HL Deb 25 June 1985 vol 465 cc661-9

3.58 p.m.

House again in Committee.

Clauses 4, 5 and 6 agreed to.

Clause 7 [Calculation of contributions]:

Lord Banks moved Amendment No. 1: Page 4, line 7, after ("week") insert ("less the first £10.00")

The noble Lord said: In moving Amendment No. 1, with the leave of the Committee, I should like to speak also to Amendments Nos. 2, 3 and 4. Amendment No. 2: Page 4, line 7, leave out from ("question") to end of line 10. Amendment No. 3: Page 4, leave out lines 11 to 23. Amendment No. 4: Page 4, line 29, leave out from beginning to end of line 3 on page 5.

The Bill reduces the national insurance contributions from employer and employed for the lower paid. The reductions are to be paid for, at least in part, by abolishing the ceiling on employers' though not employees' contribututions. There are three steps in the new graded scale as it affects employees. For example, for contracted-in employees, for those earning between £33.50 and £55 the employee's contributions is 5 per cent. at £55 to £90 it is 7 per cent. and at £90 or more it is 9 per cent. The scale for employers is the same, except that for those earning over £130 the rate is 10.45 per cent.

The aim of this is to reduce the burden of the lowest paid and to reduce the cost of employing the lower paid. Both aims are unexceptionable. However, the new system substitutes a number of smaller poverty traps, at £35.50, £55 and £90, instead of the one big poverty trap. It is inevitably more complicated to operate and there is also the danger of employees being trapped in bands just below the limits, in order to avoid higher contributions having to be paid.

These amendments would be simpler. Instead of the graded scales which I have described, they would simply exclude the first £10 of earnings from national insurance contributions. I believe that it would cost about the same as the Government's proposed reforms. It would of course bring some relief to all employees. It would bring rather less to the lowest paid, although, even there, their reductions would be a higher proportion of their earnings than was the case for higher earners. The same would apply to the employers' contributions.

Amendment No. 2 would abolish the upper limit for employees' contributions. In the Bill this has already been abolished for employers' contributions. Now that it is proposed to phase out the earnings-related pension, the argument for retaining the upper limit for employees' contributions is greatly weakened. It seems absurd that national insurance contributions should form an increasingly smaller percentage of proportion of earnings as earnings rise above £265 per week. Removing the upper limits could well allow a reduction in the percentage rate and that would be accomplished at the same time as a fairer system was established so far as employees are concerned. I beg to move.

Baroness Jeger

I shall delay the Committee only long enough to say that we support the amendments which have been spoken to by the noble Lord, Lord Banks.

Lord Mottistone

This is not quite clear to me and perhaps the noble Lord, Lord Banks, can explain it. It seems to me that his Amendment No. 4 will sweep away the employer's contribution altogether. Alternatively, does that mean that it stays as it is now, with no change at all?

Lord Banks

It stays as it is in the Bill with no further change.

Lord Mottistone

But is the noble Lord not taking away from page 4, line 29, new subsections (6D), (6E) and 6F)? Does not that sweep away what the Bill is proposing, or am I being very dull?

Lord Banks

I do not think it does. However, I shall consider what the noble Lord has said and perhaps return to it.

The Minister Without Portfolio (Lord Young of Graffham)

It is with a mixture of pleasure and trepidation that I rise to assist my noble friend: pleasure because this is my debut in this Chamber in matters concerning social security and trepidation because I find myself answering such an acknowledged expert in these matters as the noble Lord, Lord Banks. But I am glad to be able to do so because, even though a Minister Without Portfolio, as your Lordships well know, I have a very particular interest in the encouragement of employment. I believe that the changes in the national insurance contributions which my right honourable friend the Chancellor proposed in his Budget, and which this Bill seeks to put into effect, are a bold and imaginative step to encourage employment at the lower end of the wage scale, particularly among that vitally important group: young people looking for their first job. I am too old a hand to hazard predictions of my own, but I notice that among the experts in this field the London Business School has suggested that there will be some 150,000 extra jobs as a result of these changes, and some have made even higher predictions.

Although not an old hand when it comes to national insurance, except perhaps as a contributor, I have already learned that it is a technical and highly complex matter. In such matters bold steps may be amply justified by the helpful changes they introduce for a wide majority, and in this case the assistance given to the lower paid and to their employers has been widely welcomed. However, in a complex field there may be inescapable repercussions for others, and I understand that the noble Lord's amendments are in part addressed to these.

