6. National Insurance contributions (NICs)

Background

In his 1998 Budget, the Chancellor of the Exchequer announced a package of reforms to the structure of NICs. Most of these changes were introduced in the Social Security Act 1998, and came into effect in April 1999. As a result:

• The point at which employers start to pay NICs (the employer earnings threshold) is set at the same level as the single person's tax allowance (currently £83 a week) rather than the Lower Earnings Limit (currently £66 a week);

• Employees no longer have to pay any contributions on earnings up to and including the Lower Earnings Limit, and employers do not pay any contributions on earnings below the employer earnings threshold;

• The four employer rates of contributions have been replaced by a single rate of 12.2%, and Class 1B contributions have been introduced. Class 1B contributions are paid by employers who enter into a PAYE Settlement Agreement with Inland Revenue for tax.

The Chancellor also announced in 1998 that he would raise the point at which employees start to pay NICs to the level of the single person's tax allowance as soon as measures were in place to protect people against the benefit losses that would otherwise result. These changes were confirmed in the 1999 Budget. In his 1999 Budget statement, the Chancellor also announced that the Upper Earnings Limit (UEL) for employee contributions would be raised to £535 a week in 2000, and £575 in 2001; and that changes would be made to counter National Insurance avoidance where services are provided through an intermediary.

The measures in the Act

These Budget changes, including protection for benefit rights on earnings between the Lower Earnings Limit and the new threshold, were introduced as amendments to the Bill at Commons Committee and Report. The Act also contains various other minor NICs measures.

The NICs measures in the Act are contained in sections 73-78 and 81; and Schedules 9-11). Section 73 introduces Schedule 9, which:

• Introduces a new primary earnings threshold from which employees will start to pay NICs. In two stages, the threshold will be raised to the single person's tax allowance. It is being set at £76 a week in April 2000, with full alignment in April 2001;

• Protects benefit rights for earnings between the Lower Earnings Limit and the new threshold. This will ensure that people with earnings below the new threshold are not prevented from building up their entitlement to contributory benefits; and

• Provides for the Upper Earnings Limit (UEL) for employee contributions to be set as a multiple of the new threshold. This will enable it to be raised to £535 a week in 2000 and £575 in 2001, in line with the Chancellor's Budget statement.

Section 74 introduces Schedule 10, which makes corresponding provision for Northern Ireland.

Sections 75 and 76 contain new measures to counter National Insurance avoidance, where services are provided through an intermediary. Most employers engage staff direct under a contract of service, paying Class 1 NICs, and income tax through Pay As You Earn (PAYE). They may also hire staff under a contract for services where the person being hired is self-employed. Sections 75 and 76 concern the situation where an individual is hired through a third party (such as a service company) in order to escape any direct contractual relationship between the client and the worker. This provides scope for avoiding tax and National Insurance, and can also lead to a loss of the worker's legal employment rights. Section 75 gives the power to ensure that, if the normal tests of employment and self-employment show that the worker would otherwise be an employee of the client, any payments made by the client in respect of that worker may be treated as earnings for National Insurance purposes. Section 76 makes corresponding provision for Northern Ireland. Matching tax proposals will be made in the Finance Bill introduced in 2000.

The Act also contains three further minor NICs measures. These:

• alter the way in which the Class 1B rate of NICs payable on items employers include in PAYE settlement agreements (PSAs) is set (sections 77 & 78). The previous legislation allowed the Government to vary the rate in regulations independently of the main employer's rate. Now the rate of Class 1B is tied directly to the rate of employer (Class 1) contributions;

• remove references in existing legislation to the payment of NICs by means of adhesive stamps (Schedule 13, Parts VI & VII); and

• make a number of minor amendments and corrections arising from the Social Security Contributions (Transfer of Functions, etc.) Act 1999 (section 81, which introduces Schedule 11). The amendments do not in any way affect the intention of this Act, which transferred NICs policy and the Contributions Agency to the Inland Revenue.

