. Although the Chancellor made it clear that he is most concerned about the unskilled labour force and youth unemployment, there is no doubt that many of the changes that have been outlined will also encourage part-time employment. We do not wish to discourage part-time employment, but it is quite clear that the National Federation of Self-Employed and Small Businesses Ltd. would like more full-time employees to be recruited if only the economy, in terms of demand, were better, and if only some of the financial conditions under which they have to operate were more satisfactory. To introduce measures that will probably extend the scope of part-time employment cannot be a satisfactory or adequate response or solution to the problem. On this point I agree with the hon. Member for Birkenhead (Mr. Field). Therefore, the improvements, although welcome, are likely to be felt only at the margin. I echo what has been said by the Child Poverty Action Group. It welcomed the restructuring of contributionsinsofar as it reduces the burden of national insurance on the lowpaid without disenfranchising them from entitlement to national insurance benefits.This has to be a key element in a change of this nature.
It is also significant that on the evening of Budget day the BBC television programme "Newsnight" visited a part of the country that is suffering some of the most severe problems caused by the recession and unemployment. On that programme a local business man who might have been expected to benefit from these changes said that it was unlikely that he would be able to create more full-time, long-term employment. He believed that the abolition of the upper earnings limit might discriminate against the profitability and competitiveness of his company. I believe that this is a genuine cause for concern.
The hon. Member for Tatton referred to North sea oil-related companies. Given the geographical location of Ross, Cromarty and Skye, hon. Members will appreciate that oil-related industries are a significant factor in their economy. Certain firms that are seeking to expand those 428 activities and at the same time to encourage local employment may face difficulties at the top of the scale over their higher-paid employees.
All this, however, clearly falls within the Government's broader intention to move towards a more flexible and, certainly to some extent, more low-waged economy, with which I very much disagree. The Highlands and Islands Development Board recently commissioned a survey that showed that average earnings in its area were about 10 per cent. below the national average. Yet, for typical economic reasons, and for some cyclical reasons related to oil and tourism, unemployment is extremely high—well over 20 per cent., and more than 30 per cent. in some parts of my constituency. It is clear, therefore, that one cannot go too far in seeking to relate low wages to the encouragement of employment because, persistently and historically, the situation in my area has shown the opposite to be the case.
§ Mr. Frank Field
I agree that the Government are putting undue emphasis on the creation of low-paid jobs, but I am genuinely puzzled as to how anyone can interpret the proposals in new clause 12 as part of that policy. I do not see why raising the earnings threshold for national insurance contributions from £33 to £55 and then starting at 5 per cent. and tapering up to the full 9 per cent. at £90 per week will increase the number of low-paid jobs.
§ Mr. Kennedy
Curiouser and curiouser—I began by agreeing with a Conservative Member and a Labour Member is now defending the Government against me. We welcome the restructuring, but the changes must be seen in the context of the general approach outlined elsewhere in the Budget. I have grave doubts about the Government's broad approach. As the hon. Member for Birkenhead has said, the proposals before us are unlikely to have a resounding impact if they are set within that broad framework. I hope that the hon. Gentleman will agree that that is a fair point.
We are happy to welcome the changes, especially to the extent that they may herald moves towards full integration of the tax and benefit systems, which I believe would command broad support throughout the House. We congratulate the Government on their initiative in that respect, albeit tempered by qualifications arising from other aspects of their general economic policy.
§ Mr. John Watts (Slough)
I welcome the restructuring of national insurance contributions especially warmly, not least because in the employment debate earlier this year I urged my right hon. Friend the Chancellor to deal with the problem of national insurance contributions at the lowest earning levels. I welcome the significant boost that the changes will give to the take-home pay of the lowest paid, the incentive for employers to offer relatively low-paid employment and the incentive for potential employees to accept such employment. I also welcome the scope for further modification to the brackets and to the rates, which I hope foreshadows more radical changes in the system of levying and collecting national insurance contributions, so that the system moves in stages, like the income tax system, rather than from one bracket to another.
Like my hon. Friends the Members for Halifax (Mr. Galley) and for Tatton (Mr. Hamilton), I have received representations from companies in my constituency about the removal of the upper earnings limit for employers' 429 contributions, the non-availability of contracted-out rebate above that limit and the non-cumulative basis on which employers' contributions are to be calculated and collected.
Taking new clause 12 as a package, I believe that the importance of the benefits given at the bottom of the scale is so great that if the only way to fund it is to remove the upper earnings limit, companies employing predominantly higher-paid staff will have to live with that burden. Overall, there is a modest reduction of about £80 million in the total burden of employers' contributions, but the cost is redistributed according to the pay profile of the employees concerned. Naturally, I have sympathy for companies that will be hit especially hard by the removal of the upper earnings limit, but the value and impact of the benefits at the lower end of the scale in my view justify that burden.
As for the contracted-out rebate, I understand that there is a limit to the earnings taken into account for the accrual of earnings-related pension. That being so, it is logical that any rebate should apply only to that level of earnings which would otherwise qualify for the state earnings-related pension because the rebate is a recognition of the fact that by providing a scheme with benefits equal to or better than those of the state scheme the employer is relieving the public purse of certain costs. Therefore, although this is also a greater burden for companies operating contracted-out schemes, it is logical that rebate should not extend beyond the upper earnngs limit.
