Motion to Consider
My Lords, I am pleased to introduce the Employment Allowance (Increase of Maximum Amount) Regulations 2016, the Employment Allowance (Excluded Companies) Regulations 2016 and the Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016. As all three sets of regulations deal with national insurance contributions, it seems sensible that they should, with the leave of the Committee, all be debated together.
The substance of the two instruments concerning the employment allowance was announced at the Chancellor’s summer Budget on 8 July last year. The NICs rates and thresholds for the 2016-17 tax year were announced as part of the Chancellor’s Autumn Statement on 25 November.
I will start with the Employment Allowance (Increase of Maximum Amount) Regulations 2016. The Government are committed to supporting businesses which want to expand their workforce. To that end, the employment allowance was first announced at Budget 2013 as a reduction of up to £2,000 a year for eligible businesses and charities on their employer NICs bill. In the year 2015-16, the allowance has benefitted almost 1.2 million employers, helping to cut the cost of employment in the UK. These regulations increase the employment allowance to £3,000 from 6 April 2016. The increase will further support businesses and charities to enable them to grow. As a result of this increase, 90,000 more employers will be taken out of employer NICs altogether. It also means that firms will be able to employ four workers full-time on the new national living wage next year without paying any employer NICs.
The Employment Allowance (Excluded Companies) Regulations 2016 focus the employment allowance on companies that support employment. As announced at summer Budget 2015, these regulations mean that limited companies where the director is the sole paid employee will no longer be able to claim the allowance from April 2016. This ensures that the allowance is focused where it should be, on its original objective of supporting businesses with the costs of employment. HMRC anticipates that there still will be around 1 million employers who will benefit from the employment allowance next tax year, taking this measure into account.
Lastly, I turn to the Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016. As you may be aware, these regulations contain some technical detail, so I hope noble Lords will bear with me while I explain their content. The consumer prices index rate of inflation is the basis of indexation for most of the national insurance contribution limits and thresholds. The CPI rate of inflation was minus 0.1% in the year to September 2015. As a result, not all of the national insurance contribution limits and thresholds will need to be changed for the 2016-17 tax year. The exceptions to this are the upper earnings limit, the upper secondary threshold, the upper profits limit and the new apprentice upper secondary threshold.
I start with the upper earnings limit, which is the level of earnings at which employees begin to pay class 1 national insurance contributions at the additional percentage rate. It is aligned with the point at which the higher tax rate is paid. From this April, the income tax personal allowance will increase above indexation from £10,600 to £11,000 and the point at which the higher tax rate is payable will increase from £42,385 to £43,000 in the 2016-17 tax year. The upper earnings limit will be increased from £815 to £827 per week from 6 April 2016 to maintain this alignment.
The upper secondary threshold is the level below which employers are entitled to a 0% rate of national insurance contributions on the earnings of employees under the age of 21. Since it was introduced in April last year, the zero-rate earnings band for employees under 21 has supported the jobs of more than 1.5 million young people. The UST will continue to be aligned with the upper earnings limit and will also be set at £827 per week from 6 April 2016.
From April this year, employers will also be entitled to a reduction in secondary class 1 NICs on the earnings of eligible apprentices under the age of 25. This will reduce the cost to employers of providing apprenticeships for young people. The new apprentice upper secondary threshold will be the level below which employers are entitled to a 0% rate of NICs on the earnings of relevant apprentices. Like the UST, it will be aligned with the upper earnings limit, and so it will be set at £827 per week from 6 April 2016.
Moving on to the self-employed, these regulations also set the upper profits limit for class 4 contribution liability. The upper profits limit is the level of profits below which the self-employed pay the main class 4 percentage rate of NICs on profits above the lower profits limit. The UPL also will rise to maintain alignment with the level at which the higher rate of income tax is payable—to £43,000 for the 2016-2017 tax year. These regulations also set the prescribed equivalents of thresholds and limits I have mentioned for employees paid monthly or annually.
