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Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2021

Volume 810: debated on Monday 8 February 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2021.

My Lords, these regulations set the national insurance contributions limits and thresholds, as well as the rates of a number of national insurance contributions, for the 2021-22 tax year and make provision for a Treasury grant to be paid into the National Insurance Fund if required. National insurance contributions, or NICs, allow people to make contributions when they are in work in order to receive additional contributory benefits when they are not working; for example, when they are retired or if they become unemployed. NICs receipts go towards funding these contributory benefits, as well as the NHS. As announced in November, the Government are using the September consumer prices index—CPI—figure of 0.5% as the basis for setting all national insurance limits and thresholds, and the rates of class 2 and class 3 national insurance contributions, for 2021-22.

I will first outline the specific changes to the class 1 primary threshold and class 4 lower profits limit. The primary threshold and lower profits limit indicate the points at which employees and the self-employed start paying class 1 and class 4 NICs, respectively. These thresholds will rise from £9,500 to £9,568 per year. The rates of class 1 and class 4 NICs are unchanged by these regulations. Increases to the primary threshold and lower profits limit do not impact on state pension eligibility. This is determined by the lower earnings limit for employees, which will remain at £6,240 in 2021-22, and payment of class 2 NICs for the self-employed, which I will come to shortly.

The upper earnings limit, the point at which the main rate of employee NICs drops to 2%, is aligned with the higher rate threshold for income tax. The upper earnings limit will increase from £50,000 to £50,270 per year. Similarly, the upper profits limit is the point at which the main rate of class 4 NICs drops to 2%. This will also increase from £50,000 to £50,270 per year. As well as class 4 NICs, the self-employed also pay class 2 NICs. The rate of class 2 NICs will remain at the weekly rate of £3.05, due to the rounding rules which require the calculation of the CPI increase to be rounded to the nearest 5p. The small profits threshold is the point above which the self-employed must pay class 2 NICs. This will increase from £6,475 to £6,515 per year. Class 3 NICs allow people to voluntarily top up their national insurance record. The rate for class 3 will increase in line with inflation, from £15.30 a week to £15.40.

The secondary threshold determines the point at which employers start paying employer NICs on an employee’s salary. This threshold will increase from £8,788 to £8,840 per year. The threshold at which employers of people under 21, and of apprentices under 25, start to pay employer NICs on these employees’ salaries will increase from £50,000 to £50,270 per year. The rate of employer NICs is unchanged by these regulations.

The regulations also make provision for a Treasury grant of up to 17% of forecasted annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2021-22. A similar provision will be made in respect of the Northern Ireland National Insurance Fund. The Government Actuary’s Department report laid alongside the re-rating regulations forecast that a Treasury grant will not be required in 2021-22, but in view of the economic challenges created by the Covid-19 pandemic, the Government consider it prudent to make the maximum provision at this stage.

These regulations will also ensure that tax credits, child benefit and the guardian’s allowance increase in line with the consumer prices index, which had inflation at 0.5% in the year to September 2020. As noted in the Secondary Legislation Scrutiny Committee’s report, the increases provided for in these regulations result from the statutory annual review of benefits and credits rates and, as such, are separate from the temporary measure announced by the Chancellor in March 2020 and enacted in the Coronavirus Act 2020. The powers in the Act increased the basic element of working tax credit by an extra £1,045 for the tax year 2020-21 and ensured that the temporary increase was not to be considered for the purpose of the annual review.

In summary, this proposed legislation makes changes to the rates, limits and thresholds for national insurance contributions and provision for a Treasury grant. It also increases the rates of tax credits and guardian’s allowance in line with prices. I hope noble Lords will join me in supporting these regulations. I beg to move.

I am grateful to the noble Baroness, who so often in the time she has been on the Front Bench has impressed with her clarity and detail. In fact, I did not really need to have read the Explanatory Notes because she has covered the situation extremely well. However, I thought I would join this Grand Committee discussion on these statutory instruments both to support my noble friend on the Front Bench and to make one or two points which I think should be made in the light of the changes.

