Baroness Merron

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That the Bill be now read a second time.

Northern Ireland, Scottish and Welsh legislative consent sought.

The Parliamentary Under-Secretary of State, Department of Health and Social Care (Baroness Merron) (Lab)

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My Lords, it is essential that the changes we hope to make in this Bill resolve some of the existing workforce issues within our NHS. I say at the outset that the Bill will not be a silver bullet, and I do not wish to present it as such, but the changes it introduces for foundation and specialty training will lead to a more sustainable medical workforce that can better meet the health needs of our population.

I am most grateful to all those who have engaged with us, including the devolved Governments, to recognise the shared challenges that we face across the United Kingdom. My thanks are also due to noble Lords from across the House for their constructive contributions, time and interest in meeting me and officials. I am also most grateful for the cross-party support that has been demonstrated, both in the other place and in my discussions with the Front Benches in this House. A number of organisations have also expressed their support, including: the BMA, the Academy of Medical Royal Colleges, the Royal College of Physicians, and the Royal College of Surgeons of Edinburgh.

The NHS is beginning to show signs of recovery, following a period of unprecedented strain. Nothing in the NHS functions without its workforce and I am grateful for the dedication and professionalism of our workforce. Supporting, valuing and planning for that workforce is fundamental and, I know, something that your Lordships’ House takes a great interest in—and rightly so. Because the NHS depends on its workforce, we are developing a long-term approach to workforce planning, aligned with the ambitions set out in the 10-year health plan published in July, which set out the intent of this Bill.

That work will culminate in the publication of a 10-year workforce plan in the spring, setting out how we intend to ensure that the NHS has the right people in the right places with the right skills. Staff have been clear for some time that they want change, not only in absolute numbers but in how they are trained, supported and treated at work. We have heard from many who have been exceptionally frustrated by the current application process. There are challenges within medical training that cannot be addressed without legislative change, and that is why we are taking action with this Bill. I am absolutely delighted that my noble friends Lord Duvall and Lord Roe have chosen to make their maiden speeches in this important debate. I, like all noble Lords, very much look forward to hearing from them.

One of the most pressing of those challenges is the severe bottleneck in postgraduate medical training. For several years now, the number of applicants for foundation and specialty training places has grown far more rapidly than the number of available posts. In 2019, there were around 12,000 applicants for 9,000 specialty training places. In 2020, visa restrictions were lifted, and we find this year that this has soared to nearly 40,000 applicants for 10,000 places, with significantly more overseas-trained applicants than UK-trained ones.

This has created intense competition, uncertainty and frustration for many at the start of their careers. At the same time our NHS has become increasingly reliant on international recruitment. This Government deeply value the contribution made by doctors from all around the world, many of whom have played and continue to play a vital role in patient care, and nothing in in this Bill diminishes that contribution. However, it is neither sustainable nor ethically comfortable for the UK to depend so heavily on recruiting doctors from countries that themselves face serious workforce challenges while a growing number of UK-trained doctors struggle to access training posts. Competition for medical staff has never been fiercer. The World Health Organization estimates a shortfall of 11 million health workers by 2030. Shoring up our own workforce will limit our exposure to such global pressures without depriving other countries of their homegrown talent, and this Bill seeks to address that imbalance.

Let me turn to the Bill itself. The Medical Training (Prioritisation) Bill gives effect to the Government’s commitment to place UK-trained doctors and other defined priority groups at the front of the queue for medical training posts. It does so while continuing to allow internationally trained doctors to apply for and contribute to the NHS. Let me emphasise that the Bill is about prioritisation. It is not about excluding people, but it is unashamedly about prioritisation. For the UK foundation programme, the Bill requires that places are allocated to UK medical graduates and those in priority groups before being offered to other eligible applicants. For specialty training, it introduces prioritisation initially at the offer stage for 2026 and from 2027 at both the short-listing and offer stages. That will significantly reduce the level of competition being faced by UK-trained applicants, and it will provide greater certainty at a critical point in their career.

Internationally trained doctors with significant NHS experience will continue to be prioritised for specialty training, recognising the service that they have given. This year, immigration status will be used as a practical proxy for NHS experience in order to allow prioritisation to begin swiftly. For following years, we have taken powers in regulations to enable us to refine this approach in consultation with key partners. I have been asked by noble Lords what this means for those with refugee status. This status is not a stand-alone priority group, although refugees will be prioritised for specialty training in 2026 if they fall within another priority category, such as holding indefinite leave to remain or having completed the foundation programme. Refugees who do not fall within a prioritised group may still apply for specialty training posts and the Bill will not change their eligibility to apply for locally employed doctors’ roles.

I am seeking to address up front some of the concerns that will quite rightly be raised in the course of the debate. One of those is a concern I have heard about why British citizens who have graduated from medical schools outside the UK will not be in the priority group, including some doctors who would be eligible only for provisional GMC registration. I understand the reasons why this is being raised, and I have heard how some would prefer all British citizens, in a blanket sense, to be prioritised. The problem with that is that it would undermine the very intent of the legislation, which is to enable effective workforce planning and the development of our future medical workforce.

The principle is to create a sustainable domestic workforce. It is not about where a student is born; it is about where they are trained, and the fact is that UK-trained doctors are more likely to work in the NHS for longer. In addition, the Government set UK medical school places based on future health system needs. Student intakes and graduate outputs of overseas medical schools are not included in our domestic workforce planning. If we prioritised British citizens in a blanket sense for foundation training places regardless of where they studied, that would undermine our key aim to build UK-trained capacity while ensuring that we do not provide more foundation programme places than we need. I reiterate that this Bill is about prioritisation and not exclusion. All eligible applicants will still be able to apply and will be offered places if vacancies remain after prioritised applicants have received offers, which we expect to be the case on the basis of our long experience.

I have also listened to colleagues expressing concerns around the treatment of applicants graduating in Malta. The UK’s long-standing partnership with Malta on healthcare is valued and will continue. Doctors training in Malta will still be able to come to the UK to gain NHS experience to support their training, for example through fellowship schemes. These arrangements are not affected by the Bill. However, as I stated earlier, for recruitment to specialty training places in the UK, the Government assess that it is important to prioritise to ensure a sustainable workforce that meets health needs.

I turn to the matter of public health specialists, who are particularly identified in the Bill. Public health is a unique medical specialty that draws applicants from medicine and other professional backgrounds who all undergo the same rigorous training. All public health specialists, regardless of professional background, complete the same rigorous medical specialty training programme and are subject to the same high professional standards. The Bill excludes from prioritisation any specialty programmes wholly in the field of public health, as it would undermine the multidisciplinary public health specialist workforce. The Government will monitor the impact on the public health specialist training programme, which currently accepts very small numbers of international medical graduates.

I am aware that there are concerns relating to terms and conditions and mobility for some specialists. We have set out the actions we will take to make the NHS a better and great employer. However, a focus on the NHS alone will not support the whole health workforce, as many public health specialists work outside the NHS with differing employment arrangements. But we are committed to working with the BMA, employers and professional bodies to make public health careers more attractive.

On timing, the Bill includes provisions to allow prioritisation to apply to the current application cycle, with posts commencing this August. That requires Royal Assent by 5 March. It is therefore important to seek timely passage for this Bill to avoid disruption for trainees who need sufficient time to find somewhere to live, sort out childcare and arrange any other aspects of their lives before their posts start, and for NHS trusts that are planning the front-line services. I hear the concerns of some noble Lords about the impact on those applying in the current application cycle, particularly where applicants report that they did not know how prioritisation might affect them. As I said earlier, these concerns are understandable, and they have been carefully considered. However, delaying action would only prolong the current problem by further entrenching the existing imbalance in training competition and it would weaken our ability to plan a sustainable workforce.

