HL Deb 30 October 1975 vol 365 cc724-35

7.28 p.m.


My Lords, I beg to move that the Social Security (Contributions, Re-rating) Order 1975, a draft of which was laid before this House on 23rd October, be approved. Under the Social Security Act 1975, the Secretary of State for Social Services is required to review each year the general level of earnings in Great Britain and to consider what changes in National Insurance contributions need to be made in the light of movements in earnings and other relevant factors. This year's review has been completed and the draft Order now before your Lordships provides for increases from next April in the rates and levels of contributions. Before coming to the details of the changes, I will comment on the factors which have made these increases necessary.

First, the Government are committed to review pensions and other benefits at least once a year. There has already been one increase this year, in April, and a second increase is being made in a few weeks' time. The money has to be found to pay for these increases. This does not take into account the cost of further increases, resulting from the 1976 review of benefit rates, which must take effect from the middle of November 1976 at the latest. And it has to be remembered that a high level of unemployment not only increases the amount paid in unemployment benefit but also reduces the income from contributions. These factors make it inevitable that there must be contribution increases for 1976–77.

I will turn now to the details of the changes which the Order would make. For Class 1 contributions (that is, the earnings-related contributions paid in the main by employed earners and employers) the lower earnings limit for contribution liability is raised from £11 to £13 a week and the upper limit from £69 to £95 a week. This means that people earning at least £13 a week will be liable for contributions on all their earnings up to £95 a week. These increases not only take account of an increase of about 30 per cent. in the general level of earnings in the 12 months up to April 1975—the period covered by the Secretary of State's review of earnings—but also of the further factors to which I have already referred. But because of these factors the additional income which will result from raising the upper earnings limit to £95 per week will not be sufficient to keep the National Insurance Fund soundly financed. It is for this reason that the draft Order also provides for the rates of Class 1 contributions to be increased by ¼ per cent. for both employed earners and employers; that is, to 5¾ per cent. and 8¾ per cent. respectively. These are the maximum increases in rates which can be effected by Order.

For someone earning £69 a week—the present upper limit—the effect of these changes will be to put up his contribution by 19p a week. For those with lower earnings the increase will be proportionately smaller. The maximum increase will be for those earning £95 or more a week. Their contribution will go up by £1.67 a week. There will be corresponding increases in employers' contributions. I will explain why the increase for those earning more than £69 a week is proportionately greater than that for those with lower earnings. People earning less than £69 a week this year who have had a pay increase will have begun to pay higher National Insurance contributions at the time of that increase. But those earning more than £69 a week will have escaped a contribution increase at that time no matter how large the increase in their pay. The new upper earnings limit of £95 will mean that their contributions will catch up from next April.

As regards the self-employed, my right honourable friend the Secretary of State for Social Services announced earlier this year that she was putting in hand a detailed re-examination of the problems involved in establishing for them a system of earnings-related pensions with corresponding contribution rates. Work on this study is proceeding, but it is a major undertaking to overcome the practical difficulties which, as my right honourable friend explained, had so far ruled out such a system under successive Governments. Much work remains to be done and no conclusions can be reached at this stage. But the proposed changes in self-employed contributions for 1976/77 are consistent with Government's objective; namely, a system of fully earnings-related contributions and benefits. The proposed arrangements for next year do not simply achieve consistency with this desirable objective; they also help the less well-off self-employed. This is being done by holding down the flat-rate Class 2 contribution and, as a counterpart, leaving the lower limit of profits or gains on which the earnings-related Class 4 contributions are levied at its present level of £1,600 a year, while increasing the upper limit from £3,600 to £4,900 a year.

This new upper limit is the approximate annual equivalent of the new upper limit of £95 a week for Class 1 contributions. The rate of the Class 4 contribution is to remain unchanged at 8 per cent. The effect is that there will be no increase in the total amount of contributions payable by a self-employed man on any particular level of profits or gains up to £3,600 a year. Those with profits or gains in excess of £3,600 a year will pay additional contributions equal to 8 per cent. of their profits or gains which fall between £3,600 and £4,900 a year. The maximum increase in these contributions is thus £104 and—I emphasise this—not £350 a year as I have seen reported in the Press. I want to make that quite clear.

It may be helpful at this point if explain that, unlike other contributions — which are normally paid weekly or monthly—Class 4 contributions are normally paid in two instalments, the first in the January of the tax year to which they relate; and the second six months later. Thus, payments for the tax year beginning April 1976 do not fall due until January and July 1977, just as those for 1975–76 fall due in January and July of 1976. I mention this because I have also seen a comment reported in the Press which may have given the impression that self-employed people who are liable for Class 4 contributions will be faced with paying two years' contributions in one year. I hope that my remarks will remove any misunderstanding that there may have been about this in some people's minds. I should perhaps mention that the lower rate of Class 2 contribution for women, which we are bringing progressively up to the rate for men, as is envisaged in the 1973 Social Security Act of our predecessor, is to be increased by 10p to £2.20 a week under a separate Order which was also laid on 23rd October.