The non-cumulative basis on which employers' contributions are calculated and collected, however, presents real problems for companies operating incentive and bonus schemes. I hope that my hon. Friend the Minister will address his thoughts to that rather narrow point. A company operating a contracted-out pension scheme and incentive bonus schemes, where employees' normal earnings are below the upper earnings limit, will benefit from the contracted-out rebate, but if an incentive bonus is paid in one lump the earnings in that week or month may exceed the upper earnings limit for that period and push the employer's contribution up to the full 10.45 per cent. rate even though the employee's earnings over the year may still be below the £13,000 limit.
It would be sad if these imaginative restructuring proposals had the unintended side effect of discouraging employers from offering incentive bonus schemes. I hope that my hon. Friend will give further consideration to that problem and, if possible, seek a remedy that will remove the possible adverse impact on incentive schemes, as I am sure that all Conservative Members wholeheartedly support such schemes.
§ Mr. Kirkwood
We have always said that national insurance contributions constitute a tax that bears disproportionately on the poor, so we welcome the restructuring proposals. However, I hope that the Minister will pay attention to the circumstances that employers now find themselves in. High earners and their employers have enjoyed a slightly anomalous privilege as a result of the upper earnings limit, and they naturally resent losing it. I should have preferred more time to have been spent in consultation with industry about what will result from the change. Nevertheless, the change is necessary in the public interest.
430 There is a danger and a suspicion that high earners and their employers will get round the change and try to mitigate the impact of it by shifting the emphasis from salaries to perquisites. The Minister has an opportunity to say that, if companies and employers do that, the Government will seriously consider tightening the tax regime that applies to perquisites.
Employees' national insurance contributions should be integrated fully with income tax. That would involve applying the combined rate only above a personal allowance threshold—which threshold might have to be lowered to compensate for the loss of national insurance contributions currently levied—on all income from the first pound. We should like a move to be made towards the tax credit scheme that we have adumbrated for many a long year.
The Government could have approached the matter in other ways. I should have liked them to have considered the redistribution to low-paid employees in the forni of employees' national insurance contributions throughout the earnings range above £35.50 a week being levied only on earnings above, say, £10 a week instead of on all earnings. That would have given some benefit to everyone rather than being directed entirely at low earners, and it would have been simpler to administer and have avoided the anomalies that we now have in many poverty traps.
We support the changes in the employees' national insurance contributions, but the House should recognise that the clause will introduce parts of the poverty trap in other ranges of income. The high marginal rates will be reduced by a few per cent., but at the expense of moving them still closer to the discontinuities introduced by new clause 12. I understand that some of the calculations that have been done show that, for a 1p increase in salary, sums of up to £1.77 can be lost. That must be a disincentive.
We fear that the encouragement of employers to take on more low-paid workers as a small contribution to reducing unemployment might be marred by a tendency to lock many people, especially women, into wages just below the £55 or £90 a week level, just as many part-timers are now locked into wages below £35.50 a week to avoid national insurance contribution liability. Except in that latter regard, these objections do not apply to the stepped structure for employers' national insurance contributions, which is generally welcome for its redistributive and job promotion effects.
I should like the Minister to give the Government's view about the emphasis being shifted from salary to perquisites.
§ Mr. Higgins
It is completely wrong that we should debating new clause 12. When the Bill was given a Second Reading, such a clause was not generally envisaged. The important principles involved in the clause were therefore not considered at the stage at which it is normally appropriate to consider them.
These are highly complex matters which deserve detailed scrutiny such as can be given only in Committee. My hon. Friend the Member for Slough (Mr. Watts) mentioned the effect on employees who are contracted in and on those who are contracted out. That matter deserves detailed examination, preferably specific amendments, when hon. Members can speak more than once. On Report, an hon. Member can make his point only once, as has happened with my hon. Friend the Member for Slough. If he does not like the Minister's reply or if the 431 Minister does not understand what the argument is about, there is no way in which my hon. Friend can come back, as he could in Committee. This clause should have been the subject of a separate Bill or, at least, it should have been recommitted so that it could receive the consideration and attention that it deserves.
These measures were clearly part of the Budget. I fully understood my hon. Friend the Minister's reply to my intervention, when he gave the technical reasons why these measures could not rightly be incorporated in the Finance Bill procedure. Nevertheless, the measures were clearly part of the Budget, and it is therefore right that the Treasury and Civil Service Select Committee should have given careful attention to them.
The Select Committee has taken evidence from Treasury officials, my right hon. Friend the Chancellor of the Exchequer, the Governor of the Bank of England, the Confederation of British Industry and the Trades Union Congress. We took evidence from the TUC and the CBI only last Monday. I understand that, fortunately, I am able to refer to that evidence as it was all taken in public and has been reported to the House. It would not be right for me to quote it because the official published report has not yet been corrected. The House has not had the opportunity to consider evidence which is directly related to what we are debating today before reaching a decision. That is extremely unsatisfactory.
The broad point about the changes in the lower end of the contributions scale and the effect that they will have on employment is a matter that the House is likely to welcome. I do not think that there is a division of opinion on that. However, that does not mean that the changes do not raise some difficult technical problems which ought to be discussed in detail. It is likely that we agree about the beneficial effect of the changes on employment.
Studies made by the Institute for Fiscal Studies suggest that, of the 270,000 people who are affected by the poverty trap, even at the 75 per cent. effective marginal rate of tax level, only 10,000 will be taken out of the poverty trap by my hon. Friends proposals.