The commencement provisions provide necessary flexibility, ensuring that implementation can be carried out in an orderly and workable way, taking account of operational realities. On that point, there is a material consideration, which I am sure will be raised and understandably so, about whether it is possible to proceed if strike action is ongoing. The disruption strikes cause, and the pressure they put on resources, would undoubtedly make it a lot harder operationally to deliver the important measures in this Bill. It is our intention to commence as soon as we can, subject to the Bill’s passage through Parliament, but it is vital to have a safeguard to ensure that the systems planning and operational capacity required for successful implementation are firmly in place.

I conclude by saying that the Bill will not solve every workforce challenge, but it is a very important step towards a more coherent, ethical and sustainable approach to medical training and workforce planning: something that has been called for for many years.

It is estimated that four resident doctors will be competing for every specialty training post in 2026. With the delivery of this Bill, this number can reduce to two resident doctors per place. British taxpayers spend £4 billion training medics every single year. It will be by better aligning public investment, training capacity and long-term service needs that the Bill will give UK-trained doctors a fair chance to serve in the health service they train to support, and to do so in a way that benefits us, the public, across the country. I beg to move.

Earl Howe (Con)

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My Lords, I begin by declaring my interest as an honorary fellow of the Royal College of Physicians. It is a pleasure to open the first of our discussions on the Bill, and I should like to express my thanks to the Minister for her clear explanation of its provisions and its policy background.

I also thank her for the informative letter that she circulated earlier this week, and for the helpful private discussions she has facilitated. Like the noble Baroness, I look forward to the two maiden speeches we are to hear later from the noble Lords, Lord Roe and Lord Duvall, whom I welcome very warmly to the House.

This Bill may be small in length, but it is far from insignificant, not least because it is being introduced to Parliament on an emergency timetable. More pertinently perhaps, its significance can be measured in its potential effect on the lives and careers of many thousands of doctors. That fact alone makes this a measure deserving of the closest scrutiny, and I am therefore appreciative of the fact that the Government and the usual channels have enabled a greater interval between each stage of the Bill’s passage through the House than was the case last week in the other place.

I should say to the noble Baroness at the outset that His Majesty’s Opposition have no quarrel with the principle underpinning the Bill. However, as she would expect, we have identified and been made aware of very considerable concerns over a number of its key provisions, and I know she will understand that we need to explore these thoroughly during the course of our proceedings.

Doctors trained in this country and funded by the taxpayer should have a fair, clear and consistent pathway to progression within our NHS. Britain trains some of the finest doctors in the world, yet too many are being lost because they cannot access the training places they require. That represents a waste of talent, it undermines morale and it ultimately has consequences for patient care. It also represents a loss of taxpayer investment made through the public support of medical education and training when doctors are forced to take their skills abroad because they cannot progress within the system at home. It is, therefore, a problem that we on these Benches agree must be addressed.

However, the manner in which these challenges are addressed matters greatly. There has to be a test of reasonableness and fairness if the Government’s response can be judged acceptable not only in the eyes of UK-based doctors but to doctors who have studied overseas. The solution to the problem must also offer sustainable, long-term change and not just a short-term sticking plaster. I say that because, as we all know, the danger inherent in emergency legislation of any kind is that it can result in unintended and unwanted effects.

To my eyes, one of the first ways in which the Bill falls short, along with the Government’s narrative, is its failure to address the wider question of how its provisions dovetail with any changes in the availability of training places. To solve the problem of recruitment bottlenecks, the Government are using the Bill to refashion the order in which eligible applicants are considered. However, the other way of approaching the issue is to expand the number of training places. Elsewhere, the Government have promised to deliver 4,000 new specialist training places, including 1,000 places that are needed in reasonably short order.

Where do these plans now sit and how are they likely to affect the career prospects of the doctors of the future and those already in the system, particularly those doctors trained overseas? How quickly can capacity be expanded? These were questions that the previous Government tried to address head-on in the NHS Long Term Workforce Plan, published in 2023, which was well received across the medical community.

I mentioned just now the risks and dangers inherent in introducing emergency legislation on a curtailed timetable and, in that vein, another area of concern is the seeming contradiction in the Government’s characterisation of this legislation as an emergency measure. As we understand it, the Government are proposing that the Bill should come into force not on Royal Assent but at a time of the Secretary of State’s choosing. Why is that? If the Bill before us were genuinely urgent, addressing, as it purports to, the 2026 recruitment round, it is difficult to understand why it would not be commenced immediately following its approval by Parliament and the sovereign.

The disconnect between the Government’s rhetoric and reality is troubling, not least because it serves to highlight a number of provisions in the Bill that pose real worries. One such worry concerns the Bill’s impact on doctors who are trained overseas through established UK higher education institutions. These are doctors who are undertaking identical GMC-approved MBBS courses, sitting the same assessments and receiving the same GMC-approved degrees as their counterparts trained in the United Kingdom.

Under the Bill, these doctors will find themselves suddenly classified in the non-priority category of applicants, both for foundation programmes and for specialty training. We are aware that at least one of these programmes operates under a long-standing international arrangement, with wider diplomatic and institutional implications. The noble Baroness, Lady Gerada, will be addressing the issue in greater detail. At this stage, however, I wish to highlight one programme run by Queen Mary University of London in Malta, which is sustained by a long-standing UK-Malta agreement, first established in 2009 and reviewed as recently as 2024. That agreement sits within a broader context of deep and enduring ties between the two countries’ health systems and approaches to medical education.

Undermining it risks significant and long-lasting repercussions for the UK-Malta relationship. I understand that the Government of Malta have written to the Secretary of State to raise these concerns—so far, I understand, without a response. The Minister very helpfully referred to the Maltese concern in her recent round robin letter, as she did today. But I believe it is an issue we shall want to pursue in Committee in greater depth. The concern is multifaceted because, in the scheme of things, what the Bill does to Maltese doctors looks completely unnecessary. The numbers involved are tiny. The Maltese example demonstrates that the Bill as drafted risks causing disproportionate harm to well-established international partnerships, seemingly not as a matter of policy intent but as a consequence of legislation being rushed through Parliament.

There is a further issue that has been brought repeatedly to our attention by doctors and medical academics in this country and abroad: the position of applicants who are already part way through the current foundation programme recruitment round. The noble Baroness mentioned this in her speech. We have heard compelling evidence of a real risk of creating what has been described as a “stranded cohort”: that is, the cohort of doctors who entered a live national recruitment process in good faith, under published rules and fixed deadlines, only to face the risk of materially different outcomes because prioritisation is applied mid-cycle in a radically different way from before.

We need to be clear on the point that applicants at this stage have already committed significant time and cost to the process and are making concrete plans around registration, visas, relocation and employment. For foundation programme applicants in particular, there is often no straightforward alternative NHS route if an outcome is delayed or left indeterminate, given the constraints around provisional registration.

From a system perspective, uncertainty of this kind also risks avoidable disruption to workforce planning, late withdrawals and rota instability. None of these comments are intended to challenge the core principles of the Bill, but they surely call into question the justification for the process and whether it is fair and reasonable for Parliament to permit what amounts to retrospective disruption to an already defined recruitment cohort. Are the Government willing to make use of the commencement and transitional powers in the Bill to ensure that the changes introduced operate only prospectively, so as to give clarity and fairness for those already in the pipeline?

Beyond the issues I have already referred to, there are a number of further concerns about the way the Bill is framed and how it will operate in practice. As drafted, the prioritisation process that the Bill envisages rests chiefly on one decisive qualifying factor—where a doctor was trained. While that may work as an idea in general terms, we are concerned that it risks excluding from the priority group individuals who are British citizens but who have undertaken part of their training overseas, which can arise for entirely normal and legitimate reasons. Again, I listened to what the noble Baroness had to say on this subject, but one clear example is doctors who have completed elements of their medical training while serving with the UK’s Armed Forces abroad. Those individuals have trained within UK systems, often in demanding circumstances and in the service of this country. It would be perverse if their contribution were overlooked simply because aspects of their training took place outside the British Isles. Any credible definition of a UK medical graduate ought to be capable of recognising that reality.