The remaining changes under the draft Order now before us are as follows. First, the level of earnings below which a self-employed person can be excepted from liability for Class 2 contributions is raised from £675 to £775 a year. Finally, the voluntary Class 3 contribution is increased from £1.90 to £2.10 a week. I must emphasise that, large though some of these increases in contributions are, they are essential if as we would wish, and as the public would expect us to do, we are to continue to protect pensions and other benefits against the effects of inflation. I commend the Order to your Lordships, and hope that you will approve it for the reasons I have given. My Lords, I beg to move.

Moved, That the draft Social Security (Contributions, Rerating) Order 1975, laid before the House on 23rd October, be approved.—(Lords Wells-Pestell.)

7.38 p.m.


My Lords, I shall open by thanking the noble Lord, Lord Wells-Pestell, for introducing this draft Order in considerable detail. It is a melancholy document, both in its contents and in the fact that it emerges so soon after the Social Security Act 1975 reached the Statute Book. As your Lordships are aware, the Social Security Act became law on 6th April this year, and now, only a few months later, this draft Order has been brought before your Lordships' House in the name of the Secretary of State varying the terms of the Act and altering contributions. It is symptomatic of the situation in which we find ourselves today, a situation of high inflation. I am sure the noble Lord, Lord Wells-Pestell, will not demur from the fact that this has been brought about by the effects of inflation which it must be the aim of all Parties to reduce as far as possible. However, we cannot close our eyes to the fact that some of the decisions contained in this Order must, to a greater or lesser extent—and naturally one hopes to a lesser extent—feed the fires of inflation. We in your Lordships' House can only approve this Order in present circumstances.

The only comments I would wish to make upon it are these, and they relate largely to Class 4 contributions in regard to self-employed. In paragraph 5 of the Order, we note that under Sections 9(2) and 10(1) of the Social Security Act 1975 Class 4 contributions recoverable under the tax Acts and regulations, are to be changed from the limits which the noble Lord described, and the upper limit is to be changed from £3,600 to £4,900. I am glad that the noble Lord stressed what the increase is to be; that is 8 per cent. on the extra £1,300 by which this bracket is enlarged. This has made it clear, and it is of benefit universally.

Nevertheless, one should not close one's eyes to the fact that a £104 additional increase for a Class 4 self-employed person is a substantial extra contribution. It is £2 a week. Taken with further tax increases in other sectors and with the increase in rates, and putting oneself in the mind of a self-employed person, this will be a most lamentable increase and will undoubtedly have serious effects on the finances of many self-employed people who manage shops, offices or small businesses, or direct their affairs towards that end. This is a large increase. We naturally hope that the Secretary of State will not bring a further Order before your Lordships' House within so short a time as a matter of six months. This is a matter of regret for your Lordships, and we note that the passage of time has been so small between the passing of the Act and the bringing in of this Order.

7.42 p.m.


My Lords, I should like to join with the noble Lord, Lord Sandys, in thanking the noble Lord, Lord Wells-Pestell, for his thorough explanation of the implications of this Order. He referred to the fact that there have been two increases in benefits during 1975, and he said that the money must be found for these increases. But where one has an earnings-related scheme, a scheme which is based on earnings-related contributions, any up rating to match an increase in average earnings should automatically be provided for by increased contribution income, and this increased contribution income comes from Applying the same percentage to the greater earnings. But, of course, we have been only on a full earnings-related system since April. It may be suggested that the previous estimates of contribution income were too optimistic, but when we look at the Government Actuary's Report we find that that is not the case. On the contrary, the Government Actuary says that previous estimates of contribution income proved too cautious.

The noble Lord mentioned unemployment as another reason, and when he mentioned that he got to the root cause of these increases, because the Government Actuary makes it clear that while he was instructed to work on the basis of 850,000 unemployed, he has now been instructed to work on the basis of 1 million in 1975–76, and 1,200,000 in 1976–77. Also, he points out that a variation of 100,000 in the level of unemployment means a difference of £120 million in costs, and it is £230 million, as I understand it, which is raised by the increase in contributions proposed in this Order. If there are other factors, they seem to me to be counter-balancing, and my conclusion is that this increase is part of the price of unemployment.

