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 under-contribution 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.

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