In the 2016-17 tax year, employers will continue to pay contributions at 13.8% on earnings above the secondary threshold. Employees will continue to pay 12% on earnings between the primary threshold and the upper earnings limit, and 2% on earnings above that. This is in line with the commitment the Government made in the National Insurance Contributions (Rate Ceilings) Act 2015 to provide certainty for businesses and employees by locking in the main rates of class 1 NICs for the duration of this Parliament.
Finally, to ensure that the National Insurance Fund can maintain a working balance throughout the coming year—which the Government Actuary recommends should be one-sixth of benefit expenditure for the year—these regulations provide for a Treasury grant of up to 5% of benefit expenditure to be made available to the National Insurance Fund in the 2016-17 tax year. A similar provision also will be made in respect of the Northern Ireland National Insurance Fund.
I commend the draft Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016, the Employment Allowance (Excluded Companies) Regulations 2016 and the Employment Allowance (Increase of Maximum Amount) Regulations 2016 to the Committee.
My Lords, I thank the Minister for introducing these regulations this afternoon. As he has outlined, there are three separate instruments before us today. I will start by addressing the two on the employment allowance before turning to national insurance limits and thresholds. The Opposition will not oppose any of the measures, but I will put a number of questions and clarifying points to the Minister.
Labour is committed to stimulating employment growth and in particular supporting SMEs, and therefore from the outset we have been behind the intent of the employment allowance. That said, it is not clear whether the policy is having the intended impact. The main reason stated by the Government for these changes is to make the employment allowance more focused on businesses that create and sustain employment, ensuring that the employment allowance is better targeted on employers who may take on additional staff, and so supports the objective of supporting employment. However, as the Chief Secretary to the Treasury openly admitted, there is a particular problem when it comes to,
“assessing how many jobs are created as a result of the allowance, because of the inherent complexity in that matter”—[Official Report, Commons, National Insurance Bill Committee, 21/11/13; col. 58].
Given the Government’s stated purpose, it is not at all unreasonable for us to judge the success of this policy against the number of people it enables SMEs to employ. However, due to the apparent impossibility of collecting the necessary data, how would we know? How can the allowance be targeted on particular gaps in small business employment if we do not know who is and who is not using the allowance to take on more staff? Indeed, according to the employment allowance impact report, only 34% of those surveyed stated that they planned to use the allowance to take on additional staff. The majority said that the money would be absorbed into the general revenues and expenditure of the business.
Increasing the allowance by £1,000 to mitigate the increased cost of the national minimum wage seems perfectly reasonable. However, can the Minister go into some more detail about the impetus behind the exclusion of sole-director companies? What were the reasons why further exemptions were felt appropriate? Can the Minister when responding make particular reference to whether the evidence of tax avoidance had encouraged the Government to respond in this fashion?
As I stated at the beginning, we support the measures, but perhaps it will be appropriate to offer a word or two of caution. In the report Awareness and Impact of the Employment Allowance–Research with Small Employers, the main reason for businesses not claiming the allowance was concerns around eligibility. Does the Minister anticipate whether further exemptions will be added? If so, the Government ought to be aware of the confusion that already exists among employers about who is eligible. It is also worrying that the understanding of the rollover mechanism built into the legislation is lower still. Does the Minister not agree that producing policy with the intent of easing the burden on SMEs can only be as effective as the knowledge of those whom the policy impacts? Without this, the efficiencies that the Government are making are pointless.
I turn to some of the specifics about the regulations themselves. The consultation was held for five and a half weeks, between 26 November 2015 and 3 January 2016. Why was the period so short? The Chancellor announced these measures in his summer Budget; surely consultation could have commenced during the Summer Recess?