As to the increases themselves, as the noble Lord, Lord Wells-Pestell, explained, it is 0.25 per cent. extra of a man's income that he has to pay up to the limit of the former top limit of £69 per week. But, as the noble Lord pointed out, over and above that up to the new top limit of £95 the percentage increases all the time throughout that period, and those people must pay 0.25 per cent. on their income up to £69 a week, and 5.75 per cent. on all income between £69 and £95 a week. This means that someone on £95 a week, the new limit, is faced with an increase of 1.8 per cent. of income—something like seven times greater than the percentage increase. I am not talking about amounts of money, but the percentage increase is seven times greater for the person at £95. But, and this is a point which the noble Lord did not mention, after £95 it begins to run down again until you get to the point of an income of something like £50,000 with a 0.17 per cent. increase. It goes up to the point of £95, and then runs down.

The noble Lord used the phrase—and it was used also by the right honourable lady the Secretary of State—that people getting around £69 to £95 had escaped increased contributions, but that is a very arbitrary sort of statement. Anybody over the top limit, as it was, has escaped further contributions, and why it should be said that we must recoup from people up to the limit of £95 and not above it, and allow the people above it to have a declining percentage of increase as their income increases, I do not know. I do not know whether that is Socialist economics, but it is not the kind of economics of which I would approve. It does not seem to me to be very fair. It seems to suggest that the Government ought to consider having no target rates, but a rate that runs right throughout the band; no limit at all, but a lower rate running right throughout income, and this could be both for the employer and the employee. I imagine we shall be told that you cannot do that, because if you have a ceiling on benefits you must have a ceiling on contributions. But this is to pretend that there is some connection between the contributions and the benefits, yet we know that that is not the case. The scheme is a pay-as-you-go scheme.

If we had a tax credit scheme, whereby the national insurance benefit, other benefits and allowances against tax on what are now allowances against tax, were paid as cash credits, and all income were taxed from the first pound, then we could have a personal tax rate of, say, 39 per cent., or 40 per cent.—which would be the present income tax rate of 35 per cent. plus 4½per cent. to 5 per cent. social security tax—and the employer would pay social security tax in the same proportion as he pays now to the employed contribution. The formula for pensions which is planned under the Social Security Pensions Act would be kept precisely the same, and the percentage reduction for contracting out would also remain precisely the same. There would be no interference with any of that, or with all the protracted negotiations and so on that we have been through.

For the self-employed, to whom the noble Lords, Lord Wells-Pestell and Lord Sandys, referred, the previous Government decided to keep the basic contribution level, not to increase the flat rate contribution, and to levy 5 per cent. of income between £1,150 and £2,500. The present Government decided to alter the limits to £1,600 and £3,600 and to levy 8 per cent. Now they propose under this Order to increase the level from £3,600 to £4,900. I understand why they say that there should be an increase; because the contribution of the self-employed has fallen behind as a proportion of the contributions paid on behalf of the employed person. I understand why it has been done in this way by successive Governments; to protect the position of the self-employed person at the bottom end of the scale.

As the noble Lord, Lord Sandys, said, the increases for some people are very steep. For the person on £3,600 in the current year—and I take the noble Lord's point about its being in two stages—it is £160, which is a 4.5 per cent. increase. Imagine suggesting to that person that his income tax rate should be increased by 4.5 per cent. to 39 per cent. Imagine what we would say if it were applied to us. It would be a severe income tax rate increase, but if it were the income tax rate we should have all sorts of allowances to set off against it, which is not the case when we are dealing, as we are here, with National Insurance contributions.

The person on £4,900 has, over two years, had increases of 3.2 per cent. and 22 per cent., and for the employed person the highest rate is the one I mentioned, of 1.8 per cent. Thus, over two years this person has had an increase of 5.4 per cent. or £264. A man earning £4,900 a year, if he has two children and a mortgage, is probably paying tax at between £750 and £800 a year, so we are really saying that his tax bill is increased by one-third, so these increases for some people have been extremely steep. One understands why it has been felt necessary to have an increase for the self-employed and why it is done in this way —and, of course, one is glad that the possibility of earnings related benefits, which they do not get at the moment, is being investigated. But one is bound to ask whether it would not have been wiser to phase in these increases over a longer period of time and more gently.

7.52 p.m.


My Lords, I will not delve into either the figures or the percentages; I leave that to the men who are taking part in this debate. I have not had time to examine them and, in any event, when I look at figures I have to take a great deal of care. The noble Lord, Lord Sandys, called this document melancholy and I wondered why, as I listened to him and the noble Lord, Lord Banks, neither of them had any constructive alternatives to put forward. The noble Lord, Lord Sandys, spoke more in sorrow than in anger, which was rather pleasant, although he was somewhat strong on condemnation. The noble Lord, Lord Banks, was very strong on analysis but, like the noble Lord, Lord Sandys, did not have any constructive alternatives.


