National Insurance Contributions Bill - Frequently Asked Questions
- What is the Bill about?
- What was announced in Budget 2007 about income tax and NICs?
- Why are the UEL and UPL for NICs being aligned with the point at which higher rate tax becomes payable?
- Why do you need this Bill to align the UEL?
- What about the UPL for Class 4 National Insurance contributions paid by the self employed?
- What is the UAP and why is it being introduced now?
- Why have you brought forward the start date for the removal of earnings related S2P?
- At what level will the UAP be set?
- Will people loose out because of this?
- What does this mean for contracted out rebates?
- What will this mean for employers?
- Why are you are adding to employer burdens by introducing a requirement to report earnings at the UAP?
- Why do employers need to record and report this additional information?
The Bill contain two substantive measures:-
- to allow the Upper Earnings Limit (UEL) for National Insurance contributions to be aligned with the higher rate threshold for income tax from 2009/10.
- to bring forward the introduction of the Upper Accruals Point (UAP) for the State Second Pension and contracted out rebates to April 2009.
- The UEL for NICs is to be increased by £75 per week above indexation in April 2008, and, from April 2009, will be aligned with the higher rate threshold – the point at which taxpayers start to pay the higher rate of income tax.
- The aligned higher rate threshold and the UEL will be raised by £800 above indexation for 2009/10.
- The Upper Profits Limit (UPL) for the self-employed will be increased in line with the UEL (no change in primary legislation is needed to achieve that).
- The 10p starting rate will be removed creating a simpler two-rate tax structure for earnings, pensions and savings. A 10p starting rate will be retained for savings.
- The 22p basic tax rate on earnings and pensions will be reduced to 20p from April 2008 and will apply to earnings pensions and savings generally.
Why are the UEL and UPL for NICs being aligned with the point at which higher rate tax becomes payable?
This change is part of the personal tax package announced in Budget 2007, it represents the next stage in the Government’s programme of reform to the tax and benefit system. The changes included simplifying the income tax structure by reducing the main rates from 3 to 2. Alignment of the UPL and UEL with the point at which higher rate tax is paid. Above-indexation increases to the personal allowances for those aged 65 and over, and changes to the rates and threshold for Child Tax Credit and Working Tax Credit. The impact of each change should not be viewed in isolation.
The mechanism currently provided by primary legislation for increasing the UEL prevents full alignment from 2009/10.
The Class 4 UPL and Class 1 UEL are aligned at present and will continue to be aligned in future. However, the changes to the UPL will be made in secondary legislation without the need for a Bill.
The Upper Accrual Point is a new threshold for the calculation of both State Second Pension and contracted-out rebates. It replaces the Upper Earnings Limit in both the State Second Pension and rebate calculations and was planned for introduction from 6 April 2012 at the earliest. It is being introduced in 2009 to ensure that the State Second Pension (S2P) reforms introduced as part of the Pensions Act 2007 remain on track.
It was always intended that S2P would eventually become a flat rate benefit. In line with the Pensions Commission’s own recommendation this process is being accelerated, so that flat rating occurs around 2030.
To achieve this goal, it was originally envisaged to introduce the new S2P accrual cap in 2012. However, in light of the 2007 Budget decision to harmonise the Upper Earnings Limit with the 40% band for income tax, the start date has been brought forward in order to still hit the 2030 target.
The weekly limit will be £770 per week.
No-one loses out because of the withdrawal of the earnings related element of S2P or because of the new cap in S2P or NICs rebate. Although earnings relation will be withdrawn, the gap even for the highest earners will be more than made up by the earnings uprating of basic State Pension.
Even in the short term people do not lose out because of the erosion of earnings relation. A high earner retiring in 2015 would get a total State Pension of £190 a week under the current system. Under reform they will get £197.
The band of earnings on which the rebate is calculated will be kept in line with the band of earnings on which S2P accrues. That is, from April 2009, the rebate will be paid on earnings between the Lower Earnings Limit and the Upper Accrual Point.
P11s/P14s or their equivalents completed by employers will need to include additional information (earnings between the Upper Accrual Point and Upper Earnings Limit)
Why are you are adding to employer burdens by introducing a requirement to report earnings at the UAP?
The change is relatively simple for employers who have modernised their payroll process and use software, the HMRC CD-ROM or payroll bureaux.
This information is necessary for S2P calculation purposes and to enable HMRC to calculate and pay over age related rebates up to the UAP for those employees in contracted out money purchase schemes and to calculate and pay over minimum contributions up to the UAP in respect of those employees who hold Appropriate Personal Pensions.
It is also necessary for HMRC to ensure that the correct amount of contributions have been paid.