The first relates to the national insurance uprating. I have no objection to these regulations except in thinking that there needs to be much wider debate about the regressive nature of the national insurance system. There needs to be a challenge—it is as much a challenge for my own party as it is for the present Government—to the nonsense that the more you earn, the less you pay in national insurance, given the new cut-off of £50,270 at the upper rate and the 2% contribution. There is also the silly situation where those who are over statutory retirement age and continue to earn do not pay national insurance. At a time when we need every penny we can get, this seems an area for future exploration. We just need to be honest with people who are doing very well while over the age of retirement. There are now very many of them—well over 1 million—who could make a small contribution. Associated with that is the reconsideration of the 2% contribution. I think this would be seen to be fair and would avoid having to top up the national insurance scheme by £200 million. I just lay that on the table.

I also wanted to contribute in relation to working tax credits and their associated uplift. As the Minister has already indicated, under Schedule 77 to the Act there was a temporary uplift of £1,045, or £20 a week, for working tax credits and associated credits, but also, of course, for universal credit. While there has been great public attention on universal credit, people have not necessarily understood that—if there is no change of heart by the Government—the £1,045-a-year uplift will be withdrawn.

I cannot read the Chancellor of the Exchequer’s mind for 3 March, but I can read the minds of those around me and those I used to represent. A reduction of £20 a week for people in the situation we are describing —including those we are dealing with tonight—is a substantial sum of money, even if it is not for those making the decisions.

I think the Minister has good contacts; she certainly ought to have, given how competent she has displayed herself to be over recent months. I appeal to her to get the message across to Treasury colleagues that it would be seen as grossly unfair at this time if people were to have withdrawn from them what is for them a very large sum of money, but is in greater government spending—in terms of the level of borrowing we have at the moment—a very small contribution to ensuring that people can survive. While I am in no way against the changes that have been described, they overlay a much more difficult and controversial situation that I felt it necessary to put on record this evening.

My Lords, I will address the NIC contribution matters in these regulations. I would have addressed the working tax credit point just made by the noble Lord, Lord Blunkett, but rather than repeating the point I will simply say “and I” and add amplification to it.

The standard uprating by CPI has been applied and, as this was only 0.5% last September, it has made only a minor difference on the current overall architecture of the NIC regime. There are bigger and wider issues concerning the NIC regime, but I will address and raise some issues relating to Covid, Brexit and international agreements with the Minister. Of course, these regulations concern social security matters.

The pandemic has produced many headaches for the administration of small companies in particular. Apart from their struggles to simply survive, the administrative burden of reporting and making payments to HMRC for their employee liabilities has continued. For many this has always been a challenge in terms of time and administration, but for small companies the administrative complication of furloughing employees is now added to that. Can the Minister update the Committee on how these extra administrative matters relating to submissions to HMRC have been managed? Has any extra help been provided to these small companies where the structure of their staffing has been so dramatically and sometimes irregularly affected?

I wish to explore a wider issue of the consequences of Brexit. Many UK citizens living and working in the European Union have seen their status changed. However, Article 30 of the EU withdrawal agreement gives social security rights where UK citizens were resident in the EU on 31 December 2020. The regulations on these rights are complicated and complex, but essentially, where an individual falls within the scope of the regulations established as a result of the EU withdrawal agreement, is in receipt of a UK state pension and resides in an EU member state, their state pension will be uprated in line with those in the United Kingdom. It is not clear to me, so perhaps the Minister could confirm either in writing or at the end of the debate, whether continuing NIC payments will also contribute to an uprated pension once it becomes payable when an individual UK citizen chose to live in an EU member state after 31 December 2020.

Regardless of this situation, I think the Minister would agree that a UK citizen living in an EU member state will, under most conditions, see their UK state pension uprated. This is an important principle: in most circumstances, as a result of a negotiated reciprocal agreement, the UK state pension will be uprated as if that person living in an EU member state was receiving their pension in the UK. The NIC eligibility for a state pension, using the individual’s contribution record and the criteria in these regulations, will mean a regular uprated pension, regardless of whether they are in the EU or the UK. The decision to follow this very sensible path was a result of a reciprocal agreement negotiated and agreed by the UK with the EU.

I am sure that the Minister will be well aware of the problem for overseas British pensioners, many of whom have not seen their state pension values uprated since their arrival in another country and all of whom fulfilled the NIC contribution record necessary for accruing a UK state pension. One such example is Anne Puckridge, whom I have met. Anne served the UK in all three Armed Forces, but despite a full contributions record she now lives on a pension of less than half of what it would be if it had been uprated as if she were living in the UK. Anne moved to Canada to be near her daughter.

