National Insurance Contributions (Hansard, 12 November 1985)

§ Mr. Fowler

I have completed the annual review under Section 120 of the Social Security Act 1975 and have today laid a draft order which requires the approval of both Houses: the Social Security (Contributions, Re-rating) Order 1985 providing for contribution rates, profits limits and revised earnings brackets (for the reduced contribution rates) to take effect from 6 April 1986. I have also laid the Social Security (Contributions) Amendment (No. 6) Regulations 1985, which set out new upper and lower earnings limits for employees' and employers' contributions. A report by the Government Actuary (Cmnd. 9672) which accompanies the order and regulations explains their effect on the national insurance fund.

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Employees and employers

As my right hon. Friend the Chancellor of the Exchequer said in his statement earlier today, I do not propose to raise the rate of contributions for either employees or employers which remain at the standard rates of 9 per cent. and 10.45 per cent. respectively. In line with the requirements of the Social Security Pensions Act 1975, the lower earnings limit for class 1 contributions is to be increased to £38 per week, just below the new basic retirement pension rate, and the upper earnings limit for employees is to be raised to £285 a week, which is a little under seven and a half times the new basic pension rate. These new earnings limits replace the existing ones of £35.50 and £265 a week respectively.

The value of the reduction in contribution rates announced in the last Budget and introduced on 6 October 1985 as a measure to boost lower paid employment will be maintained. The new reduced rates of 5 per cent. and 7 per cent. for employees, 5 per cent. 7 per cent. and 9 per cent. for employers will extend further up the earnings scale applying to earnings whose totals are within a ceiling of £60 and £95 and, for employers, £140. (The previous ceilings were £55, £90 and £130.) The effects of the changes are as follows:

Not contracted-out employees

Neither the employee nor his employer will have to pay a contribution if his earnings are less than £38 a week. For people earning between £38 and £265 (the old upper limit) there will be no increase for either the employee or the employer. In fact, because of the increase in the earnings ceilings for the reduced contribution rates, many employees and their employers at the lower end of the pay scale will have a smaller contribution to pay. For those employees with earnings above £265 a week, the maximum increase will be £1.80 a week. There will be no corresponding increase for employers for whom there is no Upper Earnings Limit.

Contracted-out employees

Contributions payable by contracted-out employees and their employers will rise slightly. Where earnings are less than £265 a week, the increase will be very small, reflecting the fact that the increase in the lower earnings limit reduces the band of earnings on which the lower contracted-out rate is paid. Any resulting increase will generally not exceed 6p a week for employees and not exceed 11p a week for employers, although many employees and employers will in fact have their contributions reduced as a result of the higher earnings ceilings for the reduced contribution rates.

Additional contributions will be payable by employees earning from £265 to £285 (the new upper limit); the maximum increase will be £1.43 a week. Because there is now no upper earnings limit for employers, the increase in that limit to £285 will mean extension of the contracting-out rebate to earnings between £265 and £285 with corresponding savings for earnings in that range.

The self-employed

The flat-rate class 2 contribution will be raised by 25p to £3.75 a week. Strict application of the formula for calculating self-employed contributions which has previously applied would have meant a class 2 rate of £5.40, but we have thought it right to continue—and again increase—the considerable discount to this formula as a relief to the small business man.

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The rate of class 4 contribution is not being increased. The annual limits of profits between which class 4 contributions are paid are being raised from £4,150 and £13,780 to £4,450 and £14,820 respectively.

The effect of these changes is that for self-employed people who pay only class 2 contributions the amount payable in 1986–87 will be £19.50 a year less than for the 1985–86 year. For those self-employed people with profits between £4,450 and £13,780, there will be a reduction of £38.40 a year, assuming the same level of profits as in 1985–86. For those with profits of or above £14,820, the new upper profits limit, the increase will be £27.12 a year.

Class 3 (voluntary) contributions

The rate of class 3 contributions is to be raised from £3.40 to £3.65 a week.