From the noble Lord's remarks at Second Reading, I understand that these amendments also reflect his interest in the integration of income tax and national insurance contributions. The Chancellor has already said that this will be one of those areas explored by the forthcoming Green Paper on personal taxation, and I shall not allow the noble Lord to tempt me into that particular thicket. Instead, I shall consider his amendments on their merits within the existing system. I shall argue that they are unacceptable drawbacks to the action he proposes and that in any case he has exaggerated the problems.

Let us first take the supposed problems. The third amendment in this group of four would remove the structure of graduated rates which we have proposed for employees' contributions, and the fourth amendment would do the same thing in respect of employers' contributions. The noble Lord argues that this is necessary because the transition from one graduated rate to the one above creates a series of earnings traps. It is true that the transition is not a smooth one. However, at each new cliff edge the increase in gross pay needed to overcome the increased contribution liability and thus produce an increase in net pay is far smaller than that which currently exists at the lower earnings limit.

These cliff edges are of course reflected in both the employee's and the employer's liability to pay contributions. Taking both together, the present cliff edge at the LEL is formidable. It costs an employer £8.58 to give an employee earning £34.50 a £1 increase in take-home pay. Under the proposed new system, and taking account of income tax, it will cost only £4.70 to give that same employee the £1 net increase. By comparison with the existing cliff edge at the LEL, the new steps at £55 per week and £90 per week are much smoother. It will cost an employer a total of £4.61 to give an employee earning £54 gross a week a £1 increase in take-home pay, and £6.75 a week to give the same increase to an employee on £89 gross a week. At that level a 5 per cent. pay increase is more than enough to leave the employee better off.

Nor should we lose sight of the fact that, whatever the transitional effects between the different earning brackets, all those employees within the scope of those reduced rates will take home more in absolute terms than they do at present, and their employers' costs are reduced. Eight-and-a-half million lower-paid earners will be better off.

What is it that the noble Lord proposes to put in place of these desirable changes? The first of his four amendments exempts £10 of weekly earnings from contributions. I shall not dwell on the drafting technicalities, but I assume that he intends that all employees whose earnings exceed the LEL, £35.50 per week, should pay contributions on £10 less of earnings than they do at present. Because of his third and fourth amendments, employees will, however, pay at the current standard rate of 9 per cent. and employers at the current standard rate of 10.45 per cent. Despite this exemption of £10, for employees only, there will still be a hefty cliff edge at £35.50. It would cost employers £7.49 to give an employee at £34.50 a week a net increase of £1 a week.

The noble Lord's proposals also mean that low-paid employees will be considerably worse off than under the Government's proposals. For example, someone earning £40 a week will pay just £2 under the Government's proposed graduated scales, but, under the noble Lord's proposals, £2.70, over one-third more. This amounts to an attack on the lowest paid of the working population. The reductions in employee liability are not concentrated on the low paid as in the present draft of Clause 7. The noble Lord's proposal provides increases throughout the wage scale and this gives assistance to some who do not need it quite so much.

The noble Lord's amendments also do little for employers. He proposes nothing to compensate them for the loss of the structure of reduced rates for their contributions. At a stroke he would add some £880 million to employers' costs in a full year, which will not help the creation of jobs one whit. The main aim of the Government's proposals for graduated rates of national insurance contributions is to improve the employment prospects of the low paid and particularly of young people seeking their first job.

I turn finally to the second of the noble Lord's amendments. I have to acknowledge that at the upper earnings limit there is a savage end to his largesse. He proposes that the upper earnings limit should be abolished for employees just as we have abolished it for employers' contributions. The effect on employees, however, is very different from that on an employer. Whereas many employers will recoup from the reduced liability for their lower-paid employees what they would incur in increased liability for the higher paid—that is, for those above the upper earnings limit—the individual employee has no such offset. Nor is it possible for the Government to mitigate this increase by adjusting the higher rates of income tax. There is a substantial body of employees, about 900,000, whose annual earnings exceed the upper earnings limit of £13,780 but who still fall within the standard rate band for income tax. The onset of higher-rate tax varies, of course, with individual circumstances. But assuming only the basic allowance, it is £18,405 for a single person and £19,665 for a married man.

For these people, above the upper earnings limit but still paying standard rate tax, there would be no way of preventing unacceptably high marginal rates of tax. It would mean an extra £8 a week for someone at the £18,405 level and over £10 a week at £19,665. Those employees who are also owner-directors of their company would be particularly hard hit, if their earnings were high, because they would have to pay both the employees' and the employers' shares of the contributions on all their earnings. My right honourable friend's Green Paper on the reform of social security makes clear that for these reasons we have rejected the abolition of the upper earnings limit for employees.