The Government of Canada have now written formally to the UK Government with a request for a reciprocal social security agreement that will cover the uprating of pensions. The UK’s policy is dishonourable and long standing. With the chance to negotiate a reciprocal deal, will the UK now take up the Canadian Government’s offer? There are too many like Anne Puckridge in Canada, and the UK has let them down. This offer from the Canadian Government is a chance to put things right. I hope that the Minister will take this matter back to the Government to press for a reciprocal arrangement, just as they have done with the EU. Every time the matter has been raised in this House it has been referred back to the Treasury, which says that it is too expensive. Now there is a chance, with a Government in another country with whom we have a good and friendly relationship, to start to put this matter right for people such as Anne Puckridge. I hope that the Minister will be able to reassure me that this issue will be considered.

My Lords, as other noble Lords have said, there is little to comment on concerning the routine uprating of amounts following the CPI indexation, but that does not mean that there is nothing to say more generally about national insurance or tax credits. I identify with the comments made by the noble Lord, Lord Blunkett, and endorsed by my noble friend Lord German about the £20 top-up for working tax credit and universal credit, which I hope the Government will see the need for.

The Explanatory Memorandum on the SI relating to NI contributions brings two things to light. The first is that the higher-rate tax threshold and upper band of NI have previously been aligned and stay in step, but the bad news about that, as the noble Lord, Lord Blunkett, pointed out, is that one goes up and the other goes down, so the marginal increase is not what people think it is. The second point is that there is a calculator that can be used by small businesses to help with the complexity of determining what national insurance should be paid. That complexity is evident from looking at the list of different parts to upgrade. Many have wrestled with how to modernise national insurance, and I am sure that it is one of those things where “I wouldn’t start from here” applies—I will return to that.

From the employers’ side, NI has often been called a tax on employment, and that has led to changes being made to stimulate employment among those aged under 21 and for some apprentices aged under 25. Both of those had good reasons. Given the effect that Covid is having on younger workers, the obvious question is whether anything more can be done on both a long-term and short-term basis, although I accept that is more of a Budget question.

The issue of self-employed national insurance contributions was also brought into the spotlight by the Chancellor when he indicated that providing Covid help to the self-employed should carry with it some presumption that, in due course, more social security contributions should be paid by that sector. A similar connection between benefits and NI payments was also picked up in the Finance Bill Sub-Committee report, where it was suggested—I paraphrase, but as I was a member of the committee, I well remember the discussions—that changes in national insurance payments need to be accompanied by commensurate changes in, or access to, benefits. Concerns were highlighted around IR35 and the fact that contractors would be asked to pay for benefits that they did not get, such as sick leave and paid holidays—and, of course, many of them did not get much out of the various Covid provisions.

That leads me on to the fact that work is much more complicated and variable than it used to be. That point was made by the Office of Tax Simplification in November 2016 in its follow-up report on NI simplification, which states that

“we live in a changing business environment, with diverse ways of working, and there are a growing number of people who combine self-employment, multi jobs and freelancing”,

and that

“the current system was built for yesterday … let alone for tomorrow.”

Nearly five years on, that is even more true. Once we emerge from Covid, the change to work patterns that it is already bringing will, I suspect, accelerate further.

The Office of Tax Simplification also said that,

“from a policy perspective any change will be challenging for government.”

This has not changed. I am tempted to look a little on the bright side and suggest that adjusting to post-Covid work patterns and needs may create an opportunity to bring about more simplification. I ask the Minister whether that is under consideration.

Various measures have been proposed, and one that seems reasonable to explore first is to make employees’ national insurance contributions work in the same way that PAYE does for income tax, so that it is related to annual income. That was favoured by the OTS, and although it reckoned it would impact 40% of the working population, gainers would generally be part-time employees, women and those aged under 35, and there would be loss mitigation from the social security system where there were losses in lower income households. There would also be positive benefits in better qualification for state pension entitlements. Overall, it would mainly eradicate unfairness that has been going on for a long time. It is also clear that such a change would benefit seasonal workers, such as those in the tourist industry, and young people—again, helping many of those most hit by Covid. As a next steps simplification, does that have any attraction for the Government? It would also seem to fit better with Making Tax Digital.

