Clause 1 - Reform of Class 2 contributions

National Insurance Contributions Bill – in a Public Bill Committee am 2:00 pm ar 21 Hydref 2014.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

With this it will be convenient to discuss the following:

Government amendments 1 to 8.

That schedule 1 be the First schedule to the Bill.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

It is a great pleasure to serve under your chairmanship this afternoon, Dr McCrea. We note your guidance on timings. Let us all hope that the Whips are not forced to make a decision at around 5 o’clock.

Clause 1 and schedule 1 set out the changes required to reform class 2 national insurance contributions. Perhaps it would be useful if I remind the Committee why we are proposing the changes. Currently, the self-employed have to navigate two completely different processes for two separate classes of NICs. Class 2 NICs are collected via a flat rate charge of £2.75 a week, paid through six-monthly billing or by direct debit, while class 4 NICs are a percentage charge on profits paid through self-assessment, alongside income tax. The changes contained in schedule 1 are aimed at simplifying NICs for the self-employed and will enable them to deal with their class 2 NICs, income tax and class 4 NICs in one go through their self-assessment.

The aims of clause 1 and schedule 1 are to change the way that class 2 NICs are structured; to change the means by which class 2 NICs are collected by moving collection into self-assessment alongside income tax and class 4 NICs; to change the means by which class 2 are enforced, with changes to associated appeal rights to broadly mirror those for class 4 NICs and income tax; and to make consequential changes to legislation relating to maternity allowance to allow women to continue to be eligible for it after the reform.

A class 2 liability will arise at the end of the tax year, and the amount due will be assessed on an annual basis, although it will still be based on the number of weeks an individual has been self-employed in that tax year. Liability for class 2 will be determined by whether a person’s class 4 profits exceed a set threshold—the new small profits threshold. The SPT will be set at the current class 2 small earnings exception level. Those with profits below the SPT will no longer be liable for class 2 under the new arrangements, but they will be given the option to pay class 2 voluntarily to protect their benefit entitlement.

For those who are liable for class 2 under the new arrangements, penalties and appeals will be more closely aligned with those for self-assessment, so that they are not subject to two different regimes. For voluntary payers and those outside of the SA process, existing penalties and appeal provisions will be retained.

Schedule 1 makes amendments to allow women to continue to become eligible for maternity allowance following the class 2 changes. Where a woman has not yet had the opportunity to file an SA return and pay class 2 NICs for the period necessary to establish her eligibility for MA, she will be able to pay the necessary class 2 contributions through a simple exception process. That process will also be available to eligible pregnant women who are neither employed nor self-employed but who participate in the business of their self-employed spouse or civil partner, to allow them to continue to have access to the lower rate of MA if their spouse or civil partner has paid the necessary class 2 NICs. Schedule 1 makes various other changes required as a result of the reform, including to allow for the continuation of the annual uprating of NICs; and to maintain the current treatment of married women with a reduced rate election.

The hon. Members for Birmingham, Ladywood and for Newcastle upon Tyne North (Catherine McKinnell) raised important points on Second Reading and, if I may, I will take this opportunity to provide some reassurance. There was a concern that the process being  put in place to allow pregnant women to pay class 2 contributions, if they have not yet filed their SA return, would be “impractical” and require

“a high level of forward planning”.—[Official Report, 8 September 2014; Vol. 585, c. 687.]

I reassure hon. Members that that will not be the case.

Her Majesty’s Revenue and Customs and the Department for Work and Pensions have worked closely together to develop a simple and straightforward process. Self-employed women who have not yet submitted an SA return will be able to choose to make a one-off payment to HMRC for the requisite number of class 2 contributions needed to secure the standard rate of MA. Some pregnant women may already be making regular payments through a budget payment plan, which they could use for that purpose.

The exception process does not require any forward planning beyond that which a pregnant woman has to undertake currently under the MA application process. A self-employed woman who wishes to make a claim for MA and has not already submitted her SA return will be able to pay for any shortfall in contributions at the time of her claim through the exception process.