We should spend a little time considering the implications of contributions on both employees and employers. We run immediately into the vexed question of the contributory principle. I was deeply worried about that principle when I made my maiden speech because official obeisance to it over the years had ruled out from any benefit as of right the people who were over a given age when the scheme was first introduced. That gave rise to great anomalies. I introduced a private Member's Bill on the matter and I am happy to say that the first thing that the previous Conservative Government did on coming into office was to put the matter right. The over-80s, as they were generally known, got that part of the national insurance pension which was not covered by contributions. Even on the employees' side, the contributory principle has to a large extent been pure myth. The problem is even more difficult on the employers' side.
We are substituting three separate scales for the poverty trap scale. That creates problems, especially in regard to overtime.
432 5.30 pm
I understand that I can refer to the evidence given to the Select Committee, but cannot directly quote from it—although when the words are published, they will be seen to be cogent. Last Monday we took evidence from Sir Terence Beckett on this very issue, and he made a number of specific points on removing the upper limit on employers' contributions. He mentioned the interesting point—and the CBI has evidence from those able to analyse the position carefully—that, because of the increased costs at the upper end of the scale, employment may be reduced at the lower end of the scale. That may not be the general case, but Sir Terence appears to have specific evidence on this matter.
Sir Terence made the important point that the effect of increasing the burden at the upper end of the scale would inevitably make many high technology industries less competitive both at home and in export markets. He said that we should be moving towards the bigger value added end of the production scale. In reality, the effect of the proposal will be to deter those who are contributing significantly to increasing the amount of value added either in competition with imports or for export markets.
In further evidence, Sir Terence spoke about the various anomalies likely to arise, especially with regard to overtime. I understand that the scheme is to work on the basis of the weekly pay packet. Apparently, a number of firms are concerned that the £1 that employees earn in overtime at particular parts of the scale may actually make them £3 worse off. That is nothing to do with the "why work?" syndrome or the poverty trap. It is a question whether people should work overtime when both the employer and the employee think it justified. Some people will work overtime under the scheme but be worse off, which is clearly absurd. If we were in Committee, we could be banging the issue back and forth, seeing the extent of the problem and trying to find a solution. Concern is being expressed about the effects of the removal of the upper limit for employers' contributions.
On the so-called contribution principle for employers, if it ever existed it most certainly will not exist if we agree to the new clause. In evidence to the Select Committee, the Treasury made it absolutely clear that if we accept the new clause there will be no link between the contributions paid by employers and any benefit that they or anyone else might recieve. In short, the scheme is a payroll tax, and let us have no doubt about that. Moreover, it is a graduated payroll tax with the adverse effect of working against the encouragement of high technology, not low technology, projects and against making us competitive in world markets.
In answer to questions about the employers' contribution, my right hon. Friend the Chancellor of the Exchequer accepted that a contributory principle was not really involved. I do not know whether my hon. Friend the Minister has had an opportunity to study the Chancellor's evidence. Perhaps he will tell us whether he has. It is relevant for the House to know the views of the Chancellor on this new clause. I regret that there is no Treasury Minister present to illuminate us further. It is sad that we should come to this. It is a straight payroll tax at the upper end of the scale. Although I welcome the amelioration at the lower end of the scale, we must be concerned about the effects of the ending of the upper limit.
Many of us campaigned for a long time for the abolition of the national insurance surcharge—a tax on jobs 433 imposed by the previous Labour Government. I am glad that it has now been abolished. However, for employers employing people at the upper end of the scale, the effect of that abolition will be offset by the proposals in the new clause. I hope that my hon. Friend will answer a specific question. At what level of income is the abolition of the national insurance surcharge wholly offset by the proposals?
I do not intend to oppose the new clause. It is a curate's egg. We can welcome its effects on the bottom end of the scale while having grave reservations about its effects on the upper end of the scale. If my hon. Friend is in his usual good debating form, he will no doubt legitimately say that if we do not want to agree to the change at the upper end of the scale, we must tell him how to raise the money to pay for that. We could have a long debate about the general economic situation, and I presume that that would be in order. We could debate general fiscal and monetary policies and so on, but I do not want to go that far. We must take for granted the fiscal stance that the Chancellor has put before us. However, I still think that there are better ways to save money than the proposals in the new clause that affect the upper end of the scale.
To be specific, I believe that it is a mistake to increase the own resources to the EEC. No case has been made to the House on why we should give more money to increase agricultural production, when we all know that there are obscene surpluses in many areas of agriculture. Therefore, I am happy to suggest that as an alternative to removing the upper limit.
We have had very little time to debate this matter; and we have had no time to bandy it back and forth. I hope that my hon. Friend will agree to drop at least the part of the new clause that relates to the upper end of the scale.
§ Mr. Tim Yeo (Suffolk, South)
I wish to give the warmest possible welcome to new clause 12. Prior to the Budget I strongly advocated the changes that it incorporates and I am delighted to see that they have been included in the Bill. It is an important step towards improving the incentives for low-paid work. I do not share the reservations expressed by the hon. Member for Birkenhead (Mr. Field). At the very least, I believe that reducing the employers' contribution is a far better way to promote tow-paid jobs than raising tax thresholds.
Reducing the employees' contribution has the further advantage of making it more attractive for employees to take low-paid work because of the increase in their take-home pay. The combination of those two measures will be beneficial in promoting prospects for youth employment.
I do not share the concern expressed about the abolition of the upper earnings limit. The money that we shall gain from that will be used on something much more worth while. However, I was glad to hear my right hon. Friend the Member for Worthing (Mr. Higgins) mention an alternative source of funding the £800 million that will be gained. I agree with his point about own resources. I should like that money to be saved in addition to the money saved in abolishing the upper limit.