On the draft tax credits regulations, again, I have no dispute with the computation of upratings, but there are underlying issues relating to child poverty that I cannot let pass by. As has already been mentioned, the temporary working tax credit uplift, which is due to expire in April, has not been extended. In a recent debate in the Commons, the Government claimed that they could not see what the landscape would look like in April. I hope that means that it will be extended in due course, because to me it is clear that matters are already worse in terms of job losses. As the “weaning off” furlough happens, it will be worsened further.

My final point is, I regret to say, a perpetual one: as with other benefits, the Government have restricted tax claims to two children regarding any children born after April 2017. As we know, this is part of the Government’s deliberate impoverishment strategy for those on benefits with more than two children. I repeat: this is the Government’s deliberate and despicable policy for child hunger. That speaks for itself, and I have no more to say.

My Lords, I am grateful to the Minister for introducing these uprating measures and to the small band of other noble Lords who have taken part in this debate. The Minister will be familiar with my standard line about the Opposition not voting down statutory instruments in this House. With our recess only a few short days away, I certainly have no appetite for creating a constitutional crisis. Nevertheless, even if I were feeling mischievous, we would not oppose these measures. As we all know, there is no mechanism for amending SIs, and without passing the instruments before us there would be no uprating of the various charges and entitlements.

As has been outlined, the first instrument gives effect to the annual re-rating of various national insurance contribution rates, limits and thresholds. As the acronym-heavy Explanatory Memorandum outlines, most of these increases are tied to the annual rate of CPI inflation, which was 0.5% in the year to September 2020. The instrument relating to tax credits, child benefit and guardian’s allowance enacts the increases previously announced in a Written Ministerial Statement of November 2020. Again, those increases are generally linked to the CPI figure of half a percentage point. Paragraph 6.4 of the Explanatory Memorandum notes the position with regard to the Coronavirus Act 2020. This increased the basic rate of working tax credit in the 2020-21 financial year, from £1,995 to £3,040. This has been disregarded for the purposes of calculating the usual uplift.

That Act was passed some time ago. We had expected public health restrictions to have fallen away by now and the economy to be growing. Given that we find ourselves in less than ideal circumstances today, is the Treasury considering a review of its approach to the tax credit uplift, perhaps as part of the upcoming Budget? I also say to the Minister that while cases and deaths now appear to be falling, which we clearly welcome, we remain some way off the conditions required for the economy to fully reopen and for the withdrawal of wider Treasury support for workers, claimants of universal credit, and so on. I hope we will hear soon from the Chancellor, who has been uncharacteristically quiet in recent weeks, rather than people being left facing a financial cliff edge, as has been the case previously.

I will finish with a broader question, relating to the data in the report from the Commissioners for Revenue and Customs to the Treasury on the number of tax credit awards and offences. Is the Minister able to opine on the reasons for significant decreases in the number of penalties and prosecutions in 2019-20, when compared to the previous year? Are there cases outstanding which are therefore not included in these figures? Is it a result of better guidance for claimants? Alternatively, is there a link with the Covid-19 uplift?

We very much welcome the decreases. While, sadly, there are cases of fraud in the benefits system, I hope the Minister will acknowledge that these new figures demonstrate that the numbers are very small as a percentage of overall claims. We are all familiar with past comments from some members of the Government, which have exaggerated the situation and created stigma around claiming additional help. With the events of the past year having highlighted the importance of our social security safety net, I hope we can start to discuss these matters in a more productive manner.

My Lords, I thank all noble Lords for their contributions to this short but interesting debate. The noble Lord, Lord Blunkett, touched on the wider debate about the nature of national insurance contributions, particularly the fact that people over state pension age do not continue to pay national insurance contributions if they are still in work. The noble Baroness, Lady Bowles, touched on the complexity of the national insurance system overall and asked about any plans for simplification. The noble Lord, Lord German, made similar points about the burden that the complexity can place on businesses. I thank the noble Lord, Lord Tunnicliffe, for his constructive tone and, indeed, all noble Lords for their constructive tone in posing some of these questions.

I am familiar with many of these issues on national insurance. It is a complex area and many of these questions go beyond the scope of our debate today. I also express a small amount of caution because I have scars on my back from tentative proposals for reform of national insurance under a previous Government. I am well aware that proposals for changes in these areas may need to be looked at carefully and cautiously.

I will have to disappoint noble Lords in my response to today’s debate and remind the Committee that national insurance contributions are different from income tax and other contributions: they are social security contributions. The rationale for not paying contributions after state pension age is that there is no opportunity for an individual to increase their entitlement to the state pension. However, employer national insurance contributions are paid for those workers.

