Social Security (Contributions) (Amendment No. 2) Regulations 2011

My Lords, I am pleased to introduce the Social Security (Contributions) (Amendment No. 2) Regulations 2011 and the Social Security (Contributions) (Re-rating) Order 2011. It is worth noting that all the changes covered by these two instruments were announced as part of a Written Ministerial Statement in December last year. As both the regulations and order deal with national insurance contributions, it seems only sensible that they should be debated together. As a matter of course, I can confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights. I shall begin with the social security regulations. The previous Government’s 2008 Pre-Budget Report announced an increase in class 1 and class 4 national insurance contribution rates of 0.5 per cent. These rate rises were due to come into force from the start of the 2011-12 tax year, but 12 months later the former Chancellor of the Exchequer declared his intention to double the increases. This would have placed additional burdens on businesses at a time when they are most in need of our support. While this Government confirmed that these rate rises would be implemented, we are implementing them as part of a wider package of reforms that will reduce the overall cost of employment and will support people on lower incomes. We will achieve this by increasing the income tax personal allowance, the primary threshold and the secondary threshold. The social security regulations before the Committee today are a vital part of this process. To start with, the point at which employers will have to start paying national insurance will increase from £110 per week to £136 per week from April of this year. This is a weekly rise of £21 above indexation, which means that employers will not pay any national insurance on the first £7,072 of any worker’s earnings. From April of this year, the class 1 primary threshold, which is the point at which employees start to pay class 1 national insurance contributions, will increase from £110 per week to £139 per week. This is an increase of £24 a week above indexation, which will help to mitigate the effects that a 1 per cent increase in the employee’s rate of national insurance contributions will have on the lower-paid. As a result of the increases in thresholds included in today’s regulations, around 950,000 low earners will no longer pay national insurance contributions, while their contributory benefit entitlements will be protected. Employees earning under £35,000 a year will pay less both in terms of income tax and NICs. Employers will pay less in NICs on all workers earning less than £20,000 a year. In relation to NICs thresholds, employers will be better off by £150 for every employee earning above the secondary threshold. Compared with the plans that this Government inherited, more than £3 billion a year is being returned to employers through the secondary threshold rise. Even more money will be going straight into the pockets of hard-working families due to the changes in the primary threshold. Today’s regulations also set the level of the lower earnings limit. This takes into account changes that we are making to the way in which the basic state pension will be uprated. As part of last year’s June Budget, my right honourable friend the Chancellor announced that the basic state pension will be linked to earnings from April 2011. Not only that, we included the added guarantee that it would rise in line with either earnings, prices or 2.5 per cent, depending on which is greatest. Now that the earnings link has been restored, the lower earnings limit is no longer legislatively linked to the basic state pension. This means that the Treasury can set its level independently of the basic state pension through affirmative resolution. As a result, large rises in the basic state pension will not result in lower earners being taken out of contributory benefit entitlement. This is fair and progressive and it will support the poorest and most vulnerable in our society. For the upcoming tax year, the lower earnings limit will increase by RPI to £102 per week, while the upper earnings limit will go down from £844 per week to £817 per week. This is to maintain the alignment with the point at which the higher rate of income tax is paid. It is also worth noting that the regulations will increase the main rate primary contributions paid by women who married before 6 April 1977, taking them up to 5.85 per cent from this April. The social security order sets out the NICs rates and thresholds for the self-employed and those paying voluntary contributions. In the case of the self-employed, it raises the small earnings exception for paying class 2 contributions. The exception will rise in April from £5,075 to £5,315 a year, which is broadly in line with prices. The rate of class 2 contributions will increase from £2.40 to £2.50 a week. The rate of voluntary class 3 contributions will also increase from £12.05 a week to £12.60 a week. Again, this is similar to the general increase in prices. Today’s order sets the profit limits for which main rate class 4 contributions are paid. The lower limit at which these contributions are due will increase from £5,715 to £7,225 a year, in the same fashion as the class 1 primary threshold. At the other end of the scale, the upper profits limit will be reduced from £43,875 to £42,475. This maintains alignment with the upper earnings limit for employees, which, as I said, is being reduced to reflect the changes made to the higher rate of income tax. The changes to the class 4 limits will ensure that the self-employed pay contributions on a similar range of earnings to employees paying class 1 contributions. The increase in the lower profits limit will guarantee that the 1 per cent increase in the class 4 NICs main rate is offset for the self-employed. This is in much the same way as the increase in the primary threshold offsets the 1 per cent increase for employees. The legislation included as part of today’s order and regulations is an important part of the Government’s plans to reduce the taxation of labour. It will encourage employers to take on more workers, help those on the lowest incomes and support private enterprise and employment across the country. This is important for the economy and important for the recovery. I commend the regulations and the order to the Committee.