I wish to make three brief points. The new clause drives a complete coach and horses through the idea that national insurance is any longer either an insurance or a contributory system. I happen to believe that that is very welcome. It is an overdue acknowledgement by the Government that the contributory basis is completely bogus.
434 I hope that we shall hear no more of that argument because it has been used to obstruct all sorts of reforms in the national insurance system over the years. We have seen contributions at the lower end reduced. As a result of the new clause, contributions at the higher end will be increased, but there has been no change in the benefit to which people are entitled. Thus, there is no insurance principle at stake here.
§ Mr. Frank Field
A number of hon. Members have said that a coach and horses has been driven through the national insurance system. Will the hon. Gentleman reflect on the position of our constituents when they come to claim benefit? Many of them are denied benefit on the basis of inadequate contributions. For them, therefore, the contribution principle remains intact.
§ Mr. Yeo
I appreciate the point that the hon. Gentleman makes as it affects those who have been paying in the past. I am simply pointing out that for those who think that they have been buying a benefit by their contributions and who are suddenly told that, because they are higher earners they must pay two, three or four times as much without any increase in benefit, there is no insurance principle, and the same applies at the bottom end of the scale.
I acknowledge that the perception of many people who have paid national insurance contributions has been that they have been buying an insured benefit. Let us disabuse them of that perception as quickly as possible. The new clause will help to do that.
The distortion will continue, though to a lesser extent because the rate of contribution is payable on total earnings. Thus, when one moves through the thresholds, one has a marginal rate of what I would call tax of well in excess of 100 per cent. That is unfortunate, but it is not as serious as it was, and we should continue to try to refine the system to avoid that disincentive effect, which will, to some extent, apply to employers as well as to employees.
I hope that the new clause is only the first step to the complete integration of national insurance contributions with income tax. Once we have recognised that we are no longer dealing with an insurance system, and once we have acknowledged that national insurance is, in effect, a tax, we are ready to integrate the two systems.
Employees' national insurance contributions could easily be merged with their income tax. We have the ironic consequence, as a result of the changes made by the new clause and last year with the abolition of the investment income surcharge, that investment income is now effectively taxed at a lower rate than earned income. I see no reason why that situation should continue.
If we merged employees' national insurance contributions with tax, there would be some disadvantage initially for pensioners, but that could be dealt with by raising the age allowance. Employers' national insurance contributions have always been a payroll tax, and they should be further reduced in future years.
The right hon. Member for Plymouth, Devonport (Dr. Owen), during Prime Minister's Question Time, raised a point which seemed to be critical of the changes that are now proposed. However, I was glad to hear his hon. Friend the Member for Ross, Cromarty and Skye (Mr. Kennedy) supporting the changes. It is a comfort to those of us who like to see familiar sights to have the SDP facing in opposite directions at the same time. I hope that that will 435 not deter the Government from moving ahead eventually to the complete abolition of national insurance and its integration with tax, which would result in considerable administrative savings.
I do not always have cause to congratulate the Government on the effect of their fiscal and financial policies on the voluntary sector. However, since, on the whole, voluntary organisations have an above average proportion of low-paid workers, they will be substantial beneficiaries of the changes that are being made. The large charities, of which I have close personal knowledge, will experience a considerable saving in their wage bills as a result of this measure.
§ Mr. Michael Morris (Northampton, South)
I apologise to the House for being delayed, and I apologise in particular to the Minister for not being present to hear him move the new clause.
I recognise the broad strategy behind the new clause, and I support it. However, I wonder, in relation to its implementation and bearing in mind the removal of the employers' upper limit, whether the Government have understood the full implications of what they are doing. My right hon. Friend the Member for Worthing (Mr. Higgins) did the House a service in referring to some areas that were troubling him. I agree that as detailed a new clause as this warrants the careful attention of hon. Members.
The House will note amendments (a)and(b) to the new clause which stand in my name and that of my hon. Friend the Member for Halifax (Mr. Galley). My hon. Friend represents a northern seat and I represent an industrial seat in the midlands. The reason for our choice of £25,000 in respect of amendment (a) was that it seemed logical to have an upper limit. After all, while our European partners do not have identical schemes, they are similar; for example, the French have had an upper limit for many years. It is a variable limit—depending on whether the contributions are for pension, unemployment, health or sickness—of about £11,000 depending on the pound-franc exchange rate. West Germany, which is perhaps the closest analogy to the United Kingdom, has an upper limit of £20,000. Therefore, before we rush away from the idea of having an upper limit, we should think of our relative competitiveness with out continental partners. That was one of our motivations in tabling that upper limit.
Our second purpose was to try to have some relationship with the other guides that we have in Britain, and the one that my hon. Friend the Member for Halifax and I chose was that at which people no longer get tax relief when they are made redundant. If one is unfortunate enough to be made redundant and one has a tax benefit payment, it is tax-free up to £25,000, and beyond that it is taxable. That was the logic behind the figure that we chose.
In choosing that figure, we were not aware of the question that had been tabled by my hon. Friend the Member for Croydon, South (Sir W. Clark) on 15 April, in which he asked for the cost of what we propose. It was made clear in the answer, at column 40 of the Official Report for that date, that the cost would be the substantial sum of £275 million. However, I was cheered as I journeyed south this afternoon to hear that the outturn from 436 the public sector borrowing requirement was a good deal better than the Chancellor had forecast at the time of the Budget. In other words, that £275 million has probably been saved.
