HMT9 9 March 1999 CHANCELLOR ANNOUNCES FURTHER REFORM OF NATIONAL INSURANCE The reform of National Insurance Contributions is to continue as recommended in last year's Taylor report, announced the Chancellor, Gordon Brown. A package of measures set out today will continue the drive to improve work incentives and encourage job creation and build a fair National Insurance system. EMPLOYEES Further cuts in employee National Insurance Contributions (NICs) From April 2000 employees will not pay any NICs on earnings below #76 per week. This is the first step in the process of aligning the threshold for employee NICs with the single person's tax allowance, as recommended in the Taylor report. From April 2001, full alignment at #87* per week will be implemented. This is an increase of over 25 per cent over two years and takes around 900,000 people out of NICs altogether and means that people who do not earn enough to pay tax will not pay NICs either. This change also reduces the National Insurance burden on low and middle earners by up to #2 per week. Taken alongside the measures announced in last year's Budget (which reduced the National Insurance liability of all employees by #1.32 per week from April 1999 by abolishing the two-per-cent employee "entry fee" payable when earnings crossed the lower earnings limit) the National Insurance burden for people earning around the single person's tax allowance will fall by around #160 per year from April 2001. This will increase the rewards from work, helping to ensure that work pays, even for those on low incomes. Benefit rights protected The contributory benefit entitlements of all workers who, as a result of this measure no longer have to pay NICs, will be protected by means of a zero-rate of NICs on earnings between the lower earnings limit and the new threshold. This will also be introduced in April 2000. For the longer term, the Government is determined to simplify the tax and NICs rules and so reduce administrative burdens on employers. The Government will examine ways to achieve this and will report back with proposals for the way forward in the next Pre-Budget Report. A fairer NICs base for employees The rise in the starting point for NICs necessitates a rise in the upper limit, if the historical relationship between the two is to be maintained. The upper profits limit will be therefore be set at #535 a week from April 2000 and #575 from April 2001. Employees affected by this change will see gains from the new 10p rate of income tax and the 22p basic rate and the reforms to the threshold for NICs. Employers will not be affected by this change as there is no upper limit on the contributions they pay. THE SELF-EMPLOYED Removing barriers to self-employment From April 2000 the position of self-employed workers with lower profits will be improved significantly. The flat-rate Class 2 national insurance charge, currently payable once profits reach #69.00 a week, will be reduced from #6.35 per week to #2 per week. This will reduce the burden of national insurance on the lowest earning self- employed and encourage start up of self-employed businesses. The point at which Class 4 contributions on profits become payable will be aligned with the personal tax allowance (#85 per week for 2000/2001, assuming statutory indexation). The rate of class 4 will change from six to seven per cent. The upper profits limit - the point at which liability for class 4 ends - will rise to #535 from April 2000 and then to #575 in April 2001, in line with the changes to the upper earnings limit for employees set out above. These changes: - reduce the self-employed's "entry fee" into the NICs system by over #4.35 per week. - enhance work incentives by taking a large part of the burden of NICs off the shoulders of low earners - all self-employed people earning under around #9460 per year will be better off as a result of these changes; - recoup National Insurance revenue lost through changes to class 2 and address the undercontribution to the National Insurance Fund of the sector as a whole; - make national insurance for the self-employed fairer; and - simplify the system by bringing closer alignment with the tax system and with NICs for employees. Benefit entitlement for the self-employed is based on Class 2 NICs which is why they will be retained, but at #2 per week. These measures follow Mr Martin Taylor's report into the National Insurance system as it applied to self-employed people, published in March 1998. EMPLOYERS NICs on Benefits in Kind In a further step towards tax/NICs alignment, employers' NICs on benefits in kind will be extended from April 2000 to cover not just cars and car fuel, as at present, but other benefits in kind such as private medical insurance and cheap loans which are