Briefing. 17 December 2014

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James Henderson
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1 Briefing The 2016 National Insurance increase 17 December 2014 The 2016 National Insurance increase From April 2016 colleges and their staff will start paying higher National Insurance bills. The costs will be substantial and will have an impact on pay levels and on the number of people colleges can afford to employ. The increases affect all public service organisations including schools, universities, NHS, civil service, local government and the police. For colleges, AoC estimates that the additional NI will either reduce the number of staff employed by 5,000 or depress pay by around 2% How national insurance and contracting out works National insurance is paid by both employers and employees as a percentage of income. National insurance has a complicated set of rates and thresholds. The following table is a simplified representation of the main rates 1 : Employee Employer Earnings below 7,956 0% 0% Earnings 7,956 to 40,040 Earnings 40,040 to 41, % 10.4% 12% 13.8% Employer above 41,865 2% 13.8% For the last fifty years, it has been possible for employers to contract out of National insurance on the basis that their workplace pension scheme provides additional benefits. People who are contracted out receive the basic state pension but do not receive all the enhancements 2. In return, they qualified for a National insurance rebate. These reduce employers NI by 3.4% and employees NI by 1.4%. These rebates apply to 6 million people (5 million of whom are in public sector pension schemes). The current ( ) rates are as follows: 1 National insurance is more complicated for people with several jobs (a situation which applies to some part-time college staff) of for people already receiving pensions. There are also additional rates for low earnings and variations around the higher rate tax band. Over the next two years, employers NI will be reduced for younger workers and apprentices. 2 The main enhancements to people who were in the main NI scheme were the earnings related SERPs pension from 1976 which was replaced after 2002 by the Second State Pension

2 Employee Employer Earmings below 7,956 0% 0% Earnings 7,956 to 40,040 Earnings 40,040 to 41, % 7.0% 10.6% 10.4% Employer above 41, % 10.4% State pension reforms and the national insurance changes in 2016 In 2016 there is a major overhaul of state pensions and, as a result, contracting out will end. The changes were set out in a white paper published in early 2013 and were enacted in the 2014 Pensions Act. The key changes are: A new single stage pension which is set at a higher level for most people ( 144 per week) and thus remove the various enhancements. Arrangements to increase the state pension age to 67 which will particularly affect those born in the 1960s The abolition of contracted out rebates (see below) Provisions for those running private sector pension schemes to exercise a statutory override and change the benefits paid to recognise the new arrangements 3. The impact of the changes in National Insurance rates are summarised below. Now After 2016 Earnings below 7, Earnings 7,956 to 40,040 Earnings 40,040 to 41, Earnings above 41, The CBI successfully lobbied to persuade government to allow private sector employers with defined benefit schemes to be allowed to change terms and conditions to take account of the state pension reforms. This did not apply to public sector schemes because ministers promised in 2012 that the changes implemented following the Hutton report would not be varied for 25 years

3 DWP officials describe these changes as the removal of a rebate rather than as a tax increase 4. The revenue raised from higher national insurance DWP reported to Parliament that the new state pension arrangements will cost no more than the existing system. DWP calculates the impact of pension changes over a 50 year time horizon, taking account of: Additional costs associated with a higher flat rate pension Savings made from increasing the state pension age and ending contracting out. Ending of contracting out represents an immediate saving for government because the higher national insurance revenue takes effect immediately. HM Treasury provided the following figures in the 2013 budget 5 : Additional NI revenue 0 5,145 5,010 4,975 Public service employers (ER) Public service employees (EE) 0 3,325 3,285 3, ,365 1,350 1,335 Private sector (ER and EE) HM Treasury reported the additional revenue for the first time in the March 2013 budget but, in the same budget, reported additional spending costs and tax reductions which mean that the money raised has effectively already been committed, for example on long-term care. Reversing the national insurance change would involve finding a replacement for 5 billion in revenue for and also involve a change in the law to restore the relief. Neither seems likely. The impact on public sector staffing 4 DWP presentation to LGA conference 5 Policy costings for the 2013 budget