We must also consider the wider implications of this legislation for medical schools. Changes to prioritisation will inevitably influence the number of international students choosing to study medicine in the UK, with potential adverse financial consequences for institutions that are already under significant pressure. Parliament should not be asked to legislate in the dark on such effects, which is why we believe that there is a strong case for the Government reporting regularly on the impact of these provisions on student numbers and on the financial sustainability of medical schools—centres of excellence that sustain a world-class teaching environment that is a genuine credit to this country.

The Bill was prompted by a problem that we all recognise—too many talented British doctors are finding their progression blocked, and the NHS and, ultimately, patients are paying the price. We support the principle that UK training, public investment and commitment to the NHS should be properly recognised, but principle alone is never enough. If this legislation is to succeed, and succeed fairly, it must be both precise and proportionate. Of course, it must address the core of the problem in a sufficiently far-reaching way. However, it must also recognise the realities of life for aspiring doctors who have submitted applications to enter UK training programmes, relied in good faith on explicit written assurances from the relevant authorities and committed what are often large sums of their own money on the back of those assurances, and who now find the rug pulled from under them.

Legislation designed to remedy the current problem must also take full account of those elements of UK and foreign-based training systems that are in practical terms identical. It must be robust enough to protect UK training pathways stemming from long-standing international partnerships that are already established firmly in our medical education system. Our relations with allies and Commonwealth members such as Malta really matter.

We approach the next stages of the Bill in a constructive spirit. Our aim is not to frustrate its passage but to improve its drafting to ensure that it does what it is intended to do without unintended consequences. We want it to command confidence across the House as well as outside it so that the future of medical training, and indeed the future of the NHS, is genuinely safeguarded and strengthened.

Lord Clement-Jones (LD)

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My Lords, I too thank the Minister for her introduction. I look forward to hearing from our two maiden speakers and add to the noble Earl’s welcome to the House to them. It is a pleasure to follow the noble Earl, and I agree with a great deal of what he said.

Let me say from the outset that we on these Benches support the underlying principles of the Bill. The Government’s impact statement makes the case that UK graduates are significantly more likely to remain in the NHS long term than their international counterparts. It is entirely reasonable that where the British taxpayer invests some £4 billion annually in medical education, there should be a secure pipeline for those graduates into our health service.

However, while the intent is sound, the execution is marred by serious flaws. Fairness requires that those who have relied on a long-standing government position are not disadvantaged by abrupt alterations. Six months’ notice is wholly inadequate for a decision with such a long lead-in time, and few could reasonably have expected such a significant change to be implemented with so little warning.

I want to highlight two specific areas where the Bill creates profound inequity—the treatment of UK university campuses overseas, specifically Queen Mary University of London in Malta, and the flawed criteria used to assess significant NHS experience for our international colleagues.

First, on the anomaly regarding Queen Mary University of London and its campus in Malta, until mid-last year, I was chair of Queen Mary University of London’s governing council. It is vital to understand that Queen Mary University in Malta is not a foreign institution or a private commercial venture; it is an integrated campus of a UK public university. Its students study a curriculum identical to that of their peers in London. They sit the same assessments, including the UK medical licensing assessment, and they are awarded the exact same GMC-approved primary medical qualification.

In her letter to noble Lords this week, and I welcome her correspondence, the Minister argued that these graduates should not be prioritised because they may lack familiarity with local epidemiology and NHS systems. With respect, that does not hold water. These students follow the exact same NHS-aligned curriculum as Queen Mary students in Whitechapel.

Contrast that with Clause 4, in which the Government rightly prioritise graduates from Ireland, but also prioritise graduates from Switzerland, Norway, Iceland and Liechtenstein. A graduate from Liechtenstein has no UK medical degree, has not sat the UK medical licensing assessment and has no training in UK epidemiology. Yet, under the Bill, they will be prioritised over a Queen Mary in Malta student who holds a UK degree and has been specifically prepared for the NHS. This is a manifest absurdity.

The Minister’s letter also suggests that including those students would undermine workforce planning because numbers are uncontrolled. That is incorrect. Queen Mary in Malta’s student numbers are capped by the Maltese Government at just 50 to 70 graduates a year—statistically negligible in a system of 11,000 places. To penalise them on such grounds is neither proportionate nor fair.

Furthermore, the Government’s own impact assessment justifies the Bill on the need to protect taxpayer investment, yet Queen Mary in Malta students are self-funded. This is not merely a matter of academic equivalence; these graduates provide the NHS with doctors trained to UK standards at no cost to the British taxpayer, representing a rare example of value without expenditure —precisely the kind of pipeline a fair system ought to support rather than disadvantage. By excluding them, the Government are working against their own value-for-money logic.

We also risk breaking a solemn international commitment. The Minister’s letter implies that our agreement with Malta is limited to ad hoc training. That downplays the reality. Since 2009, the UK and Malta have operated under a unique mutual recognition agreement regarding the foundation programme itself, explicitly renewed by the Department of Health and Social Care as recently as 2024. Malta is the only country in the world with this status. By unilaterally demoting these graduates, we are, in effect, tearing up a long-standing agreement with a Commonwealth partner—one that Malta’s own Minister for Health describes as having served both countries for over two centuries. Other universities, such as Newcastle University, which operates a similar campus in Malaysia, face similar predicaments. Its vice-chancellor has noted that its graduates too receive identical accreditation and transition seamlessly into the UK workforce.

Then there is the second critical flaw in the Bill: how it attempts to identify significant NHS experience for the upcoming 2026 recruitment round. Under Clause 2, the Government propose using immigration status, specifically indefinite leave to remain—ILR—as a crude proxy for NHS experience. This reveals a fundamental misunderstanding of medical training timelines. ILR typically, at the moment, requires five years of residence, yet UK graduates enter specialty training after just two years of the foundation programme. That creates a perverse experience gap. International doctors who have served on our front lines for three or four years, passed royal college exams, built a career portfolio and worked the same rotas as their UK colleagues will be treated as if they have no experience at all, simply because they have not yet clocked up the five years required for ILR. This, effectively, tells dedicated doctors that their three years of service counts for nothing.

In her earlier letter, the Minister defends this blunt proxy, as she did today, by claiming it was not operationally feasible to assess all applications for actual NHS experience in time for the 2026 cycle. We have received compelling evidence to the contrary. Doctors currently using the recruitment platform Oriel inform us that the system already captures data on months of NHS experience. The data exists, the mechanism to do this fairly exists, and to persist with the ILR requirement is to prioritise administrative convenience over the reality of clinical contribution. We should define significant experience not by visa status but by time served. A benchmark of two years of NHS experience would be equitable, and mirror the two years of core training required of UK graduates.

Furthermore, we have all received distressing correspondence regarding doctors on spousal visas. These are permanent residents, married to British citizens, with an unrestricted right to work, yet under the Bill they are placed in the lowest priority tier. We risk driving away not just those doctors but their British spouses who work in our public sector as families are forced to emigrate to find work.

There is a deep anxiety, in particular, regarding the mid-cycle implementation of these rules. We have received correspondence from doctors who have spent years building career portfolios and investing substantial resources based on published criteria, only to find the rules changing while the recruitment process is active. This creates procedural unfairness and huge instability for their families. If our guiding principle is, as it must be, fairness, then it cannot be right to introduce such consequential changes mid-cycle when candidates have already ordered their lives and careers around criteria that have stood in place for many years.