To sum up, it is true that the assistance we are giving to the lower paid will create small new steps in contribution liability where none exists today. But the steps are all small both in relation to earnings and to the current cliff edge at the lower earnings level. Everyone affected will be better off in absolute terms than at present and jobs will be created. By contrast, the noble Lord's alternative creates grave distributional problems. A more rational relation between tax and national insurance contributions requires very careful consideration. I would urge your Lordships to await the proposed Green Paper on personal taxation and meanwhile to reject all these amendments.

Lord Banks

I should like to thank the noble Lord very much for his comprehensive reply to these amendments. The amendments were designed to make the working more simple by removing the administrative problems created by having these three different tiers by the very simple procedure of excluding the first £10 and extending the payment by employees throughout the range of earnings.

I do not think that the noble Lord replied to the point about the reduction of the rate which could have been done for the employers' contributions as well as for employees if the top earnings limit were to be abolished. It is wrong to assume that the same percentage would be applied and to work out what that would cost. Indeed, somewhere around £800 million has been added to Government revenue by what has already been done with regard to employers. However, it would be wrong for me to try to reply to all the points that the noble Lord was good enough to set out. I would like to consider carefully all that he has said. In the meantime, I seek the leave of the House to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 2, 3 and 4 not moved.]

4.15 p.m.

Lord Mottistone moved Amendment No. 5:

Page 5, line 3, at end insert— ("(6FF) The Secretary of State may by order make provision for the implementation of percentage rates, which are to he paid in the primary earnings brackets set out in subsection (6B) above, to be deferred until the weekly earnings reach a sum which equals the lower earnings limit of a particular bracket plus the percentage rate of that bracket applied to its lower earnings limit.").

The noble Lord said: This amendment springs from remarks that I made at col. 545 on Second Reading, when I pointed out that the cliff edges that my noble friend Lord Young has been talking about, or perhaps, as I might call them, the pay traps, as opposed to the poverty traps, are quite serious and cannot readily be swept away because of the implications that they could have for industrial relations and wage bargaining. I would not take exception to what my noble friend the Minister Without Portfolio was saying about all the benefits of the broad picture of the new scheme that is proposed in the clause. But he did not say, or did not take into account, that the fact that there are these cliff edges could have quite serious implications for wage negotiations.

It could well happen that someone having a 5 per cent. increase negotiated for him will be able to say that if this takes him over the edge from one bracket into another, he will have to pay—if he goes over the bottom one—5 per cent. on national insurance, not having paid anything at all before, and that this will sweep away the benefit of the pay increase. Therefore he, or his trade union for him, will seek to negotiate an even greater pay increase. But the company will neither wish nor need to do this for people who are not going over the cliff edge. I did say that it seemed to me that it would be very difficult to draft an amendment to meet this point. With the aid of a wise industrial relations expert of many years' standing, we have come up with Amendment No. 5.

The principle here is that it eases the movement from the lower bracket to the higher bracket. If, for instance, you take the current lower earnings limit of £35.50 for bracket No. 1, the imposition, if my amendment was accepted, of the 5 per cent. NHI deduction would not be effective unless the new weekly earnings were on or above £37.28—that is, £35.50, which is the current lower earnings limit, plus £1.78, which is 5 per cent. of £35.50 rounded up. This means that if there are increases that hover around the borderline, which is very likely—we know from other statements that these borderlines will move with inflation and are not therefore static—they will be spared having to pay this extra NHI deduction until they reach the new softened limit.

However, it is not really good enough. I take the example that I gave. Let us suppose that the new earnings, after a percentage increase, were £38. The person would suffer some of the pay trap shortcomings but not all of them. In pointing that out to my noble friend Lady Trumpington when trying to indicate the line that I was going to pursue, I invited her to instruct the cleverest of her advisers to get to work to see whether they could not improve these provisions even further. At this point I strongly say to my noble friend the Minister Without Portfolio that the industrial relations implications are of such a nature as potentially to cause all types of trouble which will then negate the advantages which, I fully admit, should accrue from the general policy which is within the Government's amendments.

Therefore, I hope that my noble friend will say that he understands the point that I am making and that he will give it consideration and see whether he can come back on Report with an even greater improvement than the suggestion which I am putting forward. I beg to move.