A more significant point is that HMRC has not published a summary of the responses to the consultation in question. Its publication would be of value—I would be interested to see, for example, whether contributions were made by those who had started their own business and claimed the employment allowance, and what they believed the impact of the proposed restriction of the allowance to companies with a single director would have had on the ability to establish their company. Can the Minister say whether there are any such examples? Could he give a commitment to publish the consultation and place it in the Libraries of both Houses? Given the acknowledgment that data collection on, and analysis of, the employment allowance is difficult to come by, any information gathered on the issue would be of considerable value.
Paragraph 11.3 of the Explanatory Memorandum refers to the same consultation on the regulation of small businesses, and says:
“The basis for the final decision on what action to take to assist small business will be responses to the technical consultation on the Excluded Companies Regulations, to ensure that the measure does not have any unintended consequences”.
We are only going to access the merits of the Government’s judgment in this regard if we have the relevant information available to us.
Finally, paragraph 3.2 of the Explanatory Memorandum states:
“Disregarding minor or consequential changes, the territorial application of this instrument includes Scotland and Northern Ireland”.
Would the Minister commit to writing to me to outline how this measure, and indeed the national insurance measures, will be applied differently in the devolved Administrations?
The third measure in this set of statutory instruments —the Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016—sets limits and thresholds for class 1 national insurance contributions paid by employees and employers on employee earnings and for class 4 national insurance contributions paid by the self-employed. The rise in the threshold for employees means that employees will pay up to an additional £1.20 per week in national insurance. However, the Government have not shifted the lower threshold upwards accordingly. Although this has occasionally stayed the same as the previous year, that has not been normal government practice. Could the Minister expand on the Government’s thinking behind this aspect of the proposals?
In addition, the regulations set the thresholds for two national insurance relief measures: first, abolishing NICs for employees under the age of 21 on earnings up to the higher rate threshold; and secondly, abolishing employer NICs up to the upper earnings limit for apprentices aged under 25. The Government’s ambition to create 3 million apprenticeships by 2020 is widely known. However, a repeated problem that we have consistently raised is that, although a rise in the number of apprenticeships is of course welcome, they have disproportionately favoured people over the age of 25. Could the Minister say whether today’s regulations are a recognition from the Government that something needs to be done to tackle the lack of high-quality apprenticeships available to young people? Have his colleagues at the Treasury produced statistics about the number of people under the age of 25 who will be affected? If the Minister has any information on this, I would be very grateful if he would share it with us.
I end by once again stating that the Opposition will not be opposing these measures today. However, I would be grateful if the Minister could respond to the points that I have raised, if not in his reply perhaps at a later date in writing.
My Lords, I thank the noble Lord for his questions and above all for his party’s support for these regulations, which I believe was also given last year. When I have answered some of the questions, I think he may feel even happier about providing that support.
The noble Lord asked whether the employment allowance achieved its intended purpose of supporting employment, given that the impact report stated that only 34% of those surveyed planned to take on more staff. The aim of the employment allowance is of course to support businesses and help them to grow by reducing the cost of employment. Statistics published by HMRC at the end of October 2015 show that 1.17 million employers have had their employment costs reduced by the employment allowance. Of course, it is up to individual businesses to decide how best to use these savings. The latest research from the Federation of Small Businesses suggests that 29% of small businesses will use the savings to boost staff wages, 28% will employ additional staff and 24% will invest resources. However, this is one of a suite of measures and, as I said, it is up to them how to use the allowance.
The noble Lord made a point about information and asked how we can target the employment allowance to specific gaps in small business employment if we do not have the data about who is using it. There are already positive indications to suggest that employment allowance is being widely claimed by the small business community. The impact report states that nearly seven in 10 eligible businesses with fewer than 50 employees are claiming the allowance. That report was compiled when the scheme had been running for less than a year. Since then, figures show that 1.17 million employers have benefited and, at the moment, 98% of the benefit of the allowance goes to small and medium-sized businesses—by which I mean those with fewer than 250 employees.
I turn to the regulations on excluding single-director companies from employment allowance. The impetus, as the noble Lord put it, behind these is to reinforce the objective of the allowance as a means to support wider employment and to help to ensure that it is focused on reducing the cost to companies of expanding their workforce or taking on their first employee.
