This snapshot, taken on 07/04/2010, shows web content selected for preservation by The National Archives. External links, forms and search boxes may not work in archived websites.
Budget
17 March 1998
The biggest reform to National Insurance Contributions (NICs)
since the mid-1970s was announced by Chancellor Gordon Brown
today. The radical package of measures will improve incentives,
encourage job creation and cut down on red tape. All employees
paying National Insurance contributions can look forward to a
significantly reduced National Insurance burden following the
changes unveiled in today's Budget. And employer contributions
have been reduced for the vast majority of lower and middle
income employees. The reforms will cost nearly 1.4 billion
pounds a year from April 1999.
National Insurance entry fees abolished
From April 1999, employees and employers will only pay National
Insurance on the portion of earnings above the NIC starting
point. The entry fee will be abolished. This change will reduce
the National Insurance paid on that initial amount of earnings
by 1.28 pounds a week for employees and by 1.92 pounds for
employers.
Removing barriers to employment
The Chancellor also accepted Mr Martin Taylor's recommendation
that the current structure of employers' National Insurance
should be reformed to remove barriers to employment. The amount
an employee can earn before employer NICS are charged will from
April 1999 be aligned with the personal allowance for income tax.
Compared to the position in 1998/99, this will represent an
increase of over 25 per cent in the earnings point at which
employers start to pay National Insurance. As a result up to one
million employees will be taken out of the employer's NIC charge.
The Chancellor also committed the Government to aligning the
starting point at which employees pay NICs with the single
personal allowance. When this change is implemented, action will
be taken to protect the benefit entitlement of the low paid.
Real simplification for employers
The complicated array of four separate rates of employer NICs
will be replaced with a single employer rate of 12.2 per cent.
This will remove distortions from the system and make it easier
for employers to understand and administer their National
Insurance. Overall these changes will not alter the amount of
NICs paid by employers as a whole.
The Chancellor said he would consider Mr Taylor's recommendations
on possible reforms of the National Insurance system as it
applies to self-employed people.
The Chancellor also announced that, in line with Mr Taylor's
recommendation, the Contributions Agency would move to the
Inland Revenue in April 1999. Separately, the Government is also
committed to transferring the related NICs policy functions to
the Inland Revenue once agreement on a new entitlement test for
benefits has been reached. The Department of Social Security
will retain responsibility for benefit entitlement (IR 44).
NOTES FOR EDITORS
Employees
Current structure
Employees do not pay NICs where weekly earnings are less than the
lower earnings limit of 64 pounds (1998-99 figures). Once the
64 pounds earnings limit is reached, an entry fee of 2 per cent
(i.e. 1.28 pounds) is paid and thereafter 10 percent on earnings
between 64 pounds per week and the Upper Earnings Limit (485
pounds per week).
Examples: Weekly earnings NICs due Net pay
£63.99 NIL £63.99
£64.00 £1.28 £62.72
£65.00 £1.38 £63.62
An increase of one pence in weekly earnings can lead to an
increase of 1.28 pounds in employees National Insurance
contributions (NICS).
The new system
The 2 per cent entry fee will be abolished from April 1999 so
that employees will pay no NICs at all on their first 64
pounds(at 1998/99 levels) of earnings. So the present situation
in which someone can be faced with a drop in net pay as a result
of an extra penny of earnings will no longer arise. All
employees will pay less NICs under the proposed structure.
The 10 per cent rate and the lower rate of 8.4 per cent for
contracted-out employees is unchanged.
The cost of the abolition of the entry fee is nearly 1.4 billion
pounds.
Employers
Current structure
Employers do not pay NICs where weekly earnings are less than the
lower earnings limit of 64 pounds(at 1998/99 rates). Once the 64
pounds earnings limit is reached, NICs are paid on every pound
of earnings, i.e. earnings paid up to that limit and on all
earnings above it.
There are four rates paid by employers for employees not
contracted out of the State Earnings-related Pension Scheme
(SERPS). The appropriate band depends on the level of
employee's earnings. The earnings bands and NICs rates which
will apply for 1998/99 are:
Earnings bands NICS rate* (on all earnings)
£64 - £109.99 3%
£110 - £154.99 5%
£155 - £209.99 7%
£210 and above 10% (there is no upper earnings
limit)
* Not contracted-out rates. Contracted-out rates are 3 per cent
lower up to the 485 pounds Upper Earnings Limit.
The current stepped structure means that where pay rises an
employer could be faced with a much larger NICs charge. For
example, an employer pays NICs of 14.70 pounds at the rate of 7
per cent on earnings of 209.99 pounds. Once earnings reach 210
pounds the employer pays NICs at 10 per cent on all earnings -
an increase of 6.30 pounds a week.
The new system
The new system follows the proposals put forward by Martin Taylor
in February, (HMT 6). The starting point for employer NICs will
be aligned with the personal allowance for income tax, which is
set at œ81 per week in 1998/9. No contributions will be charged
on the first 81 pounds of earnings. Only the portion of earning
above the 81 pounds will attract a NICs charge. Employer NICs
will be at a single rate of 12.2 per cent. This rate means the
improvements to employer NICs will be achieved on a revenue-neutral
basis. The band between 64 pounds and 81 pounds percent will be
charged at 0 per cent, effectively increasing the LEL for employers
in a way that is very simple for employers to handle.
The Class 1A charge on company cars and car fuel benefits in kind
will also be at the rate of 12.2 per cent from April 1999.
Contracting-out of SERPS
The arrangement for contracting-out of SERPS will continue
broadly as at present.
For further details see also:
HMT 6 Martin Taylor's proposals on work incentives
IR 44 Good news for employers - Contributions Agency teams up
with Inland Revenue.