To cap it all, there is a glaring incoherence at the heart of the Government’s approach. Just days ago, the Education Secretary, Bridget Phillipson, announced a new strategy to grow our education exports to £40 billion a year by 2030. She explicitly encouraged our universities to expand transnational education and open campuses overseas. Yet in the Bill, the Department of Health and Social Care is actively undermining that very strategy. We cannot have the Department for Education urging universities to go global to boost the economy while the Department of Health and Social Care simultaneously pulls up the drawbridge against the very students who enrol. That is a fundamental contradiction.

For Queen Mary in Malta, the solution is simple: a minor amendment to Clause 4 to recognise its UK degree, or the inclusion of Malta in the priority list, honouring our 2009 agreement. For the broader issues affecting international medical graduates, we must abandon the blunt instrument of ILR and use the data we already have to recognise two years of service as the true mark of commitment. Let us not mar a necessary piece of legislation by failing to correct these obvious injustices.

Baroness Finlay of Llandaff (CB)

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My Lords, I declare my recent observer role with the Medical Schools Council, and as a pro-chancellor at Cardiff University, which, of course, has a medical school. The Bill aims to address a problem that has been brewing for years—but some medical graduates will unintentionally suffer, and we must consider them.

Specific groups have already been mentioned by the noble Earl, Lord Howe, and the noble Lord, Lord Clement-Jones, but they warrant reiterating. First, there are medical graduates from established overseas branch campuses of UK universities. That is not only Malta; Newcastle has already been spoken of, and there are others. There are also UK citizens studying medicine in the EU in good faith, always intending to work in the NHS, and international graduates unable to receive specialist training in their own country, who come here before returning to develop key specialist services in their home country. There are also those who relied on the published recruitment framework in good faith for years, and made irreversible decisions—relocating families, investing time and money, filling rota gaps and sustaining NHS services through Covid—never expecting specialty training to be rewritten while applications were already in progress. Would a separate tier, after the current priorities but ahead of those with no UK connection, provide a solution?

As has been said, a few UK medical schools deliver their degrees from established branch campuses abroad, by fully accredited programmes regulated by the General Medical Council. They follow the UK curriculum, and are taught and assessed in English to identical academic and clinical standards. These students graduate with a UK medical degree and will have passed the UK medical licensing assessment. They often apply to work in the NHS and transition smoothly into clinical practice, benefiting the NHS. These graduates have applied for UK training posts under one set of rules, but face different rules with limited options. Should these UK medical graduates not be prioritised over graduates from non-UK universities across the world?

There is a wider significance, as has already been alluded to. The Government’s international education strategy states the importance of universities seeking global opportunities, such as developing branch campuses. To avoid opening the floodgates, do the Government envisage capping UK healthcare degrees delivered offshore? This year, there were over 25,500 UK applicants for just over 10,000 UK medical school places. Selection at 18 years old is difficult. Each year, having invested in years of their schooling, we reject highly capable home applicants who would be excellent doctors. Many of them choose to study abroad, determined to return to work in the NHS. Should they be required to pass the UK medical licensing assessment, so that UK citizens studying in the EU after school are not left stranded?

For postgraduate trainees who applied through the previous recruitment framework and are currently working in the NHS, with several years’ experience, would recognising service from Covid onwards be considered in the eligibility in the current round? Where is the expansion of specialty training posts and academic posts for some of these graduates?

Lastly, all UK health expertise benefits international development. Many countries lack their own training expertise, and historically the UK has trained specialists to go back to develop services in their home countries. This altruism improves global health and creates opportunities for the NHS, universities and pharmaceutical and tech companies to gain international contracts. Without routes for overseas doctors to train here, our international partners will look elsewhere.

The Bill apparently aims to secure a reliable supply of doctors for the future, ensuring that those with a UK medical link are more likely to progress to current consultant roles and continue their careers in the NHS. Will international medical student places here be further limited? Otherwise, the Bill could mean that UK students forced to train overseas through limited home student places will not be prioritised, whereas international medical students at UK medical schools will. In passing the Bill with speed, we must avoid penalising our own graduates, jeopardising international partnerships, or appearing hostile to international excellence or unreliable by suddenly changing the rules. Will the Minister consider widening the priority group or adding other tiers to recognise the importance of medical graduates?

Lord Roe of West Wickham (Lab) (Maiden Speech)

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My Lords, it is the greatest honour to speak in your Lordships’ House for the first time. I thank my fellow noble Lords from right across the House for the warmth of their welcome, extended not just to me but to my family on my introduction. Equally, I thank all the staff, from Black Rod and the Clerk of the Parliaments to the doorkeepers, police and security staff—and, perhaps most importantly, as I have spent the past two weeks eating, to the caterers. I can say with some certainty that your Lordships’ House has some of the best work canteens I have ever encountered, and I have been in some over the years. Without wanting to labour this—pardon the pun—the ham, egg and chips in the Millbank basement is of particular note to a connoisseur of such matters. The professionalism and patient good humour of every single noble Lord towards a new Member of this House is a credit to the extraordinary place that they both protect and sustain.

I thank my sponsors, my noble friends Lord Kennedy of Southwark and Lady Twycross, who, alongside my noble friend Lady Smith of Basildon, have offered encouragement and support as they have guided me in the process of joining your Lordships’ House. In particular —and I am looking at her now—I need to thank my noble friend Lady Twycross, who was my deputy mayor when I was first appointed as London Fire Commissioner. She deserves particular thanks, as my noble friend is probably asking herself once again why she is having to keep me on the straight and narrow in a new job. It is also a particular pleasure to see in his place my old friend, my noble friend Lord Duvall, who also served London for so many years and was such a great supporter of the London Fire Brigade—my chosen profession—and to speak on the same evening as him. That gives me great pleasure.

I am very much a son of south London, and my journey here has been shaped by that, along with a lifetime in uniformed service, first in the British Army, coming from a long line of soldiers on my father’s side, and then in the London Fire Brigade, where I served at every rank from firefighter to commissioner.

I believe that I am the first firefighter in history ever to sit in your Lordships’ House. Serving for half my life in, and eventually commanding, the brigade, one of the world’s largest and busiest emergency services, and one of this country’s last great remaining working-class institutions, was the most enormous privilege. It gave me an education in life and membership of a club that you cannot pay to be part of. I hope that I can therefore give firefighters and their families some voice in my contributions here.

I would also like to speak to the role boxing has had in my life, first as a competitive fighter for many years, then as a coach, still now as a club chair and—unbelievably to me, as that young kid walking into a boxing club in south London all those years ago—sitting on the national board that supports our great British Olympic team. The support and the safe space that boxing clubs provide young people, particularly in some of the poorest places in this country, must not be underestimated. Boxing gave me confidence, fitness, discipline, purpose and a structure.

At a time when the politics of division seem to be painting a picture of Britain, characterising Englishness in particular in a way that, as a proud Englishman, I simply do not recognise, boxing clubs are still very much beacons of openness, tolerance and unity. I have fought and trained in clubs and halls the length and breadth of these islands, and I can say that without exception my experience is that in boxing your faith, race, background and nationality are irrelevant, as what is shared in a boxing club is a common respect for anyone who has had the courage to take that first step into the squared circle and face their own fears. In that sense, the sport and its spaces both epitomise and set the standard for true British values.

In respect of today’s debate, addressing the quality and accessibility of the training we give our doctors, I believe that my experiences bear some relevance. Having responded alongside so many medical colleagues over the years, I know that, like being a firefighter or a soldier, a career in medicine is profoundly rewarding and has the greatest benefit to both the individual and their community. It seems clear to me that, by ensuring that our graduates are given priority access to the best available training, we will help to sustain and protect our health service while also providing important opportunities to young British people of all backgrounds to make a difference.

Lastly, and perhaps most personally to me, in my working life, both as a soldier and as a firefighter, I have been repeatedly and directly involved in the tragedies that befall ordinary people when politics, institutions and systems simply fail to protect them, often with catastrophic loss of life. I have been a witness in those moments, standing on streets from Portadown to inner London—witness to the unbelievable heroism of my fellow soldiers and firefighters in their actions in responding to those failures. Some of them made the ultimate sacrifice, whether then or in later years. They are never very far from my mind, and I must pay tribute to them today.