Amendment (b) may appeal to the Minister. It would allow him, should he wish to do so at a future date, to put on a top limit—that is, if he is not persuaded today that £25,000 would be the right figure. In other words, it would give him a degree of flexibility to meet many of the points that have been made today. I look forward with interest to hearing his reply on that point. It is true that the days have gone when a limited contribution produced a limited benefit. I take the point of the hon. Member for Birkenhead (Mr. Field) that it is conceivable that a man or woman who is short of contributions at a certain stage may make good, make an enormous contribution to the national insurance fund, and still be ineligible for the basic pension because of an insufficiency of contributions. That is an anomaly to which my hon. Friend the Minister for Social Security should address himself. Those who find themselves in that position will feel aggrieved, and rightly so.
Only four weeks have passed since the Budget but calculations have been made by four companies in Northampton which show that, if the proposed levels of contribution are implemented, a medium-sized company that tends to operate in the high-tech area will pay more than it will save from the national insurance surcharge. That seems to be the wrong approach. I suspect that we shall find that many medium-sized companies are adversely affected. It is the growing, medium-sized company that we want to prosper, and such companies should be given every encouragement.
It is a fact that national insurance contributions are paid for up to 52 weeks for an employee who is working overseas. When that rule was introduced it was the norm for employees to go abroad for 18 months or two years. That was the normal tour. That was reduced to about 15 months. However, there has been a further change and the bulk of expatriate Britons in the middle east or far east, where my right hon. Friend the Member for Worthing has been recently, are abroad for nine months. As the cost of living abroad is higher than it is here—that is usually the position—salaries have to be enhanced and employers will find themselves having to pay enhanced national insurance contributions. That will produce an additional on-cost for those whom we want to be more competitive in the market.
My right hon. Friend the Chancellor of the Exchequer and his ministerial colleagues have rightly placed great emphasis on share incentive schemes over the past few years. This is to be applauded, but we must recognise that such schemes are likely to be attractive to middle management and top management. If someone is on the shop floor or is a member of lower management and he receives an annual bonus, which in many ways is comparable to a share option scheme, which will attract medium and top management, he will find himself in the top bracket for contributions if the bonus is paid in any one week. That is an unnecessary disincentive. It will not encourage better employer-employee relationships and it will negate the benefit of having good involvement between men and management.
§ Sir Brandon Rhys Williams (Kensington)
I support my right hon. Friend the Member for Worthing (Mr. 437 Higgins) in his complaints about the introduction of the clause at this stage in the Bill's passage through the House. It is clear that we have an important new clause before us, but the Bill was intended originally to be much smaller in scope. It was not envisaged that it would involve the enormous implications that will undoubtedly flow from the new clause.
It is sad when a Department uses a Bill which is a minor measure when set against the provisions contained in the new clause as a vehicle for placing additional legislation on the statute book quickly without giving Parliament the opportunity of a proper Second Reading debate or the opportunity fully to examine in Committee the measures proposed in the new clause.
It is wrong that this new clause should have been presented in this way. The provisions contained in it should have appeared before us in a separate Bill. Parliament has a duty to consider what the Executive are proposing for the taxation of individuals. The new clause will apply to virtually the entire population at one time or another; and yet we shall let it pass after an hour or two's debate without any proper consideration of the implications.
We have had a number of interesting Second Reading speeches and some hon. Members have attempted to do the work that they would have done if they had had the opportunity of considering the Bill in Committee. The introduction of the new clause at this stage is an abuse of parliamentary procedure. If we allow this to happen and Departments learn that they can treat the House in this way, they will do it again. We shall all suffer as a result, but the nation will suffer most of all. As a consequence, Parliament will be treated increasingly by Departments as a dead letter or a rubber stamp. I support my right hon. Friend the Member for Worthing in his complaints, speaking as he did with the authority of being Chairman of the Select Committee on the Treasury and Civil Service. When the Minister for Social Security replies, I hope that he will give us an assurance that this is an experiment which his Department does not intend to repeat.
We all accept that national insurance contributions had to be related to earnings and a number of years have passed since the earnings-related system was introduced. There is no good reason for keeping the national insurance contribution separate from income tax, especially as it is collected through the pay-as-you-earn mechanism. The identification of national insurance contributions as something separate from income tax is a survival of a bureaucratic notion which should be brought to an end.
I accept that it is right to carry the contributions to the national insurance system up to the top ranges of earnings, but what justification then remains for keeping higher-rate tax at the same time? That retention becomes increasingly dubious. I appreciate that many of my right hon. and hon. Friends would not join me in this approach, but a few weeks ago I turned up the reports of the debates in Committee during the consideration of the Finance Bill of 1971. I looked them up for another purpose but I found that at that time I recommended strongly that we should bring to an end the higher rate of tax as it did no one any good. I only regret that I have not said it more often since then. The economy would be in much better heart now if we did not have a system which attacks those who earn the most and who contribute most to the creation of wealth.
In moving towards higher rate contributions to the national insurance scheme we are, if anything, 438 accentuating the evil effects of retaining the higher-rate tax. The House should ask itself who gains from discouraging the enterprise of those with the greatest earning potential. Secondly, who would lose if higher-rate tax were abolished? I believe that in a short time revenue would actually increase if it were abolished. When Sir Stafford Cripps halved the duty on wine, he doubled the yield in a very short time. If we did not have the higher-rate tax, taxpayers would pay much more within a short time in national insurance contributions and income tax at the standard rate. Much less effort and ingenuity would be wasted on tax avoidance, which is a major national industry.
