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National Insurance Contributions Bill


 

These notes refer to the National Insurance Contributions Bill as introduced in the House of Commons on 1 May 2002 [Bill 130]

NATIONAL INSURANCE CONTRIBUTIONS BILL


EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the National Insurance Contributions Bill as introduced in the House of Commons on 1 May 2002. They have been prepared by the Inland Revenue in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

SUMMARY AND BACKGROUND

3.     The Chancellor announced in his Budget Statement on 17 April 2002 an increase in the rates of National Insurance which will be introduced in 2003-04. There will be an additional 1 per cent National Insurance contribution by employers, employees and the self-employed on all earnings above £89 per week. This is in addition to existing rates of contribution below the upper earnings limit for employees and the upper profits limit for the self-employed.

4.     The extra revenues are to be added to the proportion of National Insurance Contribution receipts which already go towards the cost of the National Health Service and will not affect contributors' pensions or other contributory benefits.

Clause 1: Primary Class 1 contributions

5.     Subsection (1) replaces section 8 of the Social Security Contributions and Benefits Act 1992 ("SSCBA"). The new section 8 provides for two rates of primary Class 1 contributions (primary Class 1 contributions are those paid by employees on their earnings):

[Bill 130-EN]     53/1

  • the 'main primary percentage' is payable on earnings between the primary threshold (the level of earnings at which employees start to pay Class 1 contributions, currently £4,615) and the upper earnings limit.

  • the 'additional primary percentage' is payable on earnings which exceed the upper earnings limit (currently £30,420).

6.     The new subsection (2) of section 8 sets the main primary percentage rate at 11 per cent (an increase of 1 per cent above the rate charged in 2002-03) and sets the additional primary percentage rate at 1 per cent. The main primary percentage is subject to alteration, as now, by regulations under sections 143 and 145 of the Social Security Administration Act 1992 ("SSAA"). The additional primary percentage cannot be changed by regulations.

7.     The new subsection (3) identifies cases where the provisions in subsection (1) can be modified. These relate to particular categories of contributor, and include the rebates which apply when an employee is a member of a contracted-out pension scheme. The Bill does not change the power to make such modifications.

8.     Subsection (2) of clause 1 makes the same changes for Northern Ireland, by inserting a new section 8 in the Social Security Contributions and Benefits (Northern Ireland) Act 1992 ("SSCB(NI)A").

Clause 2: Secondary Class 1 contributions

9.     Subsection (1) replaces subsections (2) and (3) of section 9 of the SSCBA. The new subsections provide that the National Insurance rate paid by employers (the 'secondary percentage') is 12.8 per cent (an increase of 1 per cent above the rate charged in 2002-03). The rate will continue to be subject to alteration under sections 143 and 145 of the SSAA. Like the main primary percentage, the secondary percentage is subject to modification for certain categories of contributor.

10.     Subsection (2) makes the same changes for Northern Ireland, by substituting new subsections (2) and (3) in section 9 of the SSCB(NI)A.

11.     Schedule 1 makes consequential amendments to sections 10 and 10A of the SSCBA and the SSCB(NI)A to apply the main secondary percentage to Class 1A contributions (paid by employers on benefits in kind) and Class 1B contributions (paid where an employer enters into a PAYE settlement agreement).

Clause 3: Class 4 contributions

12.     Subsection (1) makes changes to section 15 of the SSCBA, which provides for profit-related contributions payable by the self-employed (Class 4 contributions).

13.     The amendment provides for contributions to be paid at the main Class 4 percentage rate on profits or gains between £4,615 (the lower profits limit, equivalent to the primary threshold for Class 1) and £30,940 (the upper profits limit, equivalent to the upper earnings limit for Class 1) and at the additional Class 4 percentage rate on profits or gains that are above £30,940. The lower and upper profits limits are subject to alteration under section 141 of the SSAA.

14.     Section 15 sets the main Class 4 percentage at 8 per cent (an increase of 1 per cent above the rate charged in 2002-03) and the additional Class 4 percentage at 1 per cent. The main Class 4 percentage is subject to alteration, as now, by regulations under section 143 of the SSAA. The additional percentage cannot be changed by regulations.