I think that all noble Lords touched on the question of extending the £20-a-week uplift to the basic element of working tax credit and the universal credit standard allowance. As was acknowledged, that is not a subject for this debate. However, as they have done throughout this crisis, the Government will continue to consider how best to support people as the economic and health situation develops. The recent development of the Covid-19 vaccine demonstrates how quickly the situation is evolving. It is important that we make the right decision at the right time and remain flexible.

The noble Lord, Lord Blunkett, said that the costs of the uplift were small. As an illustration, I remind noble Lords that extending the £20 increase by a further 12 months would cost over £6 billion. That is equivalent to adding 1p to the basic rate of income tax, plus a 3p increase in fuel duty. The £20-a-week increase forms just one part of a wide-ranging package of support that the Government have provided to protect people’s jobs and incomes, including income support schemes, mortgage holidays, support for renters, the £500 million local authority hardship fund and the £500 payments for people on low incomes required to self-isolate by NHS Test and Trace. There is also a temporary suspension of the universal credit minimum income floor for self-employed claimants and an increase to the local housing allowance rates for housing benefit and universal credit, which is being retained at the same cash value into 2021-22. I reassure the noble Lord, Lord Blunkett, that I faithfully report back to Her Majesty’s Treasury the debates that we have in this House and noble Lords’ views on these matters. I will continue to do that, including on this topic.

The noble Lord, Lord German, touched on the administrative burden that small businesses are facing, particularly during the pandemic. The Government have provided an unprecedented package of support to help businesses through the pandemic. The noble Lord asked about the furlough scheme: that is a huge support in paying employees’ wages and encouraging employee retention. I would happily write to him on the administration of that scheme, but I understand that it has been made as straightforward as possible for businesses to administer. In addition, the Government increased the employment allowance in national insurance to £4,000 from April 2020. This includes over 650,000 businesses that have been taken out of paying national insurance contributions altogether since the introduction of the allowance in 2014.

The noble Lord, Lord German, also asked about the uprating of the state pension to those who live within the EU now that we have left the end of the transition period, and touched more closely on the payments to those in receipt of the state pension who live outside the EU. I say to the noble Lord that the policy on those receiving their state pension who live outside the EU is a long-standing policy of successive Governments. It has been in place for around 70 years and there are no plans to change it. We continue to uprate the state pension where there is a legal requirement to do so, for example in those countries with which the UK has a reciprocal agreement. The Government understand that people move abroad for many reasons, and the decision remains a personal choice. For a number of years, advice has been provided to the public that the UK state pension is not uprated overseas, except where there is a legal requirement to do so. As I said to noble Lords on the issue of tax credits, I say to the noble Lord, Lord German, that I will happily take this issue and the offer he raised from the Canadian Government back to Her Majesty’s Treasury.

The noble Lord, Lord Tunnicliffe, posed a question on some of the changing statistics on the number of inquiries conducted under Section 19 and the number of penalties and prosecutions on tax credits changing. The number of penalties and prosecutions in the 2019-20 tax year decreased due to multiple factors that affect volumes of penalties and prosecutions, and the cumulative effects of those different factors are significant. For example, universal credit has led to a reduced customer base, which would already naturally lead to a reduction in penalties.

As around 80% of the problems with tax credit claims stem from customer error, we have also embedded a further upstream approach to compliance whereby we look to educate customers to avoid errors and to identify those most likely to make an error or where we would have expected a change to be reported. This is paying dividends through reductions in error and fraud, which reduces the propensity for penalties to arise. The number of inquiries conducted under Section 19 increased from 13,752 in 2018-19 to over 15,000 in 2019-20. Section 19 allows HMRC to carry out inquiries into awards after the end of the tax year, once they have been finalised. The increase in the number of Section 19 inquiries is because our digital services, particularly around income, highlight where the customer has likely made a mistake when finalising their awards, giving us the basis to inquire about the information provided at finalisation. This process will help us to support claimants in getting their tax credit award on the right footing going forward, reducing the risk of claimants accruing further debt—which would occur if the issue was not corrected—receiving penalties or potentially being prosecuted.

I hope I have answered most points made by noble Lords in response to this debate. If there are any specific questions I have not managed to address, I will happily write to noble Lords. I therefore beg to move.

Motion agreed.