National Insurance (Hansard, 30 November 1998)

§ Mr. Darling

We have completed the annual review under Section 141 of the Social Security Administration Act 1992. Proposals will take effect from 6 April 1999 alongside the structural changes to National Insurance contributions announced by my right hon. Friend the Chancellor of the Exchequer in his Budget on 17 March 1998,Official Report, columns 1097–112, and re-affirmed in his Pre-Budget report on 3 November 1998, Official Report, columns 681–702.

Full details of the changes to the structure of employees and employers National Insurance contributions (NICs) from April 1999 are as follows:

(i) the NICs "entry fee" currently payable by employees once earnings reach the lower earnings limit (currently £64 a week) will be abolished, so that employees will not pay NICs on the portion of earnings at or below the lower earning limit;
(ii) employers will also no longer pay NICs on the portion of earnings at or below the lower earnings limit once earnings reach that level. The point at which employers start to pay NICs will be further increased to the level of the personal tax allowance. In practice, this will mean no employers' contributions will be payable on earnings up to and including £83 a week;
(iii) the 3 per cent., 5 per cent., 7 per cent. and 10 per cent. rates of employers' NICs for different levels of employees' earnings will be abolished and replaced with a single 12.2 per cent. rate of employer NICs payable on earnings above the level of the personal tax allowance;
(iv) to ensure employers with Contracted-out Salary Related Pension Schemes (COSRS) or Contracted-out Money Purchase Pension Schemes (COMPS) are entitled to the same level of NIC rebate, they will continue to be entitled to a rebate on earnings between the lower earnings limit and the personal tax allowance.

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Employers and Employees In line with the Social Security Contributions and Benefits Act 1992, the lower earnings limits for Class 1 contributions is to be raised to £66 a week. It is set at the level of the basic Retirement Pension rate for a single person from April 1999, rounded down to the nearest pound. The upper earnings limit is to be raised to £500 a week which is slightly less than 7½ times the new basic pension rate as provided by the Social Security Contributions and Benefits Act. These new earnings limits will replace the current ones of £64 and £485 respectively. Employees will pay a standard rate contribution of 10 per cent. on that portion of their earnings which exceeds the lower but not the upper earnings limit. As announced by my right hon. Friend the Chancellor of the Exchequer in his 3 November Pre-Budget Report, the Earnings Threshold from which employers will start to pay secondary Class 1 contributions will be £83 a week. The multiple contribution rates for employers will be replaced by a standard contribution rate of 12.2 per cent. on all earnings which exceed the earnings threshold.

Not Contracted Out Employees and their Employers Employees will not have to pay any contributions on earnings at or below £66 a week. Employees whose earnings do not exceed £485 (the former upper earnings limit) will pay £1.48 a week less in contributions than at present. This is because the 2 per cent. entry fee on earnings up to the LEL has been removed and a further £2 of their weekly earnings will not be subject to any contributions rather than 10 per cent. For employees with earnings above £485 the maximum possible increase will be £0.02 a week. Employers will not have to pay contributions on earnings below £83 a week.

Contracted Out Employees and their Employers Employees whose earnings do not exceed £485 (the former upper earnings limit) will pay £1.44 a week less in contributions than at present. This is because the 2 per cent. entry fee on earnings up to the LEL has been removed and a further £2 of their weekly earnings will not be subject to any contributions rather than 8.4 per cent. For employees with earnings above £485 there will be no increase in contributions and the minimum possible reduction will be 18p a week.

Employers who operate a Contracted-Out Salary Related Scheme (COSR) Where earnings are between £66 and £83 employers contributions will be reduced by £1.92 a week. This is due removal of the entry fee. Employers will pay a reduced rate of 9.2 per cent. on employee's earnings which exceed the Earnings Threshold.

Employers who operate a Contracted-Out Money Purchase Scheme (COMP) Where earnings are between £66 and £83 employers contributions will be reduced by between £1.95 and £2.20 a week. This is due to the removal of the entry fee and the introduction of the Earnings Threshold which means that a further £19 of earnings is not subject to any contributions. Employers will pay a reduced rate of 11.6 per cent. on all earnings which exceed the Earnings Threshold.

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Self-Employed People The flat rate Class 2 contribution will be raised by 20p to £6.55 a week. Self-employed people with profits less than a specified amount, known as the small earnings exception limit, can apply to be excepted from paying Class 2 contributions. This limit will be raised by £180 to £3,770. There will be no change to the rate of Class 4 contributions which will remain at 6 per cent. The annual limits of profits between Class 4 contributions are paid will be raised to £7,530 and £26,000 from £7,310 and £25,220 respectively. Self-employed people who pay only Class 2 contributions will pay an extra £10.40 a year in 1999–2000. For people with profits between £7,530 and £25,220 (the former upper profits limit) Class 4 contributions will be reduced by £13.20 a year assuming an unaltered level of profits. For those self-employed people with profits at or above the new upper profits limit the annual charge for Class 4 contributions will be £33.60 higher.

Class 3 (Voluntary) Contributions The rate of Class 3 contributions will be raised by 20p to £6.45 a week.

National Health Service Allocation The allocation to the National Health Service is unchanged at 1.05 per cent. from employees and 0.9 per cent. from employers.

Treasury Grant Although benefit expenditure from the National Insurance Fund will broadly match income, we need to ensure that the Fund can maintain a prudent working balance throughout the coming year. In accordance with Section 2(2) of the Social Security Act 1993, we propose to do so by prescribing that the maximum Treasury Grant which may be available to the Fund in 1999–2000 shall not exceed 2 per cent. of the estimated benefit expenditure from the Fund for that year.

NIC Holiday Scheme Finally, we also propose to restrict the employers' NIC Holiday scheme to employments which begin on or before 31 March 1999. This will effectively close down the scheme from 1 April 1999, except for Holidays which are already in place and may therefore run on for up to a year after that date. The NIC Holiday was introduced by the previous administration to encourage employers to take on long-term unemployed people. It has had no appreciable effect on employers' recruitment practices. Our New Deal for the long-term unemployed now provides employers with better and more substantial incentives to recruit long-term employed people. This, together with the reduction that employers will see in their National Insurance contributions for almost all employees earning up to about £450 a week from April 1999, means that it is time for the NIC Holiday to go. Regulations to give effect to this proposal will be laid before Parliament in due course. We shall be laying a Draft Re-rating Order before Parliament together with a report by the Government Actuary describing the effects of the re-rating proposals on the National Insurance Fund.