Draft Social Security (Contributions) (Re-Rating and National Insurance Funds Payments) Order 2001

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Mr. Clappison: Indeed, Mr. Illsley, you are right. I was just about to return to the order, but I was excited by the fact that we were told that the 0.3 per cent. cut should be seen as part of a package, and that we must judge whether or not that cut will be sufficient to mitigate the climate change levy. The Government's case is that other factors are involved; we want to know whether other measures are coming along, or whether manufacturing industry will left substantially out of pocket.

Dawn Primarolo: I do not want the hon. Gentleman to get hung up on the word ``package''. I merely meant the various reforms to the national insurance scheme that we have before us today. I was not referring to the package of total reforms that the Government have undertaken since 1997 across the whole economic sector, because it would not be appropriate.

Mr. Clappison: The hon. Lady is right that the order contains a package of changes to national insurance contributions, but they affect various parts of the economy differently. I shall turn in a moment to the substantial cost that they will impose on the self-employed. The hon. Lady specifically introduced paragraph 2 as part and parcel of a package of measures to do with the climate change levy. Therefore, it is difficult to debate the cut without debating the levy. We need to scrutinise the measure to find out whether it is effective.

Another aspect of paragraph 2 is how long the policy of compensating for the climate change levy through reductions in national insurance contributions will last—this is, of course, an annual order. We wonder how long this 0.3 per cent. cut in paragraph 2 is going to stay in place. There is nothing to prevent a Treasury Minister, of any party, from raising the percentage of employers' national insurance contributions. He or she might also raise the level of the climate change levy itself. We want to know whether paragraph 2 is intended to create a link between national insurance contributions and the levy. If the levy is increased, will there be a corresponding reduction in the level of national insurance contributions borne by employers?

The fate of another environmental tax does not create a good precedent. That tax was introduced by the previous Government, with a cut in national insurance contributions, but has been increased by this Government, without the corresponding cut in those contributions. In many people's judgment, that has amounted to a stealth tax and another burden on manufacturing industry.

We have to form a judgment about these provisions against that background. I should be grateful to hear from the Minister what the future is as far as this reduction is concerned and what the Government's intentions may be—in the event that they are able to turn those intentions into policy.

The remaining paragraphs of the order deal with the position of the self-employed. Paragraph 3 would up-rate the small earnings exception for class 2 contributions for self-employed people roughly in line with inflation, as would paragraph 4, which deals with class 3 contributions. Paragraph 5 contains important provisions on the lower and upper limits for class 4 contributions for self-employed people. It is important to scrutinise those in a little detail.

Dawn Primarolo: When the previous Conservative Government increased national insurance contributions from 6.5 per cent. to 10 per cent. for employees, was that a stealth tax?

Mr. Clappison: I am tempted to come back to the Minister on that. I shall do so by proving that a substantial increase in national insurance contributions has been imposed on the self-employed. As the order deals with the self-employed, Mr. Illsley, I will soon get into trouble with you if I talk about employees, as you will quite rightly take a strict approach.

If the Minister wants to do battle on a wider front about the way in which the Government have used national insurance contributions, I will happily join in. To do so, I will need to scrutinise class 4 contributions. Those are contributions above the small earnings exception contained in paragraph 3, and they are mandatory for self-employed persons unless the person in question is over pensionable age or under 16 at the beginning of the fiscal year. Therefore, class 4 contributions are paid by a wide range of individuals who play a vital role in the economy and society—about 11 or 12 per cent. of the total work force.

In considering the character and effect of the provisions in paragraph 5, we must bear in mind the fact that class 4 contributions do not entitle the payer to any contributory benefits; that entitlement comes about as a result of the payment of class 2 national insurance contributions. Class 4 contributions do not give the self-employed—a wide section of the work force—an entitlement to any contributory benefits.

No doubt the Minister can give us her view of the character of class 4 contributions, but many hard-working, self-employed men and women may find it hard to see the difference between this and another form of taxation or a stealthy increase in that form of taxation. For those who are paying it, the distinction between an increase in class 4 contributions and an increase in income tax may be a rather illusive. Indeed, I think that the Minister will confirm that class 4 contributions are even collected by the Inland Revenue. There is no benefit entitlement in respect of them and, generally, no records are kept.

To be fair to the Government, there is a background to these changes, which includes a 1998 report from Mr. Martin Taylor. It is also accurate to say that there have been corresponding changes in the levels at which class 1 national insurance contributions are paid by employees. Taken together, those changes have been widely and adversely commented on. At this point, I will return to the challenge that the Minister threw at me. I shall reply not in the words of the Opposition, but in the words of those who are expert in this field and those who are affected by it.