On the question of eligibility for the allowance, whether further exemptions will be added to it and potential confusion from the changes, the report on awareness and impact on employment that the noble Lord cited was published last July and represents a snapshot of the research carried out between November 2014 and January 2015. Since then, the Government have published take-up figures and, at the end of 2014-15, the take-up rate stood at 89%—a quite substantial improvement—with more than 1 million employers claiming the allowance. As I mentioned, the mid-year estimate was 1.17 million employers. We are encouraged by those statistics and think that the early concerns set out in the report have eased with the passage of time, but, of course, the Government continue to monitor the effectiveness of employment allowance and its contribution to wider government aims.
The noble Lord asked why the technical consultation on single-director companies was so short. In fact, the tax consultation framework sets out that the consultation period for this sort of secondary legislation is four weeks, and this consultation was a bit longer, at five and a half weeks, because of the Christmas break. It was closed in early January to enable the measure to come into effect in April, as announced. As for a summary of the responses to the consultation on the single-director company measures, paragraph 8.1 of the Explanatory Memorandum provides a short summary of the comments made in response. It was quite short, and we have no plans to extend that because the essence of the replies is contained in that short summary.
The noble Lord asked, in relation to the paragraph in the Explanatory Memorandum on the technical consultation on excluded companies, whether the responses to the consultation informed the action taken to assist small businesses. That paragraph relates to the technical consultation. The responses to the consultation were useful in assisting HMRC to write the guidance for the measure, which will be published in due course on the government website GOV.UK.
The territorial application was mentioned. I can confirm that all these measures will apply to the whole of the United Kingdom, as set out in paragraphs 5.1 and 5.2 of the Explanatory Memorandum on the employment allowance changes. The paragraph that the noble Lord cited was included in relation to all the SIs to assist the Speaker in the other place by drawing attention to the fact that the instrument does not need to be certified for the purposes of the English votes procedures in the other place.
There was slight confusion about the Government increasing the upper earnings limit, meaning that employees have to pay more national insurance contributions on their earnings. The proposed increase in the upper earnings limit will maintain the alignment with the point at which the higher tax rate is paid. This will increase to £43,000 next year, which is slightly above inflation. At the lower end, the CPI rate of inflation, as I mentioned in my opening remarks, has been minus 0.1%, so those rates have been frozen. That is consistent with the approach taken in the past when the retail prices index was negative, which led to the thresholds being frozen for the 2010-11 tax year.
I did not, or at least I did in the sense that I made the point that it was focused on helping businesses to employ people. This brought it in line with the original policy, so I made it into a positive point and I did not specifically mention avoidance. However, we think that overall, in line with the policy, it is right to focus it on creating employment.
The new policy on apprenticeships starting in April will involve the abolition of the class 1 national insurance contributions for young apprentices under the age of 25. That will obviously reduce the cost of employing an apprentice, which is part of the Government’s strategy to support high-quality apprenticeships. It is part of a wider strategy, which will also introduce the UK-wide levy on employers with pay bills over £3 million to fund the step change needed in apprenticeship starts and help to achieve the 3 million apprenticeship starts this Parliament, which is part of our policy.
I was asked how many people will be affected by the under-25 national insurance relief. The impact assessment published with the regulations notes that an estimated 180,000 employers offer apprenticeships in the UK and are likely to benefit from this measure. The BIS apprenticeship data in England for the 2013-14 academic year show that around 500,000 apprentices under the age of 25 were employed throughout the country. HMRC estimates that there are around 130,000 apprentices in England aged 21 to 24. This group will be directly affected by this measure, with those under 21 already benefiting from the zero NIC rate since April 2015.
I think that I have dealt with most of the questions. Of course, if I have not covered them all, I will certainly look through the record of the noble Lord’s speech and write to him. I repeat that I am grateful to him for his support and I commend these regulations to the Committee.