We would help also to end the senseless distortion of salary structures. The sharp increases in salary that are sometimes received by senior management, especially in the private sector, are seen by some sections of public opinion as offensive; but the net effect of these increases still does not bring British levels of earnings within the range that is considered normal for top people in other countries.
Equally, we would take the unwanted burdens from companies of retaining the people that they need for the continuation of their business regardless of the enormous expense of paying the tax which goes along with paying the necessary gross salaries. If, in the enterprise economy, we ended discrimination against the most energetic and creative elements, everyone would gain and no one would lose. I hope that I shall have the opportunity to say the same thing again, because it is a point which needs to be made, if not by anyone else, then by the hon. Member for Kensington.
We have now had earnings-related contributions for a number of years. We still have no explicable relationship between contributions and benefits in national insurance. Employers' contributions should have a specific purpose and a definable, calculable end result. The recommendation that I would like my hon. Friend to consider is that the employer's contribution to the national insurance system should become a form of deferred pay which would go straight into a personal money-purchase scheme for each employee. The employer's contribution ought riot simply to be lost in the fund, but should be retained as a personal entitlement of the employee in respect of whom it is paid. It should be allowed to accumulate on money-purchase principles to provide for his retirement as a form of deferred pay.
I do not like the employer's contribution going into what is, in effect, a final salary scheme. Final salary schemes have a redistributive or money transfer effect from the low to the higher paid and from early leavers to long stayers. That last point may not be a fair criticism of the state earnings-related pension scheme arrangements, but I support those who think that the state earnings-related pension system should be wound up as soon as possible. I should like the employers' earnings-related contribution to be retained and identified as the property of the individual employee, and for it to go towards the provision of his retirement income.
If employers made a 10 per cent. pension contribution, it would not be enough to give everybody all that they hope for in retirement, but it would certainly be the basis of a satisfactory retirement income and it would be possible to calculate how it had been arrived at.
439 I accept that employees' contributions cannot purchase specific benefits if the payments into the scheme are earnings-related but the benefits are flat rate. Equally, the benefits which people have learnt to expect from national insurance are related to their families' circumstances but there is no reflection of family circumstances on the contribution side. That is another anomaly.
I accept that there is inevitably a redistribution of income where employees' contributions are concerned, but that really has the effect of making national insurance contributions into a citizenship entitlement. It is not an insurance scheme in any acceptable sense of the term and the proposal before the House today takes us no further in clarifying the underlying relationships between contributions and benefits in the national insurance system.
National insurance is a citizenship entitlement with unacceptable gaps, as hon. Members have pointed out. Because of deficiencies in the contribution records which are held to exist in certain cases, some people are not entitled to claim against national insurance when they fall into need, and we then have to have a supplementary benefit system instead which gives them virtually the same entitlements. But that alternative simply clouds the moral basis for the redistribution of income and at the same time creates tremendous administrative difficulties.
In the years of the decline of the Holy Roman Empire, it was said that they legalised anarchy and called a constitution. The redistribution of income in Britain is in the last stages of decline and must be abolished and reconstructed in one way or another. This Bill legalises the extension of income tax and calls it a contribution. It is not really a joking matter; it is a system which urgently needs to be revised. I hope that my right hon. and hon. Friends are thinking seriously of what comes after the Bill. We know that studies are being made on the reform of the redistribution of income; but are they sufficiently radical to do away with the problems that have beset national insurance since it went over to an earnings-related contribution basis?
There is a strong element of hyprocrisy and muddle in this Bill. It has no place in the redistribution of income in a fair society and is a heavy brake on enterprise. We are entitled to expect from my right hon. Friends the Secretary of State and the Chancellor a rational, comprehensible and transparently moral system for the redistribution of income. The new clause is not enough.
§ Mr. Newton
I find myself in the strange position of having had the least equivocal welcome for the new clause from the hon. Members for Birkenhead (Mr. Field), for Ross, Cromarty and Skye (Mr. Kennedy) and for Roxburgh and Berwickshire (Mr. Kirkwood), with whom I might, if I dare, couple my hon. Friend the Member for Suffolk, South (Mr. Yeo) and, very nearly, my hon. Friend the Member for Slough (Mr. Watts). I hope that they will not think that I am doing too much damage by adding them to the company in which they have found themselves this afternoon. Having said that, and recognising that several cautionary remarks have been made and questions asked by many other of my hon. Friends, I want to thank them for the balanced and constructive way in which they put their points.
440 I agree with the hon. Member for Birkenhead that it is nonsense to put forward the proposition that the new clause is directed towards promoting low-paid employment at the expense of other forms. The Government's proposition is that there has been an unduly heavy additional Government burden of tax and national insurance contributions in that part of the labour market which has inhibited employment there. That is not at all the same as saying that it is part of a deliberate plan to stimulate low-paid employment. The hon. Member for Birkenhead made that point particularly well in an intervention.
The hon. Member for Derby, South (Mrs. Beckett) asked me about the position of people with two part-time jobs. They will each be dealt with separately to determine the initial liability, but when all annual contributions are received in Newcastle the enhancement which we intend as part of the other arrangements to which I referred will be applied if appropriate. I can assure the hon. Lady that people with two or more jobs will not be in any way disadvantaged in comparison with those earning the same amount in a single job.