Equally, I recognise the resilience, courage and decency of survivors and families, particularly those I saw suffer so much following the Grenfell Tower fire. In their continued drive for justice and a safer built environment for everyone, they provide me with a lesson in dignity, resolve and clear purpose every time I meet them. I hope I might give them a voice in your Lordships’ House too.

It is in that context that I understand my privilege and responsibility in the House, as what gets said and done here and in the other place can, for better or worse, have the most profound consequences for our fellow citizens. With that in mind, I hope I can contribute with some value, give voice to those I met on the way and avoid adding, in the powerful words of Bishop James Jones following the horror of the Hillsborough disaster, to

“‘the patronising disposition of unaccountable power”.

I thank noble Lords again so much for their warm welcome and this incredible opportunity.

Lord Stevenson of Balmacara (Lab)

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My Lords, it is a real pleasure to follow my noble friend Lord Roe of West Wickham, and to congratulate him not only on his excellent maiden speech but on the wealth of experience and expertise that he brings to our House. I look forward to a lot more—but I will not be meeting him in a boxing ring.

If you read a quick resumé of my noble friend Lord Roe’s career—university. Sandhurst, distinguished military service, Commissioner of the London Fire Brigade—you might be astonished, as I was, to realise how much he has achieved in so little time; he is really quite young. Although he is too modest to have gone into the detail, we can all guess what two tours in Northern Ireland, where he was wounded, must have involved. We should also note, as he said, that he rose through all the ranks in the London Fire Brigade, including being incident commander for the Grenfell Tower fire, before being appointed London Fire Commissioner.

I am sure I speak for the whole House in joining my noble friend Lord Roe in paying tribute to the heroism of his fellow soldiers and firefighters. I welcome his determination to give voice to those he met during his uniformed service. We are delighted to welcome our first ex-firefighter to the Lords; I am sure I also speak for all in saying that we look forward to hearing his future contributions, and indeed those of my noble friend Lord Duvall, when he comes to speak.

Turning to the Bill before us, it is good to have confirmed that its aim is to address issues created by the current approach to allocating places on the foundation programme and medical specialty training in the UK. However, while the Bill deals with process, it does not deal with the content of courses. While I get the importance of having medical staff trained within the NHS, should the 10-year health plan of which it is part not also have an engagement with the curriculum content?

To give an example of what I mean, I ask my noble friend Lady Merron: how do His Majesty’s Government intend to implement the Council of Europe Committee of Ministers’ recent recommendation on equal rights for intersex persons? I declare an interest as a person born with hypospadias, which is an intersex condition. Implementing this recommendation could require significant changes in the academic training of our doctors and surgeons, which surely need to be monitored. For example, it includes: prohibiting non-consensual medical interventions on intersex children, ensuring such procedures are postponed until the individual can provide informed consent; strengthening anti-discrimination measures and ensuring access to justice, including protection from hate speech and crime; addressing inequalities in healthcare, education, employment and sports, including the need for inclusive policies and safe environments for children; ensuring that family laws, including those relating to legal recognition and parentage, are accessible to intersex people without discrimination; and calling on member states to take concrete legal and non-legal measures to uphold the dignity and rights of intersex people.

Some of these recommendations have already been legislated for in the UK, most notably the law against female genital mutilation. But the recommendation is seen by many people as a landmark, as it shifts the focus from medicalising what are often seen as disorders towards protecting fundamental human rights and ensuring equal participation of intersex people in society. It seems important that these things are fed into the medical curriculum, and I look forward to hearing the Minister’s response to that.

I appreciate that this is a complex issue and that this Bill may not be the most appropriate place to introduce such changes but, when she comes to respond, I hope my noble friend will recognise that my underlying point is about how the content of the courses provided within the foundation programme and medical specialty training in the UK can take account of policy initiatives of this type. I would of course be happy to meet with her to discuss how best to take the issue forward.

Lord Patel (CB)

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My Lords, when there is such a short Bill, there is a temptation to repeat what has already been said in great detail, because it has not been said by me. I will not succumb to that temptation but will briefly point out the areas where I agree with what has been said, particularly by the noble Earl, Lord Howe, the noble Lord, Lord Clement-Jones, and the noble Baroness, Lady Finlay.

In the many letters and emails—hundreds of them—that I have received, two things stood out. One was the grievance felt by people who were already in the process of applying for the jobs; they now feel as if they have been thrown to the wolves. The other lot were the people who are British citizens who trained overseas and cannot now access training in our programmes. There is one other minority group: those who felt that they have had some experience in the NHS, but it is not as yet defined how much of their experience, starting in 2027, will be counted. The noble Lord, Lord Clement-Jones, referred to the immigration requirements which may or may not be counted, but that produces another. These are the groups that feel disadvantaged. What I felt on receiving these letters was that we are making people who have serviced our NHS for decades feel they are no longer required and are to be abandoned. I hope we do not give that impression.

Having said that, I recognise that, in principle, the idea that UK medical graduates should be prioritised for jobs in our NHS is correct, because it is not right that they cannot get the jobs they apply for, particularly in foundation and specialist training. On the foundation programme in Clause 1, I am concerned that British citizens who may have trained in GMC-approved institutions with the same kind of curriculum described by the noble Lord, Lord Clement-Jones, cannot be considered for that. I have already made the point about specialist training programmes and those who have gone through the process of applying in good faith. We do not as yet know what experience will be counted from 2027 onwards, so I hope the Minister can comment on that.

Clause 4 refers to a “UK medical graduate”, and says:

“‘UK medical graduate’ means a person who holds a primary United Kingdom qualification”.


It does not say a “UK citizen” who is qualified. Does that mean that an overseas student attending medical courses in our universities, who is therefore a graduate of our universities, qualifies or not? I might be wrong in my interpretation. The clause continues:

“but does not include a person”

with

“a majority of their … training for that qualification outside the British Islands”.

Some of our universities run joint courses. I am a professor emeritus of the University of Dundee, which, for instance, runs one course for Malaysian students. They do part of their training in Malaysia and finish their clinical training in the UK, at Dundee. The Bill refers to a majority of their training but, in a five-year course, if the overseas student does three years in a UK university, does that count as a majority of their training in the United Kingdom?

I am glad that the Minister alluded to refugee status and was pleased to hear what she said. That was to be one of my points, because I have had representation from Ukrainian refugees who are already working in the NHS, and whose status would otherwise have been removed.

Clause 4(5) says:

“‘primary medical qualification’ means a qualification that is treated by the General Medical Council as equivalent to a primary United Kingdom qualification within the meaning of the Medical Act”.

There are lots of institutions which the GMC recognises as equivalent, but we do not regard their graduates as UK graduates, although they do the same curriculum. Universities such as Newcastle have already been mentioned several times. They have been encouraged by the education department to open campuses, as other universities have been, and to provide the same curriculum. There are then graduates of Queen Mary University, Newcastle University or Dundee University. Their status is not quite clear.

I am concerned about these issues and hope that we will be able to have greater clarification. But I accept that, in principle, prioritising postgraduate medical training for UK graduates is correct.

Lord Stevens of Birmingham (CB)

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My Lords, I declare an interest as an honorary fellow of the Royal College of Physicians and the Royal College of General Practitioners, and as chair of the council of King’s College London, which is Europe’s largest educator of health professionals. I too congratulate the noble Lord, Lord Roe, on his excellent maiden speech. Given the deteriorating physical fabric of the Palace of Westminster, it is reassuring to know that we have a firefighter in our midst.

