Social Security (Contributions) (Re-rating) Order 2012

My Lords, I am pleased to introduce the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2012 and the Social Security (Contributions) (Re-rating) Order 2012 to the Committee. As both the regulations and the order deal with national insurance contributions, it seems sensible to debate them together. I can confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights. All the changes covered by these two instruments were announced as part of the Chancellor's Autumn Statement last November. It is worth noting from the start that the basis of indexation that has been used to calculate most of the changes covered by these two instruments is different from that used for the 2011-12 tax year. In the Budget last year we announced that from the 2012-13 tax year the basis for indexation of most national insurance contribution rate limits and thresholds would be the consumer prices index, CPI, instead of the retail prices index, RPI. This is because the Government believe that the CPI is the most appropriate measure of the general level of prices. The exceptions to this are the secondary threshold and the upper earnings and upper profits limits. I will explain why in a moment. I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These regulations are necessary in order to set the class 1 national insurance contributions lower earnings limit, primary and secondary thresholds and the upper earnings limit for the 2012-13 tax year. The class 1 lower earnings limit will be increased from £102 to £107 per week from 6 April 2012. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold. The class 1 primary threshold will be increased to £146 per week from 6 April 2012. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment given in last year's Budget, this is being increased by RPI to £144 per week. This will help employers, large and small, during this difficult economic climate. From April, the personal allowance for people under 65 will be increased above indexation by £630 from £7,475 to £8,105, and the basic rate limit will be decreased by £630 to £34,370. This means that the point at which higher tax kicks in will remain at £42,475 in 2012-13. As I mentioned, the upper earnings limit is not subject to CPI indexation. In order to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid, the UEL will remain at £817 per week. The regulations also set the prescribed equivalents of the primary and secondary thresholds for employees paid monthly or annually. There will be no changes to NICs rates in 2012-13. Employees will continue to pay 12 per cent on earnings between the primary threshold and the upper earnings limit, and 2 per cent on earnings above that. Employers will continue to pay contributions at 13.8 per cent on all earnings above the secondary threshold. The social security order sets out the NICs rates and thresholds for the self-employed and those paying voluntary contributions. Starting with the self-employed, the order raises the small earnings exception below which the self-employed may claim exemption from paying class 2 contributions. The exception will rise in April from £5,315 to £5,595 a year. Many self-employed people choose to pay these contributions to protect their benefit entitlement, although they may claim exemption from paying class 2 contributions. The rate of class 2 contributions for 2012-13 will rise from £2.50 to £2.65 a week. The rate of voluntary class 3 contributions will also increase from £12.60 to £13.25 a week. Today's order also sets the profit limit from which main rate class 4 contributions are paid. The lower limit at which these contributions are due will increase from £7,225 to £7,605 a year, in line with the increase to the class 1 primary threshold. At the other end of the scale, the upper profits limit will remain at the same level as the 2011-12 tax year. This is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to class 4 limits will ensure that the self-employed pay contributions at the main rate of 9 per cent on a similar range of earnings as employees paying class 1 contributions at the main rate of 12 per cent. Profits above the upper profits limit are subject to the additional rate of 2 per cent, in line with the 2 per cent paid by employees. My Lords, I commend the draft Social Security Contributions Limits and Thresholds Amendment Regulations 2012 and the draft Social Security Contributions Re-rating Order 2012 to the Committee.