It is also worth noting that self-employed women with low earnings will no longer face the additional burden of having to apply for a small earnings exception certificate to secure the lower rate of MA; they will simply have to be registered as self-employed for 26 weeks in the test period. The current SEE process requires a person to apply in advance for an exception and forecast their earnings level for the coming year, which requires a much higher level of forward planning.

It was suggested that the Government should review the impact of the changes to MA after two years. As the first payment of class 2 through self-assessment will not have to be made until the end of January 2017, a two-year review date is unfeasible. However, DWP and HMRC are committed to ensuring that this group of women is not disadvantaged by the reforms. DWP already monitors the number of MA claims on a routine basis and that will continue post-reform.

On how the changes will interact with universal credit, the move to annual collection of class 2 NICs would create a single annual spike in outgoings, which could push a claimant’s reported earnings below their minimum income floor—that point came up in this morning’s evidence session. However, DWP believes that the effect of the proposed changes will be light as the facility to make budgeted payments to HMRC within the SA system already exists and, therefore, claimants have the option to mitigate such an effect themselves. That aligns with the UC core principle of financial responsibility. Regular monthly payment towards NICs liabilities will be reflected in their award as it is based on a net figure.

The question was asked about why the facility to make monthly payments of class 2 was referenced in the tax information and impact note published alongside the Bill, but there is no provision for it in the Bill itself. That is an excellent question and one that I am pleased to be able to clarify today. It is not legislated for in the Bill because the option to make budget payments already exists in the SA system.

The Committee may be interested to know that that is a more flexible system than under the current class 2 direct debit system. It allows an individual to set up a  direct debit for the amount and at the frequency of their choosing. They are free to vary or cancel the arrangement at any time, or indeed ask for any money they have paid to be returned to them, so it is particularly useful for those whose profits fluctuate throughout the year, which can often be an issue for those with low profits.

I hope that those answers are helpful to the Committee, although I dare say that the hon. Member for Birmingham, Ladywood was already prepared with those points. I hope that the answers are helpful to her in particular.

Government amendments 1 to 8 set the weekly rate of class 2 NICs and the small profits threshold for the 2015-16 tax year. They also set the special rate of class 2 NICs paid by share fishermen for the 2015-16 tax year.

I remind members of the Committee that the policy on indexation of NICs rates and thresholds for this Parliament was set out in the Budget on 23 March 2011, where we announced that, from the 2012-13 tax year, the basis for indexation of most NICs rates and thresholds would be the consumer price index, instead of the retail price index—the rate of inflation. These amendments are in accordance with that policy.

The NICs rates and thresholds for the 2015-16 tax year are calculated using the September CPI and RPI figures published in October. They are announced in the autumn statement and legislated for early in the new year to take effect from the beginning of the following tax year.

When the Bill was introduced in July, it included the 2014-15 tax year rate of class 2 NICs and set the small profits thresholds at the level of the small earnings exception for the 2014-15 tax year. That was because the timing did not allow us to include the 2015-16 tax year values of the weekly class 2 rate and small profits threshold in the Bill.

Amendment 1 sets the weekly rate of class 2 NICs for the 2015-16 tax year for those who are self-employed and have profits at or above the small profits threshold. The weekly rate will increase by CPI from £2.75 to £2.80.

The small profits threshold is the level of profits at or above which class 2 NICs have to be paid. The Bill sets the small profits threshold at the same level as the current small earnings exception. As the small profits threshold replaces the small earnings exception, it makes sense to apply the same rules for indexation.

Amendment 2 increases the small profits threshold by CPI from £5,885 to £5,965 for the 2015-16 tax year. Under the new regime, if profits are at or above the small profits threshold class 2 NICs will be due. Those self-employed earners with profits below the small profits threshold will still be able to pay class 2 NICs voluntarily.