I start by endorsing the thrust of the policy set out in the Bill. It clearly makes sense for the NHS and for British taxpayers to properly connect undergraduate medical education with access to specialist training, and then the flow-through of doctors able to contribute over the balance of their careers to the work of the NHS. All that makes total sense. Nevertheless, I echo three of the concerns we have heard already in the brilliant contributions to this debate.

The first is about the difficulties and concerns around the transition year, 2026, that the Bill proposes. For 2027 and beyond, rightly, there is the suggestion in the Bill that applications will be prioritised from doctors with NHS experience, who have made a contribution to the NHS. But because of not being able to get the computer system right, that is excluded for the 2026 transitional period.

As we heard from, I think, the noble Lord, Lord Clement-Jones, there is a range of views that suggest that that is not a correct assessment. I think the impact assessment says it is £100,000 to sort out the Oriel computer system—against a £4.3 billion taxpayer expenditure in this area. This is an area where the Minister and the Minister in the Commons, Karin Smyth, might want to give officialdom a little tap and just double-check that what they are being told is right, not least because there is a degree of oddity about this in that the Government declared their intention to introduce this new prioritisation for UK graduates seven months ago. It was in the 10-year NHS plan published on 3 July. It is not completely clear why there has been a seven-month lapse before we get this emergency Bill that has to be passed within four weeks.

There is the transitional 2026 concern and then, relatedly, there is the question of whether, by just changing the prioritisation, the Government actually have a game plan to deal with the more fundamental, underlying problem of the bottlenecks. This piece of legislation by itself does not widen the bottlenecks, it just changes who will occupy them. As the noble Earl, Lord Howe, I think, asked, it would be very useful to know, of the 1,000 additional specialty training places over three years promised in the 10-year plan, or the 4,000 put on the table in December as part of the Government’s negotiation with the BMA—of which 1,000 extra were to be in place for the coming year—what is their current assumption about the expansion in specialty training that will go alongside this reprioritisation for 2026 and 2027?

Today, we have seen the publication of the cancer plan, which, quite rightly, says that the Government

“will work with the Royal Colleges to encourage resident doctors and internal medicine trainees to specialise in clinical and medical oncology”—

where there are significant shortages—and will prioritise

“training places in trusts … where vacancy rates are higher and performance is lower”.

Can the Minister tell us whether the Government will give effect to that commitment in the cancer plan with the 2026 and 2027 increases in specialty training places, which are clearly required?

To circle back to a point that the Minister made—and, indeed, the Health and Social Care Secretary made at Second Reading in the Commons on 27 January—the Government’s estimate appears to be that even with this tighter, or reshaped, prioritisation, there will still be a ratio of two applicants to every place for specialty training. Just stand back a moment—that means we will be turning away half the doctors who would be able to fill those places. Are the Government sure that they are going pedal to the metal on the expansion in specialty training to reduce that oversubscription rate?

How does that connect with the upcoming rebadged, or refreshed, long-term workforce plan, given that the undergraduate doctors who start their training this year will be, in practice, coming out to deliver clinical care as consultants from 2040 and training their successors up to 2070? We really do need a long-term plan here, rather than the constant chopping and changing that, sadly, we have seen.

Finally, I completely endorse the comments about Malta. Three collective institutions have been awarded the George Cross—Malta and the NHS are two of them. We should sustain those relationships. The idea that we have less in common with the Maltese than with the good people of Liechtenstein—I have just had a quick look and Liechtenstein has one 35-bed hospital and a per capita GDP more than three times that of the UK—misses the point. We have to see the wood for the trees; the Department of Health and Social Care needs to raise its gaze and value these historic relationships that are so important for us.

Baroness Coffey (Con)

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My Lords, I start by welcoming the noble Lord, Lord Roe, to the House. I am sure that his experience will be informative in many ways, including now as chair of the building safety regulator. I am sure his insight will be very valuable to the R&R committee in a variety of ways. At some point I would love to have a conversation with him about his experience, including not having retained firefighters in London and what more we could do to try to get every firefighter across this country to potentially become a first responder; again, making sure that the blue-light services work together.

Turning to the Bill, I think there are a number of issues in it. By and large, I support the principle, but in terms of prioritisation, my sense is that it does not really prioritise, certainly not by making sure that UK students get priority ahead of other people in the different priority groups. Discussion has been had about Switzerland, Liechtenstein and Iceland; I assume there is some historic international treaty. It is clear in the way that the Government have brought this legislation forward that there is no such agreement or treaty when it comes to Malta, but I am more sympathetic to the Government on this issue than perhaps some other people on these Benches are.

This may seem unimportant, but this was rushed through in a day in the Commons by the right honourable Wes Streeting. Normally this sort of legislation is genuinely for emergencies, very specific situations, so it beggars belief that the Government seem to be using this as leverage with the BMA on strikes. Indeed, the Secretary of State mentioned this. When he was asked whether this was so urgent—and it will please students who are members of the BMA—he stated:

“It is important that the Bill is workable. A number of factors may well interrupt our ability … One of those factors is the ongoing risk of industrial action”.—[Official Report, Commons, 27/1/26; col. 805.]


I am not sure that that is a valid reason for the Bill not to be commenced immediately, and it would certainly reduce the uncertainty for some of the other situations, including the 2026 application.

I just wanted to check my understanding on something. I am not suggesting that the department is cooking the books in any way, but the impact statement provides analysis that does not help us to get into the core detail. I would be grateful if the Minister would consider releasing more raw data. I ask that because we lump all our international medical graduates into one category in this analysis, and the Bill is asking us to have more categories of IMGs.

The noble Lord, Lord Patel, was accurate in his understanding. I think there has been quite a lot of debate in the Commons, given that the UK Government have paid a lot of money—I think we heard it was about £4 billion a year on the clinical elements. I assume that is a combination of the NHS tuition fee bursary and other elements provided to medical schools. International students do not get that bursary. At the moment, it seems that by paying the £40,000 to £50,000 a year for being trained in a UK degree at a UK medical school, international students could well get priority. Within UK medical graduates, or indeed persons in the priority group which we just referred to, there is no actual prioritisation for UK students—by that, I mean UK nationals.

I think it is fair about the relationship with the Republic of Ireland; that is a historic relationship, and I do not object to that. But in the specialty training programmes, Clause 2(2)(e) covers, basically, people from the European Union and I am trying to understand why that is necessary. We just keep coming back to the fact that none of this is really prioritising UK students in UK medical schools. I would be grateful if the Minister could set out how the Government intend to prioritise all the different categories. Is it the intention that the prioritisation will start with (a), then (b), then (c) and then (d)? It would be useful to understand that.

At the moment, the Bill would allow people under paragraph (d)—to be set out in regulations—to get priority ahead of UK medical graduates. It is unclear, therefore, how this might work.

I appreciate that what happened with visas has been cited as part of the problem. There is another way, however, in that the Government could adjust the skilled worker visa to address some of these issues. Have they considered that? I would be grateful if the Minister would write to me and the House. Generally speaking, though, I intend to support this Bill.

Baroness Hollins (CB)

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I add my congratulations to the noble Lord, Lord Roe, on an excellent maiden speech.

I welcome the Minister’s explanation of the Bill’s priorities, which I broadly support, but I have some concerns about the possible unintended impact on the UK’s medical training reputation, especially given recent investments in international recruitment. While some predict that artificial intelligence may reduce demand for doctors, I believe that medicine remains fundamentally human, and current shortages make such predictions rather unconvincing. The NHS continues to face consultant-level vacancies and low morale among doctors. I agree with the noble Earl, Lord Howe, about the need for a significant increase in training placements.

Competition for medical jobs is long-standing. Certainly when I qualified—a long time ago now—there was no guarantee of specialty training at all. There was an assumption that the majority of graduates would proceed into general practice. But a shortage of specialty training placements now prevents both domestic and international graduates from progressing. This situation is made worse by poor workforce planning over many years, despite well-forecast numbers of medical students. It is this systemic issue that needs urgent attention. There are some key questions, such as whether this Bill is the best solution, whose investment in training is at risk, and how affected students and doctors will be notified and understand the impact for themselves. Many correspondents have shared their anxiety about the Bill’s career impact for them.