15.     Subsection (2) makes changes to section 15 of the SSCB(NI)A to mirror the changes above.

16.     Subsection (3) amends section 18 of the SSCBA, which deals with treatment of certain workers (e.g. examiners) who are, by regulations, treated as being self-employed for the purposes of National Insurance contributions. The section ensures that such workers pay special Class 4 contributions on their earnings between the lower and upper profits limits. Subsection (3) ensures that the additional 1 per cent is included in any calculation. Subsection (4) does the same for the equivalent Northern Ireland provision.

Clause 4: Appropriate national health service allocation: Great Britain

17.     This Clause ensures that the additional revenue raised from employees, employers and the self-employed as a result of the 1 per cent increase in National Insurance contributions will be included in the National Health Service allocation. It amends section 162 of the SSAA. Section 162 provides for a proportion of each class of National Insurance contributions collected for Great Britain to be paid towards the cost of the national health service (the "NHS allocation").

18.     Under current legislation around 10 per cent of all National Insurance contributions collected go towards the cost of the NHS and not into the National Insurance Fund from which the costs of contributory benefits are met. The main amendment is to subsection (5) of section 162 of the SSAA, which sets out the calculation of the appropriate NHS allocation.

19.     Subsections (2)(a) and (3) include within the NHS allocation all of the primary Class 1 and Class 4 contributions paid as a result of the new "additional rates" of National Insurance contributions.

20.     Subsection (2)(b) and (c) increases the percentage rate of the NHS allocation from primary Class 1 contributions paid on earnings between the primary threshold and the upper earnings limit and from secondary Class 1 contributions, by 1 per cent. An equivalent increase is made in the rate of NHS allocation from Class 1A contributions and Class 1B contributions.

21.     Subsection (2)(d) increases the NHS allocation from Class 4 contributions paid on earnings, profits or gains between the lower limit and the upper limit by 1 per cent.

Clause 5: Appropriate health service allocation: Northern Ireland

22.     This clause makes corresponding provision for the health service allocation in Northern Ireland.

Schedule 1: Consequential amendments

23.     This Schedule deals with the consequential amendments arising from the increase in National Insurance contributions rates. The main thrust of the amendments is to ensure that there is no impact on entitlement to contributory benefits or on the rate of such benefits. The amendments also ensure that there is no change in the way in which the reductions in contributions are applied in respect of employees who are contracted-out of the State Second Pension.

24.     Paragraphs 25 to 30, 33, 44 and 46 to Schedule 1 make changes to Northern Ireland benefits and pensions legislation. These amendments are subject to the approval of the Northern Ireland Executive Committee and Assembly.

FINANCIAL IMPACT OF THE BILL

25.     The cost to the Inland Revenue of implementing this policy will be around £270,000.

SUMMARY OF THE REGULATORY APPRAISAL

26.     A Regulatory Impact Assessment has been published and concludes that employees will not suffer any regulatory burden from these changes. The self-employed will only suffer a marginal regulatory burden in the form of an extra calculation once a year when they complete their tax return if they earn above the upper profits limit. This is not considered significant.

27.     Employers using payroll software will be shielded from any burden. Payroll software providers automatically update their products to reflect annual re-rating charges and as such employers will suffer only a minor disruption as they update their computer systems. Consultation with software providers indicates this will not be a significant burden.

28.     Employers who calculate their payroll manually may be affected. They will need to make one extra National Insurance contributions calculation on those employees earning above the upper earnings limit. This would affect around 180,000 employees costing employers roughly £1.5 million in 2003/04.

29.     The impact for small businesses is similar to the impact for employers in general.

COMMENCEMENT

30.     The new National Insurance contributions rates will come into force from 6th April 2003.

EUROPEAN CONVENTION ON HUMAN RIGHTS

Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of that Act). The statement has to be made before second reading. The Chancellor of the Exchequer has made the following statement:

In my view the provisions of the National Insurance Bill are compatible with the Convention rights.

 
 
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Prepared: 2 May 2002