Amendment 3 sets the weekly rate of class 2 NICs for the 2015-16 tax year for those who are self-employed and have profits below the small profits threshold and who decide to pay class 2 NICs voluntarily. The weekly rate will increase from £2.75 to £2.80. Amendments 4, 5 and 6 make similar provision in respect of Northern Ireland.

Share fishermen pay a slightly higher weekly rate of class 2 NICs, which allows them to claim contributory jobseeker’s allowance when unemployed. The class 2 contributions that they pay is increased by 65p per week to reflect this additional entitlement. As the special rate  of class 2 NICs paid by share fishermen is so closely linked to the class 2 NICs rate, we are making that change at the same time.

Amendment 7 makes changes to paragraph (c) of regulation 125 of the Social Security (Contributions) Regulations 2001 to increase the weekly rate of class 2 contributions paid by share fishermen from £3.40 to £3.45 per week from 6 April 2015. Amendment 8 removes unnecessary wording as a consequence of the changes made by Amendment 7.

By announcing these figures early and making the necessary legislative changes in this Bill, we are ensuring that they are in place in good time for the start of the 2015-16 tax year, particularly as this is an entirely new regime in terms of the collection of class 2 NICs and how that liability is assessed.

If necessary, I am happy to take the Committee through schedule 1 paragraph by paragraph, although the provisions are set out in the explanatory notes. Otherwise, I commend clause 1 and schedule 1 to the Committee.

The amendments set the weekly rate of class 2 NICs at £2.80, the small profits threshold at £5,965, and the weekly rate of class 2 NICs paid by share fishermen at £3.45, all for the 2015-16 tax year. The increases follow the policy on indexation announced in the 2011 Budget. The changes are being made early to ensure that they are in place in good time for the start of the 2015-16 tax year, as they constitute a new collection and assessment regime for class 2 NICs. The remaining NICs rates and thresholds will be announced in the usual way in the autumn statement on 3 December.

Given that explanation of the amendments, I hope that the Committee will agree that they should be made.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons 2:15, 21 Hydref 2014

Before I call the next Member, I welcome Liz McInnes to the Committee. It is a pleasure to have you here and I trust that you will enjoy this afternoon’s sitting.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

It is a pleasure to serve under your chairmanship, Dr McCrea. I welcome all Committee members to this afternoon’s deliberations, particularly my hon. Friend the new Member for Heywood and Middleton. I hope that she will get a flavour of proceedings on finance matters, although the amount of time that we take might not reflect the length of other debates in which the Minister and I have been engaged in the past few weeks and months.

I suspect that this afternoon’s deliberations will be as efficient as those on Second Reading. To that end I am grateful to the Minister, his officials and all the other witnesses who gave evidence this morning in what was a very useful and helpful oral evidence session that dealt with many of the technical points about the legislation that were raised by various stakeholder groups, including the Chartered Institute of Taxation and the Low Incomes Tax Reform Group. They were concerned about some of the effects of the simplification measures; we heard  good clarification on those points. I am grateful to the Minister for his introduction to clause 1 and schedule 1, along with the Government’s amendments.

For self-employed people—the Office for National Statistics believes there to be about 4.6 million of them—the existence of two separate systems for the collection of class 2 and class 4 NICs is undoubtedly an administrative burden that they could do without. Most self-employed people are already juggling a huge number of balls, so we welcome proposals that aim to make their business lives easier. This is not a new area of debate, and the proposed changes we are discussing today follow a change in April 2011 that sought to ease the administrative load by aligning the dates on which payment of class 2 NICs is due with the dates for tax under self-assessment—moving them to 31 January and 31 July. The changes before us build on what has gone before.