The hon. Lady asked about earnings factors. As I hope I said, we intend to use a formula to boost earnings which will ensure that the earnings factor broadly reflects actual earnings. If it errs at all, it is likely to err on the side of generosity to the beneficiary. The only people who might lose a small amount of additional component will be those with a few weeks of lower rate contributions where their normal earnings were generally considerably higher. Even they would receive additional component commensurate with the contributions paid. I hope that that gives her some reassurance on the points that were causing her concern.
My hon. Friend the Member for Tatton (Mr. Hamilton) referred to his new clause 23 and the consequences of the changes in the limits in the middle of the year. As he explained, his new clause is aimed at company directors whose annual earnings period would straddle any change in contribution liability arising from a mid-year change in the employers' upper earnings limits. Because of that, the actual contributions required from them could be significantly affected by the precise method chosen for applying a mid-year change in liability. We are not yet in a position to say what that method will be, although I know that directors and others similarly placed will want to know soon how they will be placed personally. The Institute of Directors, as is well known to those who read newspapers, wrote to my right hon. Friend the Secretary of State last week. He has agreed to meet the institute to discuss this and wider points arising from the Budget changes in national insurance contributions. I hope that my right hon. and hon. Friends will be encouraged generally that that meeting it to take place and at which some of the points they raised will be discussed.
I assure my hon. Friend the Member for Tatton that it will not be necessary to amend the Bill to implement whatever solution is reached in consultation with those affected on the issue that is the subject of new clause 23. There are already sufficient powers to make the necessary changes to regulations, both in the existing primary legislation and in the transitional provisions in the Bill. I hope that that response to his constructive remarks will reassure him.
Much has been said about the contributory system. My hon. Friend the Member for Halifax (Mr. Galley) raised the matter first, and it was echoed by my right hon. Friend the Member for Worthing (Mr. Higgins) and my hon. 441 Friends the Members for Northampton, South (Mr. Morris) and for Kensington (Sir B. Rhys Williams), who dealt with the matter in his own inimitable wide-ranging style. Many of the issues raised about the contributory system, especially by my hon. Friend the Member for Kensington, such as the inter-relationship with taxation and the future of the social security benefit and taxation systems, range too wide for me to hope to respond to them in such a debate. Indeed, it would not be appropriate for me to seek to respond to them while the Government are considering the conclusions of the social security review, and as my right hon. Friend the Chancellor of the Exchequer announced in his Budget speech proposals to introduce a Green Paper on personal taxation. However, I shall ensure that my right hon. Friends the Secretary of State and the Chancellor have their attention drawn to the remarks made during the debate.
Exaggeration was displayed in suggestions that the changes in the new clause would result in a dramatic erosion of the contributory system and suddenly change the world overnight. My right hon. Friend the Chancellor made it clear in the Budget that the essential features of the contributory principle would be preserved. We have certainly sought to do that regarding people's benefit rights through our amendments and my assurances to the hon. Member for Derby, South.
§ Mr. Newton
I am thinking of the fact that people acquire benefit rights by the payment of contributions, especially employees' contributions. I have read what my right hon. Friend the Chancellor said to the Treasury Select Conunittee when he gave evidence to it about this matter. I would not want to pretend that the argument can be presented completely in black and white. However, the present system already involves redistribution from the better paid to the lower paid, for example, by giving 100 per cent. pension return on earnings up to the lower earnings limit, but only 25 per cent. pension return on earnings between the lower and upper earnings limits. Our proposal merely extends the redistribution which already takes place within the national insurance system.
My right hon. and hon. Friends may not regard that as good, and that is a matter for argument. I think that the move is sensible as part of our package. However, it is straining the point to suggest that there has been a dramatic change compared with the structure of the national insurance system which has existed since the move to earnings-related contributions nearly 10 years ago which suddenly calls into question the basis of the contributory principle in an entirely new way. I hope that my right hon. and hon. Friends will reflect a little on that before they suggest that the change is as great as they implied in their speeches.
§ Mr. Higgins
I am sorry to interrupt again, but my hon. Friend has not answered my question. What are the essential features of the contributory principle for employers' contributions?
§ Mr. Newton
I hoped that I had at least answered my right hon. Friend's question by implication, but I shall now seek to answer it more explicitly. There has been no clear contributory principle for employers' contributions for a 442 considerable time. I do not believe that the proposals in the new clause dramatically change that. I have the greatest respect for my right hon. Friend and hope that he will not think that I seek to dodge his question. I am not sure whether he has said before—many of my hon. Friends on many previous occasions have done—that the contributory principle is now virtually meaningless. If they hold that view, I hope that they will accept that the proposals make no great difference.
The nature and extent of the contributory principle. the weight placed on it in the past, and the extent to which it was changed in the mid-1970s are matters of argument. However, as a matter of record, I wish to state that the Government did not propose, and do not see these changes as marking, a dramatic departure from previous principles.
§ Mr. Michael Morris
I am listening carefully and understanding my hon. Friend, but does he accept that this is the first time that an upper limit has been removed, and that that is a significant change? We are the only member of the European Community to have removed an upper limit. That is surely a significant change.
§ Mr. Newton
I do not wish to make heavy weather of this matter. I am not suggesting that this is not a significant change. The Government have placed a proposal before the House, which is significant for various reasons, including those that I made clear in my initial speech. However, I question whether it is a significant change in the basic principles of the national insurance system as it has been operating since the move to earnings-related contributions nearly 10 years ago. I assure my hon. Friend the Member for Halifax that contracting-out rebates will remain as at present, that is, 2.15 per cent. of earnings between the lower and upper earnings limits for employees, and 4.1 per cent. for employers. To have extended the rebates above the upper earnings limit would have been to change the contracting-out agreement when the present pension scheme was put in place.