My Lords, would the noble Baroness not regard it as a constructive suggestion, even if she did not agree with it, that there should be, for example, a contribution which runs right throughout, which was the basis of the earlier part of my remarks?


My Lords, I often hear that sort of argument from my Liberal friends and I find that mostly they like the best of all possible words, but unfortunately we cannot have that in this life. We are going through a very difficult time and the only suggestion to come from the Conservative Benches is that we should have higher unemployment.


I really protest, my Lords, I do not think that has ever been suggested from these Benches. What we have suggested repeatedly—it was a matter for our Manifesto, and I remind the noble Baroness that we have equal interest in Manifesto affairs—is a tax credit scheme, which the Government decided to set aside. That was a positive contribution and I totally disagree with the noble Baroness.


My Lords, I am sorry if I have offended the noble Lord; I did not mean it in that sense. I have read comments about inflation and how we should tackle it, and there is no doubt that an increase in unemployment always underlies the arguments of Conservative noble Lords opposite. Here is a document—I do not know how good or perfect it is—which is trying to tackle the problem of inflation in a way that falls less heavily on the lower income groups than on the higher ones. We must try to do something about this problem. Here we are trying to do something which does not seem to be drastic, although I shall have to examine the document carefully. We have tried to be fair, and just to have it dismissed as impossible or not practicable, even with the Liberal Benches putting various suggestions forward, slightly saddens one.

7.56 p.m.


My Lords, I will not delay the House by speaking at length. We have entered a fascinating field but I have to remind myself that this is an Order and be content to deal with it on that basis. In the ordinary way I would be tempted to deal with a good many of the things the noble Lord, Lord Sandys, said. Of all the Members of your Lordships' House, I think the noble Lord, Lord Banks, might well agree that it is very difficult to find a satisfactory yardstick to deal with these matters. It is difficult to find it in the sphere of taxation and equally difficult in the field of contributions. I shall draw the attention of my right honourable friend the Secretary of State to the fact that we are not taking enough from those earning £50,000 a year. I hope we will be able to do something about that and that we can give the authority of the noble Lord, Lord Banks, on that matter.

It is difficult to find a satisfactory yardstick which will meet the approval of all sections of the community. It may be that one must have a rough and ready way of dealing with it, and the rough and ready way is to look at what people are earning and to say, "This group is infinitely better off than that group"—I know they may have more commitments but commitments are to be found in every group, in terms both of income and age— "and this will be the yardstick; those earning less will pay less than those on the middle and top rungs."

Until we can find a more satisfactory method, this seems to be the right way, and we should say that those who are in a position to make a greater contribution in our society should be prepared to make it. I believe that many of them are so prepared in order to ease the burden of those less fortunately placed and to let society aid those who are less fortunately placed. Increases are often steep for some people and I do not know how we are to iron this out.

I have read a booklet by the noble Lord, Lord Banks, and I say sincerely that I look forward to the day when he will initiate a debate on this matter in your Lordships' House. There is enough competence and expertise in this House to make it an interesting debate. There are many of us who are not expert in this field and who would welcome just sitting back and listening to people like the noble Lord, Lord Banks, give us some indication of what goes on in his mind, and, of course, of what I have seen in his writings. I thank noble Lords for their comments and, as I say, I had hoped that someone would have said a word of appreciation to the Government for at least doing something to help, regardless of what has been said, the position of the self-employed.


My Lords I regret to say that, although the noble Lord has invited gratitude, there will be remarkably little gratitude from the self-employed. The reason is as follows: in order to earn a sufficient amount to pay this new impost probably over £200 would have to be earned to cover the £104 increase over the existing amount. It goes further than that, however. I want to refer your Lordships to one particular problem before we finish. That is the problem of inflation accounting. The Sandi lands Committee reported a short time ago. Owing to the pressure of other business in this House, regrettably it has been impossible to debate the Report, but it bears very closely indeed on the method of accounting throughout the country and, furthermore, it bears very closely on what the self-employed derive from their income.

I am not able to quote from The Times article because I think it inappropriate to do so on an Order. Nevertheless, The Times is on record as saying, "Real profits, nil after tax". This is the whole question of the cost of restocking goods in business.


My Lords, I am sorry to interrupt the noble Lord, but I believe him to be out of order. Under Standing Orders, no noble Lord is allowed to speak more than once to any Motion when the House is not in Committee and when he has not moved a Motion. I hope that he will forgive me for interrupting him but I thought it best, for the sake of the House, to point that out.


My Lords, I naturally accept the noble Lord's rebuke in this matter. I was provoked.

On Question, Motion agreed to.