already taxed. It is a distortion in the NICs system which currently exempts these benefits from NICs and the Taylor report recommended this be removed in the interests of tax/NICs alignment. The change should place no additional administrative burden on employers since they already need to record and report benefits in kind for tax purposes. Not levying NICs on these benefits means NIC rates elsewhere in the system have to be higher. Since this Government's major objective as far as National Insurance is concerned is to make it fairer, and to structure it so that it does not discourage work, the revenue from NICs on benefits in kind has been put to very good use, cutting NIC rates for low earners and improving work incentives. As now, employees will not have to pay NICs on benefits in kind. When combined with the restructuring of employers' NICs which comes into force from April 1999 and which represents a #600 million reduction in the burden of NICs on employers for 1999-2000, employers' net position with regard to NICs remains better than before the Government embarked on its reforms. Lower rates for employers The Chancellor has announced in this Budget his intention to reduce the employers' NICs rate by 0.5 per cent in April 2001 bringing the headline rate down from 12.2 per cent to 11.7 per cent. This measure will come into force at the same time as the climate change levy and will ensure that the introduction of the levy entails no increase in the burden of tax on business. This shift of the tax burden from employment to energy should help provide the right conditions to encourage employment whilst promoting the efficient use of energy. NOTES FOR EDITORS Employees The system from April 1999 Employees pay no NICs on the first #66 per week of earnings. Employees who are not contracted out pay NICs of 10 per cent on earnings from #66 to #500 per week. The system from April 2000 The earnings point above which employees pay NICs will be raised by #21 per week over two years - from #66 in April 1999 to #76 in April 2000 and then to #87* - the level of the single person's tax allowance - in April 2001. The upper earnings limit (UEL), the point above which employees stop paying NICs will be raised by #30 per week over indexation to #535 from April 2000 and then by #55 per week over indexation from April 2001 to #575 per week. From April 2000, employees will pay no NICs on the first #76 per week of earnings. Benefit entitlement will be protected by a zero rate of NICs on earnings between the lower earnings limit and the new threshold. Employees who are not contracted out will pay NICs of 10 per cent on earnings from #76 to #535 pw. Contracting-out of SERPS The arrangement for contracting-out of SERPS will continue broadly as at present. A lower rate of 8.4 per cent is paid by employees who are contracted-out. Self employed The system from April 1999 Flat rate class 2 NICs of #6.55 per week paid once profits exceed #72.50 Class 4 NICs at 6 per cent are payable on profits between lower and upper profits limits of #145 and #500 per week. No NICs are due on earnings over the upper profits limit. The system from April 2000 Flat rate Class 2 NICs reduced to #2 per week. Class 2 payable once profits exceed #73.50. New lower profit limit aligned with personal tax allowance at #85* per week Upper profits limit increased to #535 and then to #575 in line with the UEL. Class 4 NICs at 7 per cent payable on profits between lower and upper profits limits of #85* and #535 per week from April 2000. No NICs are due on earnings over the upper profits limit. Employers The system from April 1999 Employers of employees earning under #83 per week pay no NICs from April 1999. Above that level they pay NICs at 12.2 per cent (if the employee is not contracted out). Employers pay NICs on benefits in kind only on cars and car fuel. The system from April 2000 Employers' NICs will be extended to cover those benefits in kind which are taxed but which are not already subject to NICs. The Inland Revenue will consult employers on the technical details of extending the NICs charge to these benefits in kind. See press notice IR 7 for details of a deregulatory change to the taxation of mobile phones as a benefit in kind. Future changes The Government intends to cut the employers' NICs rate to 11.7 per cent from April 2001. * Assumptions for the income tax personal tax allowance from April 2000 and April 2001 derived by applying indexation and then statutory rounding rules. HM TREASURY PRESS OFFICE Press enquiries to: 0171 270 5238 Non-media enquiries to: 0171 270 4558 If you have access to the Internet you can find this news release at http://www.hm- treasury.gov.uk. Other Treasury material can also be found at this address # = pounds sterling