I am anxious not to delay the House unnecessarily but to deal with as many specific points as I can. I assure my hon. Friend the Member for Tatton that the amount of additional administrative burden for employers will not be as significant as he suggests because we shall provide them with tables designed to make their task little or no more difficult than the existing system.
Some of my hon. Friends expressed reservations about the effects on higher paid employment. I echo the comments of my hon. Friend the Member for Slough (Mr. Watts) in explicitly recognising that this is a package. My right hon. and hon. Friends would rightly think me foolish if I were to attempt to meet all their points by dismissing them or pretending that they had no validity. Obviously there will be problems about some aspects of the new margins between the different bands of earnings. However, they must be considered against the significant problems of the existing huge cliff edge that arises at the existing lower earnings limit.
Some firms with heavy concentrations of highly paid employees may not be happy and may suffer some difficult consequences from the rise in national insurance contributions. However, I am certain that many more firms which employ millions more people and must also compete in foreign markets—often in even more competitive markets where sheer skill and ability are not as much part of the sales package—will gain a 443 significant advantage through reductions in labour costs as part of the package. I do not run away from saying that there are disadvantages, but they must be weighed against the advantages in the package as a whole.
Within that perspective, the measures deserve the support of the House. They will help to create new employment, especially in areas where opportunities have been most difficult to find, and they will improve the health and strength of the British economy while at the same time bringing important additional social help to those in lower-paid employment who have an especially strong claim on our help. I hope that we shall have the support of the House in carrying through the proposals.
§ Question put and agreed to.
§ Clause read a Second time.
§ Question proposed, That the clause be added to the Bill.
§ Mr. Higgins
I must express some doubts as to whether we should take the step that the Question suggests. Before we decide to add the clause to the Bill, may I ask my hon. Friend, in relation to his statement that tables will be provided to show that the changes in this new clause will be easy to administer, whether that will take account of the point about people working overtime. How will the tables cope with that?
Another point about which I have grave doubts relates to the position of employers who are contracted in or contracted out of the scheme. Is it the case that those who have been contracted out will effectively be paying at the contracted-in rate? If that is so, what will my hon. Friend do about it?
§ Mr. Newton
It is entirely right that my right hon. Friend should have pressed me about the tables, since I acknowledged in my remarks that there was some validity in his comments about the effect of having several cliff edges at points on the incomes scale, which I believe is what he has in mind when referring to overtime. I thought I had acknowledged that I do not dismiss the point, but that it must be put in the context of the substantial disadvantages of the existing lower earnings limit, with the especially acute cliff-edge effect that it has on people earning small amounts of additional money.
The tables with which we shall provide employers to operate the new proposals will be related, as the existing tables are, to what employers should pay on the given amount of earnings in one week. That will necessarily be the amount of contributions due on the total earnings, including overtime. That is how the present system works. The employer looks at the tables to determine from the earnings of his employee in any week what the contribution should be, and I envisage no change in the method of operation.
§ Mr. Higgins
I am grateful to my hon. Friend for clarifying that point. Is it true, as has been asserted in evidence and elsewhere, that those who work overtime may discover that, under this scheme, they receive less as a result of working overtime than if they do not?
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
Order. I hope that the Minister will reply briefly, because in no way must this be an extension of the debate on the 444 Question, That the clause be read a Second time. We are talking about adding the clause to the Bill; we must not discuss the principle of the new clause.
§ Mr. Newton
I should be grateful for your indulgence for a moment or two, Mr. Deputy Speaker, because I would not wish to end the debate in a way that denied my right hon. Friend the opportunity to press me on the points that he wished to raise. I must acknowledge—I thought I had already done so twice—that I do not dismiss my right hon. Friend's point, but I wish to place it in context. Just as it is acutely the case, in relation to the present lower earnings limit, that a small increase in earnings can precipitate a large increase in deductions, so to a lesser extent that must necessarily be the case with the other steps being introduced into the system. But at each of those steps, the effect will be less than it is at the existing lower earnings limit. Therefore, to some extent, it will have the effect that my right hon. Friend mentioned. Clearly, that cannot be denied, and I have no intention of trying to deny it.
Nevertheless, taking account of the large anomaly in the present system, what we are doing to reduce that anomaly, together with the other advantages of the broad reduction in national insurance contributions for the lower paid in the package as a whole, means that the disadvantage to which my right hon. Friend drew attention is worth having. It will also be true that, whatever may be the effect at those margins, the national insurance contributions being paid will still be lower than those which would be paid at the same levels of earnings at present because of the overall reduction in national insurance contributions.
I hope that I have answered my right hon. Friend's query on that point, but whether I have satisfied him is another matter altogether.
§ Mr. Deputy Speaker
Order. What I feared is about to happen, and we are having an extension of the debate on the Second Reading of the clause.
§ Mr. Newton
It sounds as though I have exhausted your indulgence, Mr. Deputy Speaker. I am grateful for it, in that it helped me to assist my right hon. Friend. I continue to believe, as I have said on several occasions, that, taking the advantages and disadvantages together, there is a strong case for what the Government propose in the new clause, and I hope that the House will accept it.
§ Question put and agreed to.
§ Clause added to the Bill.