§ I have one further measure to propose. It has long been a feature of the national insurance system that, once people earn more than the lower earnings limit, which in 1989–90 will be £43, they have to pay national insurance contributions at the same rate on the whole of their earnings up to the upper earnings limit. There are currently three different rates—5 per cent. and 7 per cent. for those on lower pay, and the standard rate of 9 per cent. The two reduced rates, which I introduced for both employers and employees in my 1985 Budget, cut the cost of employing the young and unskilled, among whom unemployment was then high and rising, and cut the burden of national insurance contributions on the low paid.
§ However, the highly desirable reduction in the steep step at the lower earnings limit was achieved at the expense of creating two small steps further up the earnings scale. This is not a real problem so far as employers' contributions are concerned, but it is for employees. For it inevitably means that, at certain points on the income scale, people can still be worse off if they earn more. Their extra earnings take them from a lower rate band to a higher one, and they therefore lose more in national insurance contributions than they gain in extra pay.
§ In agreement with my right hon. Friend the Secretary of State for Social Security, I now propose to build on my 1985 reform. For pretty well everyone who pays employee national insurance contributions, I propose to reduce to only 2 per cent. the rate of contributions on their earnings up to and including the lower earnings limit. On their earnings above that limit, there will be a single rate of 9 per cent., up to the upper earnings limit, which has already been set for 1989–90 at £325 a week. This will abolish altogether the steps which at present exist at earnings, for 1989–90, of £75 and £115 a week, and thus remove a serious work disincentive from the system.
§ The step, which has always existed at the lower earnings limit, where people first come into the national insurance system, is the entry ticket to the full array of contributory benefits—as such, it is an essential feature of the contributory principle—but my proposals will more than halve this step, to only 86p a week in 1989–90. There will be no change in the contributions payable by employers.
309§ This reform will significantly reduce the burden of employees' national insurance contributions across the board. For the lowest paid, that burden is now heavier than the burden of income tax. This is the most effective measure I can take to lighten it. For everyone on just under half average earnings and above, it will leave them £3 a week more of their own money.
§ The new system will take effect from the beginning of October, the earliest practicable date. The cost will be £1 billion in 1989–90 and £2.8 billion in 1990–91. The necessary legislation will be included in the Social Security Bill currently before the House.
§ The total additional cost of all the measures in this Budget, on an indexed basis, is under £2 billion in 1989–90 and £3.5 billion in 1990–91.