7. Miscellaneous Measures

The Act also contains various miscellaneous measures. These are:

A number of pensions measures (Sections 9 - 18, and Schedule 2). The Green Paper A new contract for welfare: PARTNERSHIP IN PENSIONS (Cm 4179, December 1998) explained that the Government will continue to support occupational pension schemes and simplify regulation where possible. The Pensions Act 1995 sets out the framework for regulating occupational pension schemes and clarifies the responsibilities of scheme trustees, advisers and sponsoring employers. Monitoring of this Act in the light of the Government's commitment has identified a case for simplification in some areas and removal of a few anomalies. Four groups of measures are therefore contained in the Act:

• provisions relating to the late payment of employers' contributions to pension schemes (including personal pension schemes);

• provisions increasing the compensation payable by the Pension Compensation Scheme;

• further protection for pensions on bankruptcy - but with provision for recovering excessive contributions made by people who become bankrupt;

• minor measures, e.g. bringing the reporting periods of the Pension Compensation Board into line.

Preservation of "inherited" SERPS rights (section 52). Widows and widowers can currently "inherit" the full amount of their spouse's state earnings-related pension (SERPS). But under changes made in 1986, the amount will be halved for all new cases from 6 April 2000. This change was not fully publicised, and some people were incorrectly told that they or their widower could expect to inherit the full amount of SERPS. Section 52, which was added to the Bill at Lords Report stage, gives the power to make regulations to:

• postpone the 50% reduction from 2000 to a later year; or

• set up a scheme to determine who has been misled by incorrect or incomplete information about the 50% reduction, so as to ensure that the reduction is not applied to them or their spouses.

Until regulations implementing at least one of the options provided by section 52 are in force, widows and widowers will continue to "inherit" the full amount of their spouse's SERPS.

Extension of entitlement to state Maternity Allowance (section 53). In his 1999 Budget, the Chancellor of the Exchequer announced a reform of Maternity Allowance so that women earning below the lower earnings limit for National Insurance contributions, but earning at least £30 a week, would be entitled to the benefit for the first time. Section 53, which was added to the Bill at Commons Report stage, makes the necessary changes to the legislation.

Requirement for a National Insurance Number to claim Child Benefit (section 69). The Social Security Administration (Fraud) Act 1997 introduced a requirement for a National Insurance Number for all claims to all benefits. However, because of the definition of "benefit" used, this requirement does not apply to Child Benefit. Section69 extends the requirement to Child Benefit.

Sharing of Functions relating to claims and information (section 71). This section gives local authorities and central Government further powers to collect and share information relating to benefit claims. At present, local authorities may only deal with claims for Housing Benefit and Council Tax Benefit. However, since they will be involved in delivering the ONE pilots, they will need to be able to handle claims and information relating to a wider range of social security benefits. Section 71 aims to achieve this. It also ensures that there is no doubt about the ability of other partners in joint working arrangements with local authorities - for example, the Benefits Agency and the Employment Service - to deal with claims for Housing Benefit and Council Tax Benefit.

Disclosure and use of information (section 72). This section will facilitate cross-Government working in a number of social security and employment-related areas. It provides the powers to use and supply information which are needed to deliver the ONE pilots and Employment Zones. It will also ensure that information can be used to best effect in the New Deal for Lone Parents, New Deal for Disabled People, New Deal for Partners of Unemployed People and the new Personal Capability Assessment.

A housing under-occupation scheme (section 79) which will allow tenants living in the social rented sector (typically, property owned or managed by a local authority or a housing association), who are in receipt of Housing Benefit, to keep part of any benefit saving generated by moving to cheaper and smaller accommodation. It is intended to bring this into force initially on a pilot basis in selected areas.

Information sharing between the Inland Revenue and Child Support Agency (section 80). This measure will enable the Child Support Agency to undertake a full maintenance assessment of self-employed earnings in cases where a non-resident parent has refused to provide the necessary information. The proposed power will allow the Inland Revenue to disclose tax information in those cases where the Child Support Agency has been unable to obtain the information through any other route.

A power to incur preparatory expenditure in advance of future legislation (section 82). This enables the Secretary of State to seek specific Parliamentary approval to incur expenditure to prepare for future changes in the functions for which he is responsible (i.e. social security benefits, child support, war pensions), before Royal Assent is given for the Act that would give effect to the change. For example, a new benefit, or major changes to existing provisions, require a significant amount of preparatory work - such as developing and testing new computer systems, and preparing manuals for use by staff. Often such work has a significant lead-in time. This power will enable the Secretary of State to seek the approval of the House of Commons to commence such work, and so avoid the risk of a delay in implementation.