Lord Young of Graffham

Having just successfully climbed the cliff edge put up by the noble Lord, Lord Banks, I hope that I shall not fall promptly into the pay trap put up by my noble friend. I understand my noble friend's concern. However, the fact remains that in absolute terms all employees earning up to £90 a week are better off. There are, indeed, more cliff edges, but the steps will be smaller. To make a comparison, I would say that it is easier, perhaps, to climb a staircase than a cliff face.

I read with interest what my noble friend had to say about the effects where increases in earnings cross the threshold between one contribution rate and another. I read what he had to say in the Second Reading debate and I also listened with interest and care to what he has had to say just now. However, I am afraid that it only goes to underline what he said at Second Reading; namely: it will be very difficult to produce suitable amendments … without upsetting the whole principle of what the Government are clearly trying to achieve".—[Official Report, 3/6/85; col. 546.] I can quite see the thrust of what my noble friend intends by this amendment. By deferring the onset of a higher rate of contribution he hopes to level out that small dip in the graph where, unless gross earnings increase by an amount sufficient to compensate for the higher contribution rate, there is a small decrease in net pay. However, I have to say that this is an inherent feature of a system of progressively higher rates which, once triggered, then apply to all earnings. What is to happen when a higher rate, despite having been deferred according to the formula in this amendment, eventually applies after all? Without some additional mechanism, a cliff edge occurs again, but at a different point.

My noble friend cannily left the details of his scheme to be settled by regulations, and did not specify what the additional mechanism might be. It is true that the abruptness of the cliff edge might be reduced if, within that relatively small band of earnings over which my noble friend proposes to defer the application of a higher rate, there was a more gradual change to that higher rate. Thus between £55 per week (the threshold between the 5 per cent. and 7 per cent. rate) and £58.85 (the point to which he defers the onset of the 7 per cent. rate) it would, I suppose, be possible to provide a succession of rates increasing from 5 per cent. to 7 per cent. by stages. But I have to say that the administrative complexity that this multiplicity of rates would introduce for both employers and DHSS would I suspect far outweigh the benefits which my noble friend hopes to achieve. Indeed, I am engaged at the present time on an exercise with the object of finding out where, with safety, we can reduce the amount of regulation. I would hate to be adding unnecessarily to it by this process.

So long as we still have earnings-related benefits—and my right honourable friend's social security Green Paper proposes a phasing out rather than sudden withdrawal of SERPS—it will be necessary to record the contributions paid and to translate these into earnings factors from which benefit rights are calculated. The introduction of the new structure of three different employee rates will make that calculation difficult enough, entailing approximations which err on the side of generosity in order to avoid damage to benefit entitlement on the one hand, or more complex recording by employers on the other. Introducing a series of additional intermediate rates to smooth out the steps would clearly increase these problems.

I have already argued in response to the amendments proposed by the noble Lord, Lord Banks, that the new steps are small, both by comparison with the current cliff edge at the lower earnings level and also in relation to the earnings levels at which they actually occur. I think that we should see how these steps operate in practice before complicating the legislation now before your Lordships. My personal view is that they will not cause the difficulties that my noble friend fears. But he may be right and I may be wrong, in which case we will need to look at this again. In the longer term it is possible—and I put it no higher than that—that when we have seen how the new graduated bands operate we may be able to find if necessary some way of smoothing the steps, particularly in the light of the long-term changes in contributions and their relation to benefits which my right honourable friend has proposed in his recent Green Paper. Meanwhile, I would ask my noble friend to withdraw his amendment.

Lord Mottistone

I thank my noble friend very much for his very full comment on my amendment. Perhaps I should have said earlier that I have worded it in the form of: The Secretary of State may by order introduce this so as to give him an opportunity not to do it precisely like that. It seems to me that that is what will be necessary when we have gained our experience from these measures. It would be reassuring to know whether there are facilities for doing more than what is provided for in subsection (6F). Indeed, subsection (6F) allows the Secretary of State to alter the number of brackets below the highest bracket.

However, as I see it, there are no powers for the Secretary of State by order to make a modification along the lines of my amendment if it is shown that my fears about industrial relations are very serious ones. It might be helpful to have another order-making power to cover that type of gap. If there is no such power, perhaps I may come back at a later stage in our discussions on the Bill and put foward an amendment providing for such an order-making power without specifying what it does. I do not know whether my noble friend has an answer for me?

Lord Young of Graffham

I can assure my noble friend that I am told that we already have that power.

Lord Mottistone

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7 agreed to.

The Earl of Caithness

In order that we may take the second Statement, I beg to move that this House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.