I shall use just two of the comments that have been made about the provisions of paragraph 5. Mr. Mike Warburton, senior tax partner at the accountancy firm Grant Thornton, said that the increase amounted to a ``stealth tax'' by the Chancellor, he said:

    This is another example of the way the National Insurance system, which is little understood by most tax payers, is being used to extract more money for the Chancellor with the minimum fuss.

Charles Levitt Schrivener, a director of the independent financial adviser, Towry Law said:

    The further stealth tax increase to the upper earnings limit for national insurance contributions shows that middle Britain is firmly in the firing line.

Another commentator, who is self-employed, spoke directly on behalf of the self-employed when he said that they were being ``clobbered''

To see just how big a clobbering the self-employed have been given, it is necessary to look at the effect of the provisions in paragraph 5 in terms of a year on year increase over the position in the present year, and then to look at the provisions in the light of the significant changes that took place between the financial years 1999-2000 and 2000-01. In the present financial year, paragraph 5 increases the lower limit of class 4 national insurance contributions by £150, an increase that is roughly in line with inflation. The upper profit limit, however, is being increased by £2,080 from £27,820 to £29,900, an increase of 7.5 per cent—quite a lot more than the rate of inflation.

The broadening of the band between the lower and upper limit increases the liability of the middle-income self-employed. For example, in the present financial year, an individual earning £29,900—a figure at the top of the range for these purposes, but an amount earned by many people as it is not an excessive sum these days—pays £1,640.45 in contributions. Next year, by virtue of paragraph 5, they will pay £1,775.55, an increase of £135 or 8.24 per cent. over what they pay in the present year. That is quite an increase.

I should be grateful if the Minister would confirm the figures in the case of the self-employed person earning £29,900. Will she also give us an estimate of the yield in revenue to the Treasury from the increase in the upper profit limit, and an estimate of the net yield to the Treasury after taking into account the rise in the lower and upper profit limits? As I have said, the lower limit will be increased in line with inflation, and the upper limit by much more.

The increase in the burden of national insurance contributions as a result of the order comes on top of a substantial increase in the burden of national insurance contributions at the beginning of the current financial year. The increase in liability brought about by the changes that the order will introduce must be seen in conjunction with the changes that were introduced this year. For the current financial year, the Chancellor reduced but did not abolish the flat rate fee for class 2 contributions, from £6.55 to £2 a week, to which the Paymaster General adverted. I did not hear the Paymaster General advert to the other change that the Chancellor made—a significant broadening of the extent of the national insurance contribution limits for the present year, increasing the upper limit from £26,000 to £27,820, which appears in paragraph 5, and lowering the lower limit substantially, from £7,530 to £4,385. That lowers the entry point into national insurance contributions for the self-employed. Moreover, in the present year, self-employed people enter the broader band of national insurance contribution liability and pay it at a higher rate, because the rate has increased from 6 per cent. to 7 per cent.

Does the Paymaster General accept that the combined effect of those changes over two years, including the changes introduced in the order, will cost the self-employed, especially those at the higher end of the range, substantial amounts and will raise revenue for the Exchequer? Is the Institute for Fiscal Studies right to suggest on its website that the aggregate cost of the reforms for the self-employed, including the changes introduced in the order, will be about £250 million? Does she accept that self-employed people with incomes around the upper profit limit will be especially hard hit? We calculate that, taking into account the increase introduced in paragraph 5, a self-employed person with profits of £30,000 will see an increase of £430.75 in his national insurance contributions between the fiscal year 1999-2000 and the fiscal year 2001-02—an increase of £430.75 in just two years, for someone on an income that is hardly excessive these days. Such a person will have a total national insurance contributions burden of £1,879.55, taking into account the changes to class 2 and class 4 contributions introduced in paragraph 5 of the order.

That is a heavy burden and a whopping increase for someone to have to face. Those bearing that much heavier burden of national insurance contributions are likely to be hard-working people who promote enterprise and create wealth. Broadening the band of profit that is subject to national insurance contributions is hardly the best way of promoting enterprise and wealth creation. As I said, the change comes on top of a substantial broadening and an increase in the percentage last year. It is not surprising that the Chancellor saw fit to keep quiet about that when he made his pre-Budget announcement last November.

All those changes amount to a heavy blow for many self-employed people, and that is why we are worried about the order. We should like industry to reap the benefit of the cut in national insurance contributions, subject to the qualifications that I outlined and the criticism that I made of the overall policy. However, we are worried that the package, as the Paymaster General called it, puts a substantial burden on self-employed people, leaving them to face a whopping increase.

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Prepared 23 January 2001