Extending benefit splitting to hardship payments in Jobseeker's Allowance (Schedule 8, paragraph 29(3) to (5)). These are technical changes to correct anomalies in the Jobseekers Act 1995. All or part of a person's standard income-based JSA can already be paid to a third party where it is in the family's interest to do so. This change extends that power to JSA hardship payments.

PARLIAMENTARY STAGES

The table below shows all the Parliamentary stages the Bill went through before it received Royal Assent and became an Act.

Stage	Date (all dates are 1999) and Hansard reference
HOUSE OF COMMONS (introduced on 10 February)
Second Reading	23 February (vol. 326, col. 214)
Committee	2 March to 27 April: 25 sittings (Standing Committee D)
Report	17 May (vol. 331, col. 643) and 20 May (vol. 331, col. 1241)
Third Reading	20 May (vol. 331. col.1342)
HOUSE OF LORDS (brought from the Commons on 21 May)
Second Reading	10 June (vol. 601, col. 1561)
Committee	24 June (vol. 602, col. 1075); 6 July (vol. 603, col. 725); 13 July (vol. 604, col. 177); 20 July (vol. 604, col. 818)
Report	11 October (vol. 605, col. 26) 13 October (vol. 605, col. 366)
Third Reading	27 October (vol. 606, col. 302)
HOUSE OF COMMONS
Consideration of Lords amendments	3 November (vol. 337, col. 297)
HOUSE OF LORDS
Consideration of Commons amendments	8 November (vol. 606, col. 1154)
HOUSE OF COMMONS
Consideration of Lords amendments	9 November (vol. 337, col. 924)
HOUSE OF LORDS
Consideration of Commons amendments	9 November (vol. 606, col. 1323)
ROYAL ASSENT (11 November)

COMMENTARY ON SECTIONS

PART I: STAKEHOLDER PENSION SCHEMES

This Part of the Act (sections 1-8, and Schedule 1) creates a statutory framework which sets out the general principles for a new type of pension scheme, the "stakeholder pension scheme". It is likely that the framework will require adaptation as schemes evolve. In order to provide this flexibility, the Act allows matters of detail to be set out in secondary legislation.

Part I does not form part of the law of Northern Ireland (but see the note about corresponding Northern Ireland at the end of the commentary below on Schedule 1).

Background

An initial consultation paper on stakeholder pension schemes was published in November 1997. The Government's detailed proposals were set out in the consultation paper A new contract for welfare: PARTNERSHIP IN PENSIONS (Cm 4179), published in December 1998.

A series of further consultation papers were published over the summer of 1999, covering the more detailed aspects of stakeholder pension schemes:

• minimum standards (published 2 June);

• employer access (29 June);

• clearing arrangements (12 July);

• governance arrangements (2 August);

• regulation, advice and information (2 August); and

• the tax regime (16 September).

Commentary

Section 1: meaning of "stakeholder pension scheme"

This section defines what a stakeholder pension scheme is. The definition:

• enables stakeholder schemes to be accommodated within the existing legislative framework applying to occupational and personal pensions; and

• sets out a number of additional requirements which schemes will have to meet in order to acquire stakeholder pension scheme "status".

The Pension Schemes Act 1993 currently defines two types of pension scheme - occupational pension schemes and personal pension schemes.

Subsection (1) provides for a pension scheme of either of these types to be a stakeholder scheme providing that it is registered as such (section 2 refers) and meets a number of specific conditions some of which can be prescribed in regulations.

Subsection (1)(b) provides a general power to prescribe other conditions which will give flexibility for the future to set out additional conditions, in the light of experience of operating schemes.

Subsection (2) requires stakeholder pension schemes to be set up under a trust (or an alternative arrangement specified in regulations).

Trusts are a legal concept used frequently as the basis for pension schemes, under which one or more persons (the trustees) hold property for the benefit of others, under terms which are usually specified in the trust deed. The regulation-making power will provide the flexibility to enable schemes to be run with alternative governance structures if these offer a comparable degree of protection for scheme members. The consultation document on the governance of stakeholder pension schemes proposed a possible model for "secure stakeholder management".

Subsection (3) provides a power to set out requirements as to the content of the instruments that set up a scheme. Taken together with subsection (2), this provides the basis for defining the structure of stakeholder pension schemes.