The particular change that we are discussing today was raised by the Office of Tax Simplification in its review of small business taxation. In various work in 2011-12, the OTS noted the advantages of making the simplification change, the foremost of which was that reforming how class 2 NICs were assessed and collected would alleviate problems for many self-employed persons who find that they are obliged to apply for a refund of overpaid national insurance at the end of the tax year. The OTS also found that there could be simplification and cost reductions for HMRC and small businesses in combining the collection process and the self-assessment return. HMRC estimates that collecting class 2 NICs in that way should cut the administrative burden on businesses by around £19 million a year, thereby directly benefiting 4.6 million self-employed people.

After the legislation was published, a number of concerns were raised, particularly by taxation stakeholder groups, about the maternity allowance and the interplay between the changes and universal credit. I am very grateful to the Minister for dealing with all the points that were raised on Second Reading, some of which came up this morning in the oral evidence session. He provided some helpful clarification on the issues raised, including some reassurance that pregnant women will not miss out and that people will not find themselves disadvantaged, particularly in relation to universal credit. The point that remains outstanding from our discussions this morning relates to how these changes will be communicated, both to the wider group of the self-employed, who will have to get used to doing things differently—it is simpler, but they will still have to have the impact of the change communicated to them—and to pregnant women and people on very low incomes, who will have to think about the impact this will have on universal credit.

Witnesses who gave evidence this morning all pointed out that the rules can seem quite complex and are not well understood by members of the public, including, sometimes, the rules on eligibility for different types of benefits from voluntary contributions under class 2 and class 3. As we heard from Mr Hubbard, it is not immediately obvious what the different voluntary payments entitle people to. The Minister’s officials helped us out with that, but it shows that even the experts struggle to navigate this landscape. It would be helpful if the Minister would build a bit on some of what we heard this morning in relation to communication.

Ms Edwards, the DWP official who attended the session this morning, provided some information in outline about how these changes will be communicated to those on very low incomes and those on benefits. I was a little worried that some of what she referred to related to online communications. We know that self-employed people on very low incomes and those on benefits are often digitally excluded. Online communication is a method of choice in the modern age, but it means that those who are excluded might not be able to access the information they need. I was not completely convinced that the helpful oral advice that is sometimes necessary will be available, rather than just something in writing or on the internet. It would be helpful if the Minister would set out some further thinking and more practical information about what is going to happen for the people who will be affected in that way.

Similarly, I am very grateful for the clarification about the working of the maternity allowance as a result of these changes. It would be helpful to hear more detail from the Minister on communication to pregnant women. There is a wider point about communication to everybody who is going to be affected. Mr Whiting from the Office of Tax Simplification suggested that his dream scenario for communication of these changes would involve at least three separate letters to all self-employed people by HMRC. Is that something that the Minister is planning? Have letters already been prepared? Has anything gone out already to tell people that these changes are coming? Will he take steps to ensure that people understand some of the complexity around voluntary contributions and what they entitle people to? As the rules engage a bit more, we do not want people to miss out because they fail to understand the impact of the simplification.

As I say, it would be helpful to hear more detail from the Minister, particularly on communication, but he has helped on many technical issues, for which I am grateful, and we support the simplification measures in the Bill.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

I thank the hon. Lady for her questions and, on behalf of the Committee, for not pursuing those questions that I managed to anticipate. She raised the issue of communications, which came up this morning. We acknowledge that that is an important point. HMRC has already started work with self-employed customers to inform them of the change. It is using existing communication forums and relationships with agents and accountancy organisations and other intermediary representative groups. In addition, as we heard, HMRC is working with DWP to develop its communications about this change. A lot of this is in the context of universal credit and, therefore, DWP is actively engaged in communicating with those likely to be affected.

I acknowledge—and HMRC and DWP recognise—the point made by the hon. Lady that not everyone can or will access information online. That is why HMRC is writing to all payers of class 2 national insurance contributions, to tell them that the changes are coming and will write again at the time of the changes. Both online and written guidance will be updated and key messages are always tested before they go out en masse, to ensure that they are clear.

I hope that provides a degree of reassurance. The hon. Lady is right to raise the issue of communication because it is important, but HMRC and DWP are focused on it.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.