I will not repeat the arguments made by the noble Lord, Lord Clement-Jones, regarding the Queen Mary’s students in Malta. Similar arguments apply to students at City St George’s Cyprus campus, who follow the UK curriculum, meet GMC standards and are awarded UK-recognised qualifications yet will be deprioritised simply for studying overseas. They have taken identical exams and have committed significant time and money based on assurances that they could compete for UK foundation programme posts. Changing eligibility rules just as they graduate is unfair; it undermines confidence in our system and risks leaving qualified graduates without posts, damaging both the NHS and, of course, the reputation of City St George’s.

As an emeritus professor at City St George’s, University of London, I asked the dean for more information about the contracts that City St George’s has with students in Cyprus. Paragraph 3.4 of its contract says:

“On successful completion of the Programme, SGUL shall grant to the Student an award certificate to which he or she is entitled under the provisions of SGUL Policies and Regulations and will provide the Student’s name to the GMC in accordance with GMC requirements to enable students to be registered with the GMC as having a Primary Medical Qualification”.


This means that graduates were able to apply for the foundation programme and be considered equally alongside students who had studied in the UK. The issue of any visas required by graduates, of course, is outside the contract, as work permits for the UK sit under UK Immigration Rules. The question is whether there will be any legal risks. If a legal challenge was successful, presumably it would be financial, and presumably it would be the Government who would be accountable. I am not sure that the university could be held accountable for a breach of contract if the breach is the result of a change in law.

I also urge that consideration be given to whether those studying in overseas campuses might be included in the priority group, or at least to phasing in the changes prospectively for the sake of those already in training. Excluding such students devalues these important collaborations. I would be interested in the Minister’s response on whether there could be some valid legal challenges.

Fair workforce planning seems to be essential. Without adjustments, the Bill threatens morale and may drive talented doctors away. I have been thinking about proposing an amendment to ensure that graduates with UK medical degrees are prioritised for foundation programme entry, regardless of study location, which would seem to be fairer. One final point is that, for these overseas campuses, the numbers are actually quite small.

Lord Duvall (Lab) (Maiden Speech)

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My Lords, like my noble friend Lord Roe, it is an honour and a privilege to make my maiden speech today. Just over three weeks have passed since my introduction to this House. I have a sense of awe and pride at the history of this House but also the knowledge of how I have encountered Members from all sides of the House.

I would like to extend my thanks to the doorkeepers, the housekeepers and the catering staff, along with Garter, Black Rod and the Clerk of the Parliaments. I would like also to thank my introducers, my noble friend Lord Harris and my noble and learned friend Lord Falconer, who are former colleagues and valued friends with whom I have worked over many years. My thanks go to the Leader of the House, of course, and to the Chief Whip for the support and wise advice that they have given me.

I am also thankful for the way that I have been welcomed and received by noble Lords, again from all sides of the House. I have worked with many noble Lords in my time in local and regional politics, and it is a pleasure to be working with so many of you again for the benefit not just of London but of the country.

I want to take a moment to thank my partner, Jackie Smith. I am not referring to Jacqui Smith, my noble friend Lady Smith—I do not want to set any hares running. My Jackie Smith hails from Bermondsey, south London; perhaps I should not have mentioned, but a number of us have south London connections. I owe a lot to my Jackie. She has her own political career and her own achievements. She has been a councillor in her own right, and she has achieved many great things locally for the council and for the people that she serves. She supported me unfailingly over many years, and when I underwent a double bypass, she and the NHS carried me through it. There were difficulties, and, quite honestly, I would not be here today without her. In every sense, I am a better man because of her.

My journey—and it is a journey that I have been on before coming to this House—would not have been possible without the opportunities created for me by others: in education; in employment; and in the Labour Party and my trade union NUPE, now Unison. It also rests on the enduring influence of my mum and dad, who are not here to share this moment today.

I was made in Woolwich. The place has always been my home. Woolwich is full of history at every level, from its deep military traditions to its social legacy of the Royal Arsenal Co-operative Society and the polytechnics that opened the way for part-time learning and women returners into education. I am proud of my Anglo-Indian roots, proud of my mixed heritage and proud to be part of our nation of countries and nations. I am in Woolwich partly because of the Royal Artillery; I share that with my noble friend Lord Roe. My dad and both my grandfathers were gunners, and their service greatly impacted on my life. I am, by choice, the Mayor of London’s Armed Forces champion, and I will continue to advocate for our service men and women, veterans and their families in this Chamber if I can.

What most people do not know about my life is that I had ill health as a child. I spent 10 years in a special school. I left school at 16 and went straight into the world of work. My first role was working in a youth centre with young people. I was young myself; it takes me a while to think about that. I then became a trainee, what we would call an apprenticeship trainee, in local government, which gave me a solid grounding in public services.

I was also active in the trade union movement, representing and advocating for colleagues. I served as a shop steward and later I became a branch secretary. More importantly, I took advantage of the training opportunities that the trade union movement, and my employer, offered me. I remain grateful for that to this day.

I am also proud that I have had some opportunities to do international work. I have been involved, through the Commonwealth Local Government Forum and with colleagues in the Council of Europe, in promoting best practice within local government in regional chambers.

Closer to home, I am proud that I led Greenwich council and that I have spent the past 25 years at the London Assembly, taking on both scrutiny and many executive responsibilities. It is a real privilege to be in public life and serve people, and it is a privilege I never take lightly. I have spent my political life responding to and promoting change. You have to pre-empt, prepare and shape change, not be carried by it. It is interesting in the context of the debate that we are having tonight. Our country faces that change now, and the work which this Government are undertaking, the policies we scrutinise in this House and the way we do it define how the country embraces that change.

The Bill before us is about changing how medical training posts are allocated in the UK, ensuring that those trained here are first in line for NHS training programmes. It says something about the economic challenges our young people face today that those graduating from medical schools after five years of university study are often struggling and waiting to secure their first roles in medical training posts.

The Bill will help us develop the next generation of healthcare professionals. Internationally trained doctors will continue to make a huge contribution to our NHS. Nobody will be excluded from applying. There are some issues around the detail, which the Minister will want to respond to, but it will help us ensure that young people who have spent their early lives working incredibly hard in our schools and universities can fulfil their dreams. It will give them certainty as to where their hospital posting will be, and it will help maintain an NHS workforce that can continue to provide world-leading, life-saving care. I see this as giving an opportunity, in the same way that others have created opportunities for me throughout my life. Thank you.

Baroness Thornton (Lab)

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My Lords, it is wonderful to follow the great maiden speech of my noble friend Lord Duvall—Len, to the rest of us—and I am proud to welcome another Labour and Co-op member to your Lordships’ House.

Len and I were trying to remember how long we had known each other. It is certainly since the mid-1980s, when I was the political secretary of that venerable institution, the Royal Arsenal Co-operative Society, based in Woolwich, and young Len, as he said, was born and grew up in Woolwich with close connections to the Royal Arsenal; his father and grandfather served as gunners in the Royal Artillery, and he was a local member.

It was clear to me that this young activist was clearly going places, and indeed he did. He was elected to Greenwich council in 1990 and became its leader in 1992, standing down when he became a London Assembly member. Remarkably, my noble friend—although he did not say this—has held his seat of Greenwich and Lewisham for the last seven GLA elections and is the only member of the GLA to serve since it was founded in 2000. During that time, he has held many positions, including chair of the Metropolitan Police Authority.

