Skip to main content

National Insurance Contributions

Volume 940: debated on Thursday 1 December 1977

The text on this page has been created from Hansard archive content, it may contain typographical errors.

asked the Secretary of State for Social Services whether a deci- sion has yet been made as to the rates and levels of national insurance contributions for the 1978–79 income tax year.

Yes. April 1978 marks the start of the new pensions scheme which will bring about a major and long-awaited improvement in this country's provision for retirement, widowhood and invalidity. Under this scheme, for which provision was made in the Social Security Pensions Act 1975, people will be able to qualify for earnings-related additional pensions on top of the present flat rate. Rights to additional pensions will build up from next April. The additional pensions will be protected against inflation; and the first full pensions will become payable for those who retire with 20 years of contributions under the new scheme. A married man on average earnings will then be able to retire on more than half-pay.After the scheme reaches maturity in 20 years' time, additional pension will be calculated from the 20 best years of earnings. This will be of particular benefit to people like manual workers, whose earnings tend to fall as they get older. There will be no loss of pension rights under the scheme on a change of job.Women will not only have equal rights to an earnings-related pension under the new scheme but will have their right to a basic pension protected if they give up work to look after their children. And a woman who is widowed will be able to receive the new earnings-related pension on her husband's contributions on top of her flat-rate widow's pension.People can be contracted-out of the new State scheme if their occupational pension scheme provides benefits at least as good as those provided by the State scheme. They will then receive their additional pension from their occupational scheme and will pay smaller national insurance contributions.I now turn to the contributions required. My right hon. Friend has carried out the annual review which he has to make under the Social Security Act 1975 and, having regard to the level of future expenditure from it, he has considered what contributions are required from next April.

In fulfilment of his obligations under the Social Security Act and under the Social Security (Miscellaneous Provisions) Act 1977, my right hon. Friend has today laid a draft order, which requires the approval of both Houses, setting out revised rates and levels of contributions to take effect on 6th April 1978. A report by the Government Actuary (Cmnd. 7036) accompanies the order. My right hon. Friend has also laid regulations which set out the new earnings limits for employees' and employers' contributions. The full range of contribution adjustments for 1978–79 is set out below, together with tables which illustrate their effect at particular levels of earnings.

Employees who are not contracted-out. The Social Security Pensions Act 1975 recognised that Class 1 contribution rates for employees and employers who were not contracted out would need to be increased at the start of the new scheme under which greatly improved benefits will be earned; and there is power to set their contributions at rates which are not higher than 6·5 per cent. and 10 per cent. respectively. As the Government Actuary's report shows, on the basis of given assumptions about unemployment and earnings, the fund will show a small deficit for 1978–79 if the Class 1 rates are at these percentages and other rates and levels of contributions are as now proposed. My right hon. Friend has therefore concluded that the standard Class 1 rates should be 6·5 per cent. for employees and 10 per cent, for employers, in place of the present rates of 5·75 per cent. and 8·75 per cent. respectively.

In line with the requirements of the Pensions Act, the lower earnings limit for Class 1 contributions is to be increased to £17·50 a week, the current level of the basic retirement pension, and the upper earnings limit is to be increased to £120, or about seven times the pension rate. These new earnings limits replace the existing limits of £15 and £105 a week respectively.

The effect of these changes is to increase by 60p a week the contribution paid by an employee on £80 a week, which is approximately the amount of average earnings for males employed full-time. The corresponding increase for his employer is £1.

Employees who are contracted-out. Where an employee is contracted out, the contribution rates will be reduced, as already provided for in the Pensions Act, in recognition of the provision by his occupational pension scheme of part of the new state scheme benefits. On the first £17·50 of weekly earnings the rates will be as for other employees but between that limit and the upper earnings limit the rates will be 4 per cent. for employees and 5·5 per cent. for employers. The effect will be to reduce the weekly contribution of the contracted-out employee earning £80 a week by 96p and his employer's contribution by £1·81.

The self-employed. The self-employed will not come within the scope of the new earnings-related pension scheme and their contributions have been adjusted to take account of this. Thus, the levels of self-employed contribution have been assessed on a similar basis to that used for assessing contracted-out contributions, but allowance has also been made for the benefits not available to the self-employed for which contracted-out employees can qualify.

Calculations made on this basis result in contribution rates for the self-employed which, initially, are much lower than at present but which, like the contributions of the contracted-out, will rise progressively in real terms over the years. Initially, the self-employed will pay a Class 2 contribution of £1·90 a week, in place of the present £2·66—£2·55 for women—a week, and a Class 4 contribution of 5 per cent. on annual profits between the limits of £2,000 and £6,250 a year, in place of 8 per cent. between limits of £1,750 and £5,500. It should be possible to hold this level of liability for the first five years of the new scheme, apart from changes to the Class 2 rate and Class 4 limits to take account of increases in the general level of earnings. The changes in Classes 2 and 4 contributions will mean a reduction in contribution liability at any given level of annual profits, as illustrated below.

Class 3 ( voluntary) contributions. In consequence of the above changes, the rate of the Class 3 (voluntary) contribution will be reduced from £2·45 to £1·80.




Class 1 (employed earners):

Lower earnings limit (LEL)£15 a week£17·50 a week
Upper earnings limit (UEL)£105 a week£120 a week
Employed earner's rate5·75 per cent.Not contracted out: 6·5 per cent.
Contracted out:
6·5 per cent. to LEL
4·0 per cent. between LEL and UEL
Employer's rate†8·75 per cent.Not contracted out:
10 per cent.
Contracted out:
10 per cent. to LEL
5·5 per cent. between LEL and UEL
Reduced rate for certain married and widow beneficiaries2 per cent.2 per cent.

Class 2 (self-employed—flat-rate):

Men's rate£2·66 a week£1·90 a week
Women's rate£2·55 a week£1·90 a week
Small earnings exception where earnings are below£875 a year£950 a year

Class 4 (self-employed—earnings related):

Lower limits of profits or gains£1,750 a year£2,000 a year
Upper limits of profits or gains£5,500 a year£6,250 a year
Rate8 per cent.5 per cent.

Class 3 (voluntary contributions)


* Changes to the Class 1 lower and upper earnings limits are contained in the Social Security (Contributions) (Consequential Amendments) Amendment (No. 2) Regulations 1977. Other changes are contained in the draft Social Security (Contributions, Re-rating) (No. 2) Order 1977.

† Apart from the 2 per cent. surcharge payable under the National Insurance Surcharge Act 1976.


Not contracted-out employees

Weekly earnings

1977–78 (5¾%)

Employee 1978–79 (6½%)


1977–78 (8¾%) *

Employer 1978–79 10%)*



* These amounts exclude the national insurance surcharge.

Contracted-out employees

Weekly earnings

1977–78 (5¾)%)

Employee 1978–79 (6½%to £17·50: 4% thereafter)


1977–78 (8¾%)*

Employer 1978–79 (10% to £17·50: 5½% thereafter)



* These amounts exclude the national insurance surcharge.


Self-employed earners (Annual Liability)

Annual Profits or Gains £

1977–78* £

1978–79 £

Decrease* £


* The amount of the present contribution, and therefore of the decrease, is £5·72 lower for women.