AMENDMENTS RELATING TO PRIMARY CLASS I CONTRIBUTIONS (Hansard, 24 April 1989)

§ The Secretary of State for Social Security (Mr. John Moore)
I beg to move, That the clause be read a Second time.

§ Mr. Speaker
With this it will be convenient to consider Government amendments Nos. 7 and 10.

§ Mr. Moore
The purpose of the clause is to reform the structure of employees class 1 national insurance contributions, to reduce those contributions for almost all employees and to abolish the steps in contribution rates between the lower and upper earnings limits. These changes were announced by the Chancellor in his Budget statement on 14 March 1989 and build on the reforms enacted in 1985 when the reduced national insurance contribution rates of 5 per cent. and 7 per cent. for lower paid workers were introduced.
The 1985 reforms were a welcome change for the lower paid, but there was a major difficulty. When a person's earnings crossed the lower earnings limit for national insurance, he had to pay a 5 per cent. contribution on all his earnings. An individual earning £42 a week in 1989–90 would pay no contributions. A pay increase of £1 will take 672 his weekly earnings over the lower earnings limit of £43 a week and he will then pay a contribution of 5 per cent. on all his earnings—£2.15 a week—which is considerably more than his increase in earnings. There are similar effects when earnings rise above £75 and £115 a week—the earnings levels at which the higher 7 per cent. and 9 per cent. rates come into force. Not surprisingly, people are deterred from increasing their earnings to take them over these cliff edges.
People keeping their earnings below the lower earnings limit can be excluded from a wide range of national insurance benefits. Under the reformed system, which comes into effect in October, people earning less than the lower earnings limit—£43 a week for 1989–90—will still pay no contributions. Individuals earning more than £43 a week will pay contributions at 2 per cent.—the initial percentage rate—on the first £43 of weekly earnings and at 9 per cent.—the main percentage rate—on earnings above £43 a week up to the upper earnings limit of £325. At the current lower earnings limit, the national insurance entry fee is just 86p a week. Individuals earning at this level throughout the year will earn entitlement to all national insurance benefits for this small weekly sum.
The single 9 per cent. rate of earnings above the lower earnings limit will remove the steps in contributions that occur on changing from 5 per cent. to 7 per cent. and from 7 per cent. to 9 per cent. A pay increase of just £1 above the £75 and £115 earnings limit means that people will no longer be worse off overall by over £1 a week through higher contributions. The clause will entirely remove the disincentives for individuals to increase their weekly earnings above those earnings limits.
The change will lead to lower contributions generally. From October, 15 million people earning more than £115 a week will pay £3 a week less in national insurance contributions. The 4 million people earning less than £115 a week will not gain as much, but they have already gained from the 1985 reforms, and the combined effect of those reforms and those proposals will result in a gain of £3 a week. They will also benefit from the removal of the cliff edges at £75 and £115 a week, which may have kept down their net earnings. The new system will cost, in terms of lower national insurance contributions, about £1 billion in 1989–90 and about £2.8 billion in 1990–91, which will be its full first year of operation.
The clause removes the steps in national insurance contributions, which were disincentives for employees to increase their hours of work. It reduces the class 1 contributions for almost all employees by up to £3 a week. It provides entitlement to all contributory benefits, including the basic retirement pension, for as little as 86p a week.
I am sure that the measure will be widely welcomed and I commend the clause and associated amendments to the House.

§ Mr. Frank Field (Birkenhead)
I should like to continue a conversation that I had during an earlier Question Time with Ministers on the Treasury Bench. I made a plea that the Government should not rest on their laurels and leave their reform of national insurance at this stage. I was concerned specifically with the growth of part-time work and with the fact that 40 per cent. of all part-time jobs in the EEC are in this country. In reply, the Secretary of State said that the reason was probably that large numbers of workers wanted part-time jobs.
673 I accept that many people want to work part time, and they should have the opportunity to do so. However, at that time I was making a separate point. If employers' contributions are exempted up to the lower ceiling, as it now is, there is an incentive for them to pay people below that level—in other words, to create part-time jobs—whereas, if there were no rigging of the market by national insurance contributions, they might create full-time jobs. I should like the Government to consider that aspect.
I should like to underline a point made by the Secretary of State. For the small sum of 86p a week, people at that end of the market get a very good deal.

"Initial primary percentage";	See section 4(6) and (6A)
"main primary percentage"; "primary percentage"	Construe "initial primary percentage rate" and "main primary percentage rate" as references to the percentage rates from time to time specified in section 4(6A)(a) or (b) as the initial or, as the case may be, main primary percentage."
"Main primary percentage"	See "initial primary percentage"; "main primary percentage"; "primary percentage" above."
"Primary percentage"	See "initial primary percentage"; "main primary percentage"; "primary percentage" above."—[Mr. Moore.]