Regulations will be used to set requirements in relation to, for example:

• the scope of the trust deed: in particular to ensure that the trust deed gives the trustees control of the scheme so that they are able to appoint and dismiss the organisations or individuals that provide services to the scheme (e.g. actuaries, auditors, administrators, investment managers);

• the composition of the trustee board: to ensure, for example, that trustees associated with a commercial organisation (which may originally establish the scheme) cannot form a majority of the trustee board, or to require a specified proportion of the trustees to be nominated by members of the scheme;

• whether the scheme should provide additional benefits for scheme members: such as an option to take out life assurance cover, or insurance which provides for contributions to continue to be paid if a member becomes ill or disabled.

If details of alternative forms of governance are prescribed under section 1(2) then it is intended that regulations will also be used to set out requirements as to the contents of instruments that set up such schemes.

Subsection (4) provides that schemes must offer "money purchase" benefits to members.

Money purchase benefits are defined in section 181 of the Pension Schemes Act 1993. The main impact will be to exclude schemes which provide benefits related to the member's final salary; unlike occupational pension schemes, there will generally be no organisation to provide the funding commitment required to run stakeholder pension schemes on a salary-related basis. Schemes operating on a money purchase basis must provide benefits which are related to the contributions paid by the members together with the investment returns on those contributions. This will mean that each scheme member would have an identifiable fund of money within the scheme, which is the sum of their contributions and investment returns on those contributions (less charges and expenses). The fund is normally used to purchase an annuity at retirement.

There is also a regulation-making power to prescribe exceptions. This power provides flexibility for the future by allowing the framework to be amended to accommodate schemes which may wish to offer benefits on a suitable alternative basis.

Subsection (5) provides a regulation-making power, which will be used to prescribe requirements in relation to the amount which may be deducted from scheme members' pension funds in respect of charges and expenses.

The regulations will set out how any charge is to be calculated, specify limits on the level of the charge, and specify when a charge can be imposed. For example, it is proposed in the consultation document on minimum standards that there will be no charge for transfer of funds into or out of stakeholder schemes or for changing contribution levels. Requirements for charges will be reviewed in the light of experience of operating schemes. Providing for these matters by regulation gives some flexibility for the future to amend the charging structure or limits if it becomes appropriate to do so.

Subsection (6) makes it a condition of being a stakeholder pension scheme that a scheme complies with the obligations under section 113 of the Pension Schemes Act 1993.

Regulations will set out minimum standards concerning, for example, annual information about:

• the value of a pension,

• the contributions that have been paid in; and

• charges deducted by the schemes.

Subsection (7) provides that schemes must allow members to make contributions either on a regular basis or as and when they can; many existing personal pensions do not provide this flexibility for their members.

The subsection also provides a regulation-making power to prescribe minimum contribution levels, or other restrictions which schemes would be allowed to impose. Setting minimum contribution levels would be used to strike a balance between flexibility for members and the costs to schemes of handling very small contributions. The regulation-making power gives a degree of flexibility to vary these amounts in future if it becomes appropriate to do so.

Subsection (8) provides that stakeholder pension schemes should accept transfers of pension rights from other pension schemes.

Because stakeholder pension schemes will fall under the "pension scheme" definitions in Part I of the Pension Schemes Act 1993, members will have an automatic right to transfer their rights in a stakeholder scheme to another pension scheme (subject to certain limitations specified in the 1993 Act). This subsection provides an additional requirement on stakeholder schemes to accept transfer payments in respect of members' rights under other pension schemes and arrangements. It will allow members, for example, to consolidate their pension rights into a single fund if they so choose. There is currently no such requirement for occupational and personal pension schemes. But a stakeholder pension scheme would not be required to accept a transfer if this would prejudice its tax-approved or tax-exempt status. A tax-approved or tax-exempt scheme cannot accept transfers from an "unapproved" scheme, as this would be contrary to Inland Revenue rules.

Subsection (9) requires that a stakeholder pension scheme should be approved or exempted by the Commissioners of the Inland Revenue.

Approval or exemption confers a number of tax benefits: in particular, contributions by members qualify for income tax relief, and investment returns and capital gains on the scheme's funds are exempt from tax. Any particular provisions about the conditions for tax approval or the detail of the tax privileges will be dealt with in a future Finance Bill.