4 The public service pay bill in the UK is at least 175 billion including central government 6, local government 7 and education 8 staff. If the Treasury estimates are accurate, the 3.3 billion NI rise represents an additional cost of just under 2% of staff costs from 2016 onwards. In addition, public service staff will see a reduction in their take-home pay as a result of the higher employee NI. The impact of this tax increase on the public services has not received much attention but it has been noted. IFS s Paul Johnson described the NI rise as the largest post-election tax rise currently scheduled by the Treasury while Sir John Hills describes it as a budgeting timebomb in his recent book on UK fiscal policy 9. Remarkably the message about these future costs does not rate a mention in official Treasury or OBR publications or in departmental funding papers covering the NHS, local government or education 10. This is possibly because the government departments budget one year at a time but it seems reckless to ignore a significant cost increase just because it takes effect in the first week of the following financial year The impact on colleges Colleges face a double increase in employer on-costs in the academic year because the National Insurance rise comes a few months after a rise in Teacher Pension contributions. The on-cost double whammy is as follows: Employer contributions to the teacher s pension scheme will rise from 14.1% to 16.48% for staff at all pay levels on 1 September 2015 Employer s contributions to national insurance will rise from 10.4% to 13.8% for the majority of staff pay on 1 April For staff pay between the lower and upper National insurance limits, employer on-costs will rise from 26% of pay to 33% of pay. The combined impact is a 5% supplement on the cost of employing a teacher in Total UK central government staff costs 101 billion in , ONS PSA6E 7 Total England local government staff costs 56 billion in , DCLG Local Govt Finance statistics 8 Total UK university staff costs 15 billion in UUK Higher education in facts and figures while total England college staff costs are around 4.5 billion. University and college staff are not counted as public sector employees but they are members of public service defined benefit pension schemes 9 Sir John Hills Good times, bad times, the truth about the welfare state Page Statement made on the basis of a reading of successive HM Treasury budget and autumn statements, OBR s Economic and Fiscal Outlook, NHS England and Monitor consultation on NHS national tariff, DCLG s Local government finance statement and DFE s Dedicated Schools Grant

5 Now By 2016 TPS employer 14.1% 16.48% NI employer (approx) 10.4% 13.8% Employer on-costs 26% 33% The Teacher Pension Scheme increase The prompt for the increase in Teacher Pension Scheme contributions is the recent actuarial valuation which suggests that the scheme has a notional funding level of 92% and a deficit of 15 billion. Various assumptions contribute to this conclusion including lower interest rates, expectations of future pay growth and evidence that many teachers will live into their nineties 11. AoC's suggested in response to the TPS valuation that it would be sensible for DFE to take action to cut the employer contribution, for example by extending the period for recovering the deficit beyond 15 years or by making the post-2015 scheme less generous in terms of accrual rates or indexation 12. DFE has not acted on these suggestions. The impact on staff Based on discussions with College finance directors, AoC estimates the costs for colleges are as follows: mil % of income Higher national insurance Higher TPS contributions If EFA and SFA funding levels do not rise to take account of these increases, then colleges will need to make efficiencies to keep costs within budget. FE colleges spend around 62% of their income on staff while sixth form colleges spend 68% 13 so these efficiencies will inevitably affect staff. College options include: 11 AoC briefing note on the TPS valuation is available here 12 AoC response to the DFE consultation on TPS regulations, July The proportion of income in education spent on staff costs remains remarkably consistent. It stays around 55% in universities, 62-68% in colleges, around 75% in academies and around 80% in maintained schools

6 Holding staff pay down or even seeking pay reductions. Increasing productivity either in teaching or in support services this will involve reductions to the numbers of people employed. Making efficiencies in the goods and services bought by the college. It will be hard to make savings to fully compensate for the extra staff costs. For a small number of large FE colleges it may be possible to developing alternative activity where the income levels cover higher costs this would protect pay and jobs but would involve moving staff away from government funded courses to privately funded ones. This is very difficult, generally takes years of investment and the recent track record of colleges shows that their biggest successes are in the wider public sector (for example higher education, armed forces training or offender learning). There is no option for colleges focusing on the education of young people under the age of 19 to develop alternative privately funded education. Income for the education of 16 to 18 year olds represents an average of 45% of FE college income and 95% of sixth form college income so this sort of diversification is out of the question for the vast majority of colleges. Conclusion The increase in National Insurance in 2016 will result in pay cuts or job losses for colleges. On its own NI, could account for as many as 5,000 job losses or if jobs are protected will reduce pay by 2% from where it could otherwise be. The TPS increase makes the position even worse. DFE s error in failing to forecast or control the costs of the new TPS scheme is compounded by the likelihood that DFE funding levels will not increase to cover the costs. Julian Gravatt, Assistant Chief Executive for Association of Colleges 17 December 2014

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