Clause 1 - Payment of Class 1 contributions: Great Britain
National Insurance Contributions and Statutory Payments Bill
9:30 am
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
Of course, it is open to Opposition Members to table amendments on Report, as it is for them to follow the procedures in respect of any Bill. I take the hon. Gentleman's point, but given, as he says, that this is largely a technical Bill and that outside the House there is general agreement with the provisions, I hope that that will not be necessary. However, I am sure that my hon. Friend the Member for Luton, South (Margaret Moran), the Government Whip, listened very carefully, as did Opposition Whips, to the point about the need to be able to scrutinise draft regulations and I am sure that, should the need arise, it will be possible for Opposition Members to table subsequent amendments.
I move to clause 1, which extends employers' ability to recover class 1 primary national insurance contributions paid on behalf of their employees and ex-employees on security-based earnings. It allows the employer, with the agreement of the employee, to withhold shares to the value of the national insurance paid on the employee's behalf in, for current employees, the year in which the gain arises and, for ex-employees, the year of cessation and the year following cessation.
The first part of the Bill concerns national insurance contributions payable on earnings paid in the form of securities. Most security-based earnings are paid in the form of shares. The Government, as is to be expected, encourage a wider share-owning population—that is at the heart of our enterprise and productivity agenda. The purpose of clause 1 is to increase the choices available to employers and employees to meet the primary national insurance liability that arises when employees are rewarded through payment in the form of shares or other securities. It might help if I explain to the Committee how national insurance contributions are paid in the case of share-based earnings.
The employer is liable for secondary class 1 contributions and the employee for primary class 1 contributions at the point at which the gain on the shares arises. However, in the first instance, the employer is liable to pay the primary national insurance to the Inland Revenue and may recover it from the employee, subject to certain conditions. Those conditions form the nub of the clause.
It is necessary to attach some new rules to how an employer recovers payments from employees. Employees need to be protected by a basic framework to ensure that they are not subjected to hardship because of unreasonable deductions being made from their earnings, such as an employer deducting a year's worth of primary national insurance in one go. In the normal course of events, should an employer be unable to deduct the primary national insurance due at the normal time when earnings are paid, he or she may catch up by making further recoveries, but only from cash earnings in the year in which the earnings were paid and at an amount that is no more than the normal primary national insurance due on that month's earnings.
On most occasions the employer will be able to deduct the primary national insurance immediately from the cash earnings paid to the employee. However, when making a payment of share-based earnings, there is no cash from which the primary contributions can be deducted. Therefore, we recognise the need to ensure that the conditions restricting recovery of the primary contributions relating to share-based earnings are appropriate.
We do not want to penalise employers who reward their employees with share-based earnings by making it difficult for them to recover the primary contributions that they have paid to the Inland Revenue on behalf of their employees and are therefore entitled to recover.
We have already taken steps to help employers manage such recoveries. We amended regulations last year, which give employers an additional year—the year after the payment of the share-based earnings—in which they can deduct the national insurance from the employee's earnings so as to deal with circumstances where the gain from the shares arises towards the end of the financial year. We also removed the limits on the amount that can be deducted from the employee's future earnings where national insurance liability arises on share-based earnings.
There are two instances where an employer can recover primary national insurance contributions from an employee's non-monetary earnings. With the employee's written agreement the employer can withhold an amount of shares equal to the value of the primary contributions paid on their behalf, when the employee has been paid share-based earnings after they have ceased employment but during the year of cessation, or when the employee is ceasing employment in that year and there are insufficient future cash earnings from which to recover the primary contributions.
The purpose of the clause is to extend such provisions further. We are enabling employers, with the written agreement of the employee, to withhold an amount of shares equal to the value of the primary contributions paid on their behalf for current employees, as well as those who have ceased to work for them. We are extending the right to withhold shares in respect of ex-employees so that recovery may be made when the gains on the shares arise in the year after they ceased work, as well as the year of cessation. We will allow employers and employees to make those agreements whether or not the normal cash earnings are sufficient to meet the primary contributions due on the share-based earnings.
The clause therefore allows much greater flexibility for both the employer and the employee. They will be able to agree on the most mutually convenient method to recover primary contributions. We want employers and employees to be able to choose the form of recovery that suits them best, whether cash earnings are available or not for the deduction of the primary contributions. Those changes will be made by amending both primary and secondary legislation. The clause sets out the primary powers. I hope that I have made it clear to the Committee that we will be making the draft regulations available so that the Committee can study them and see how the provisions will work in detail.
I am happy to commend the clause to the Committee.