§ 7.55 p.m.
§ Lord McIntosh of Haringey rose to move, That the draft order laid before the House on 31st January be approved [9th Report from the Joint Committee].
§ The noble Lord said: My Lords, I am pleased to introduce this order which deals with the Class 2, 3 and 4 national insurance contribution rates and thresholds. (I do not mind noble Lords making a noise when they leave, but when Members of the Opposition Front Bench are conferring it is difficult to communicate.) In previous years this order—the re-rating order—has been debated alongside the uprating of benefits. With the transfer of contribution policy to the Treasury, the annual re-rating order will now be dealt with separately.
§ The Taylor report considered the rates for employees, employers and the self-employed as part of its wide-ranging view of contributions. It recommended several changes and we have introduced many of these over the past two years as part of the simplification of contribution structure. For the employed, this includes removing around 1 million people on low earnings from paying contributions, with no loss of benefit entitlement. For the self-employed, this order will bring in some of the Taylor recommendations, helping those starting up businesses and providing positive work incentives.
§ First, the order deals with Class 2 contributions. If profits are below the level of the small earnings exception the self-employed may claim exemption from paying Class 2 contributions. We are setting the exception at £3,825. The order also sets the Class 2 contribution rate. For 2000 to 2001 this will be substantially reduced from £6.55 to £2 a week. This will benefit all the self-employed but particularly those with lower profits. As Class 2 contributions represent such good value for money, there may be a positive 1523 incentive for those on low earnings to choose not to exercise their right to exemption but to pay the contribution out of choice.
§ Secondly, the order sets the profit levels between which Class 4 contributions are paid. The lower limit at which contributions become due will match the income tax personal allowance of £4,385. At the other end of the scale, the upper profits limits will match the upper earnings limit for employees at £27,820. This simplifies the structure of contributions for the self-employed and makes the system easier to understand. By next year the thresholds for employees will match the limits for the self-employed.
§ The rate of contribution is set at 7 per cent on profits between these limits. This rate compares favourably with the rates for employees and employers. Given the benefits to which they have access, the contributions paid by the self-employed provide them with very good value for money.
§ Finally, the order deals with the weekly rate for voluntary contributions. These are increased by lop to £6.55, a standard re-rating in line with prices.
§ The review of the levels of thresholds and contribution rates is accompanied by the report on the effects of that review on the National Insurance Fund. I am pleased to say that this year, as last year, there is no expectation that the fund will need a Treasury grant. However, a prudent minimal provision is made in line with advice from the Government Actuary.
§ For the first time, there is a single re-rating order for both Great Britain and Northern Ireland. Although Northern Ireland has a separate national insurance scheme from Great Britain, the two schemes are closely co-ordinated and maintain parity of contribution rates. Following the transfer of policy, the Social Security Administration (Northern Ireland) Act 1992 was amended last year to enable the re-rating order to include corresponding measures for Northern Ireland, including provision for a Treasury grant to the Northern Ireland National Insurance Fund. I beg to move.
§ Moved, That the draft order laid before the House on 31st January be approved [9th Report front the Joint Committee].—(Lord McIntosh of Haringey.)
§ 8 p.m.
§ Lord Goodhart
My Lords, we on these Benches welcome the order. It brings the contribution regimes for the employed and self-employed into closer alignment. Differences in contributions, unless justified by differences in benefits, distort the employment market and lead people to seek self-employed rather than employed status, sometimes by artificial means. That was why we had the debates last year on the issue of personal service companies, many of which were set up to obtain the NIC advantages of self-employment.
The reduction in the Class 2 contribution is certainly welcome. Flat-rate contributions are a regressive tax. We should prefer to see the weekly £2 contribution go altogether. Employees with earnings above the lower 1524 earnings limit but below the level of the personal allowance will qualify for contributory benefits but will pay no national insurance contributions; whereas the self-employed who fall into that bracket will still pay £2 a week. I should like an explanation from the Minister as to why the self-employed in that bracket cannot qualify for benefits like employees without paying NICs.
The reduction in the start level of Class 4 contributions seems reasonable in the light of the reduction in weekly payments in Class 2 and brings the start point into line with Class 1 contributions. The increase in the Class 4 rate seems well justified. The rate will go up from 6 per cent to 7 per cent; but the Class 1 rate for employees, taking primary and secondary contributions together, is still at least two and a half times that even in the case of employees who have contracted out of SERPS.
Employers' contributions will, of course, continue to be payable above the upper earnings limit. The self-employed do not receive jobseeker's allowance, statutory sick pay or statutory maternity pay, but they do receive incapacity benefit, widows pensions and the basic state pension. Even at 7 per cent, the self-employed will get a very good deal indeed as compared with the employed.
We believe that the order improves the contributory structure and makes it more rational. We are therefore happy to support it.
§ The Earl of Northesk
My Lords, on a personal level—and in the interests of the noble Lord the Minister, whose burden of work in the House seems to grow like Topsy—I could wish that this re-rating order was still debated in tandem with the uprating of benefits. As such it would conceivably still fall within the remit of the Department of Social Security rather than the Treasury. I should stress that, in keeping with the example set by the noble Lord the Minister, I have no difficulty in acquiescing to the Chancellor's admiration for the work ethic. But this underscores a growing trend; namely, the way in which the Treasury's tentacles are insinuating themselves cross-departmentally. Dare I say that the commentators could usefully focus on the vice-presidential aspirations of No. 11 rather than the presidential ambitions of No. 10?
Turning to the substance of the order, we on these Benches have no quarrel with the changes to Class 2 contributions or with the provisions on exemptions. The changes to Class 4 contributions require a little more thought. On the surface, the alignment of the profits limits is a small step towards simplifying the tax regime. Equally, the increase in the rate from 6 per cent to 7 per cent could perhaps be justified on the basis of restoring any lost yield arising from the changes to Class 2 contributions, as recommended by the Taylor report. Fair enough. But what has piqued my interest are the statements in the Explanatory Notes that:Article 2 substantially reduces the Class 2 contributions payable by the self-employed. The effect of Article 4 will be to increase the Class 4 contributions payable by seine of the self-employed".1525 I note, too, that the Paymaster General, in introducing the order in another place, stated that:Under the wider structural changes, more than one million employees on low earnings—of whom 770,000 are women—will pay no national insurance, and approximately 16 million people will pay less national insurance".These are, of course, statements of fact. But they obscure some important issues.First, the corollary is equally true. Many of the self-employed will be required to pay more in terms of their contributions. I therefore ask the Minister: how many and how much? I have in mind an annual total of £240 million. There is also the issue of the regulatory burden. In this context, I can do no better than cite the words of William Davis in yesterday's Evening Standard:Business has repeatedly asked [the Chancellor] to simplify the tax system. It is a task that so far has appeared to be beyond him".I admit that that judgment may be a little harsh in the narrow remit of the order before us tonight. But, as William Davis goes on to say,The Government says that it wants to create an 'enterprise culture'. It is a laudable objective, but Ministers should try to understand that most entrepreneurs simply want them to get out of the way".That leads to my second point; namely, that in substance and effect the order is redistribution by any other name. So be it. But it seems strange that this ambition from a former age should be targeted at a group of people—namely, the self-employed who have demonstrably shown the get-up-and-go to make a success of their business, and who could be defined as those who are the most entrepreneurial within the economy. That seems to be at odds with the general thrust of the Chancellor's remarks about the knowledge-based economy.
§ Those criticisms apart, we accept the order.
§ Lord McIntosh of Haringey
My Lords, I am grateful for the enthusiastic support of the noble Lord, Lord Goodhart, and the acceptance of the noble Earl, Lord Northesk. I make that distinction.
The noble Lord, Lord Goodhart has a valid point: when one starts to collect £2 a week on a statutory basis, the cost of collection will inevitably be rather high as compared to the returns. I can only acknowledge that fact. It is a relatively expensive thing to do. But the reason for keeping some figure is that Class 2 contributions secure entitlement to benefit, as Steve Webb recognised in the Commons. Those with lower profits can pay Class 2 national insurance contributions and protect their entitlement, but abolishing Class 2 altogether would prevent this. The low rate means that there is not the same entry charge as previously, which was such an anomaly. If we replace Class 2 with a single Class 4 charge without addressing the entitlement to benefit issue, we should be depriving the self-employed of benefit rights. Even the Taylor report recognised that to abolish the Class 2 charge would mean inventing a new benefit entitlement test or a minimum Class 4 payment for contributory benefits. It is for that reason that we have 1526 decided that, despite the relatively high cost of collection, it would not be possible to abolish Class 2 altogether.
The noble Earl also accused me of redistribution. I do not know whether it is an accusation or a plaudit, and I do not know whether I am allowed to accept the accusation or the plaudit. But I certainly do not deny that these changes to national insurance contributions are significantly redistributive. They make many poorer people significantly better off, and they do so at the expense to some extent of the better-off. If anyone wants to criticise me for that, I accept the criticism with some pleasure.
The noble Earl went on to say that this is in some way discrimination against the self-employed. The self-employed under-pay about £3 million for their benefits compared to Class I contributors. They get a lot for their contributions. They get the same benefits as employed and employers for a significantly lower figure.
The noble Earl asked also, "How many and how much?" Around 16 million people will pay less in national insurance contributions because of the structural changes. Introducing the primary threshold will reduce contributions by about £0.9 billion in 2001 and £1.8 billion in 2001–2002. That is how many and how much. It is well worth doing.
§ On Question, Motion agreed to.