But the measure of a person is not just the positions they hold; it is what they do and achieve. I think we can safely say that my noble friend has served his Greenwich community and London magnificently over the years, with the regeneration of the Thames Gateway, the Greenwich waterfront, campaigning and getting investment in local communities, and much more. I understand that my noble friend has been and will continue to be chair of the Labour group in the GLA and, close to my heart, he also has an unmatched record of support for equality and human rights.

Finally, I think it is likely that my noble friend and I are the only Members of your Lordships’ House who have both been chairs of the Greater London Labour Party. I became chair in 1986 and served for several years, and my noble friend became chair in 2002. I think it is safe to say that we both bear the honour and the scars of that position. I welcome my noble friend to our Benches and I know we have much to look forward to in his contributions.

I thank the Minister for her introduction to the Bill, and the noble Lord, Lord Roe, for his wonderful maiden speech. In the debate, I had a sense of déjà vu because, as I look around the Chamber, I see that many of us have been here before. I was in a different position at that time, but it gave me a great deal of pleasure to look round and listen, even to the noble Earl, Lord Howe, opposite whom I have been for about 20 years in various forms, discussing health.

It does not seem so long ago that, during the course of what became the Health and Care Act 2022 which established ICBs, many of us across the House were begging the then Secretary of State to include a commitment in the Act to have a workforce strategy, to no avail. However, as the noble Earl said, the work- force strategy then appeared in 2023.

It seems to me that a key moment in 2026 will be the publication of the new long-term workforce plan for the NHS. The plan, due this spring, will be the first for our Labour Government and is expected to set out how the workforce will be developed to underpin the 10-year health plan. It has of course been built on earlier workforce strategy work and will set out how staffing needs can be matched to the future model of care.

As the Minister said in her opening remarks, delivering that plan depends on our staffing. Therefore, improving NHS staff recruitment and retention will be central to delivering this plan. This small and important Bill should be seen in that wider context. It addresses an immediate problem and offers an immediate solution with its main functions, which have been outlined to us: for medical foundation training, the prioritisation of graduates of UK medical schools; for medical specialty training posts starting in 2026, prioritisation at offer stage of graduates of UK and Republic of Ireland medical schools; and for medical specialty training posts starting in 2027 onwards, prioritisation at interview and offer stage of graduates of UK medical schools.

I am aware that many of us have received letters about this from students who feel sometimes aggrieved and, certainly, concerned—particularly students from Malta, and I know the noble Baroness, Lady Gerada, will be addressing this, as others have. There are three things that have been identified, as outlined by the noble Lord, Lord Patel, and other noble Lords.

We will need to address, and solve, in the Bill whether or not we are ensuring fairness as the Bill progresses. I have two nephews who have qualified in recent years—one in Liverpool, one in London—and I recall from both of them the uncertainty they faced about where they might end up. It seems to me that, if we are increasing the number of places available, we must ensure that it is done in a way that addresses regional issues and regional needs. I ask the Minister to confirm that that is one of the things that will be taken account of as this progresses.

This Bill is welcome, and I welcome the rapidity with which we have responded to this issue. We can be sure that the House will resolve the issues facing us—fairness, our overseas graduates and all the others that have been outlined—because there is good will to take the Bill through the House. I think that means that it will fare well.

Baroness Gerada (CB)

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My Lords, I also congratulate the noble Lords, Lord Roe and Lord Duvall, on entering this House. As a newbie myself—I have been here only about six weeks—I know that it is an enormous privilege, as well as incredibly hard work.

The principle at the heart of this Bill is the right one: UK-trained medical graduates should be properly prioritised for the foundation programme and subsequent specialist training. No one can dispute that it is wrong that UK graduates, educated at a cost of billions to the taxpayer, are forced to compete with overseas students, pushing many doctors abroad and depleting the talent pool that should be powering the NHS. I am grateful to the Minister for engaging with me over the last few days both personally and in meetings.

However, I have some serious concerns. The first, as has been alluded to, relates to Malta. As the only Member of this House to have Maltese heritage— I thank the noble Lord, Lord Stevens, for reminding me that I have two George Crosses, one from having Maltese nationality and the other from working in the NHS—this is especially important to me. Like many noble Lords, I have received letters and concerns, but I have also received representation from all quarters in the UK and in Malta about the impact of the Bill on Malta, including from its Minister for Health and Active Ageing. He wrote a letter to our government health team where he said:

“Whilst acknowledging the supreme interest of ‘home-grown’ graduates, this development raises serious concerns for this Ministry and the people of Malta. Aside from risking to undermine two centuries of proud tradition and the dissolution of a strong bilateral relationship in healthcare, this strategy puts the training and specialisation of Maltese graduates in jeopardy”.


This matters because Malta has a long, deep and historic relationship with the United Kingdom, and not just in medicine, although I will stick to that. For nearly 200 years, since the first Maltese doctor received their licence to practise from the Royal College of Surgeons, British and Maltese medicine have grown side by side: the same language, the same exams and, for many years, the same training programme. This is why it has been possible for doctors such as my father, who came to this country in 1963, to dedicate their professional lives to the service of the NHS. This is a small group of doctors but they have had an enormous impact—tonight I should have been at a conference celebrating the power and impact that Maltese doctors have had—from revolutionary surgery treatment for Parkinson’s to revolutionary, innovative treatments for cancer.

Nowadays, each year around 50 doctors complete their specialty training in the NHS, under a special arrangement in which the Maltese Government cover 70% of their salary, with a contractual agreement that these doctors return to Malta. It is a so-called finishing school; they come here to do parts of the training that they cannot get in Malta, such as for sickle cell in haematology. It is a win-win. The NHS gets talented, skilled doctors, often working in hard-to-fill non-training grade posts, at very little cost to it.

This Maltese-UK relationship has been strengthened in recent years, as we have heard, with the establishment in Malta of a UK-based medical school, Queen Mary University of London. This is a multi-million pound initiative of QMUL and the Maltese Government. Since 2009, QMUL has delivered an integrated training programme, awarding an MBBS degree that is academically and regulatorily identical to the UK London programme. These are not rich kids buying a medical degree; they are hard-working students, among the top performers across the MBBS exam. The diversity of the campus in Malta mirrors that of the UK: 80% are from Black and minority-ethnic groups, 20% are disabled and 65% are women. Their training is aligned to NHS principles and practice. Nearly 80% of them do part of their training in a UK NHS hospital. Of course they understand the NHS—nearly 70% of these students are British nationals or have indefinite leave to remain in the UK. Deprioritising these doctors risks abandoning a small, committed cohort without a fallback, simply because they choose to fund their own training. This seems unfair.

I will briefly move to another area where I have serious concerns. This legislation will disadvantage many international graduates already in training who have spent thousands of pounds in good faith and were encouraged to come to this country to train. I have received representation from the British Association of Physicians of Indian Origin, which is seriously concerned about this. These international medical graduates have been disadvantaged since the start of the NHS; they have been subject to racism, bullying, disproportionate complaints and punishment, and failure to progress in their career. They now risk losing employment, their visa status and everything they have worked for. This seems unfair, especially given the assurance by the UK Foundation Programme that the same preference informed allocation method used in 2024 and 2025 would be used for 2026. Should there not be transitional arrangements for these doctors, who have relied on public assurances?

As is often said, if one intervenes in a complex system, there is no guarantee that outcomes will be achieved but there is a guarantee of unintended consequences. I look forward to engaging with the Minister further and hope we can redress some of these issues.

Lord Mohammed of Tinsley (LD)

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My Lords, I thank noble Lords across the Chamber for their contributions, and in particular the noble Lords, Lord Roe and Lord Duvall, for their fantastic maiden speeches. I look forward to working alongside both noble Lords in taking forward this and other Bills. I was particularly interested to hear about the journey that the noble Lord, Lord Duvall, took here; I also worked with young people in a youth centre, and I have military history on both my mum’s side and my dad’s side of the family, spanning the First World War and the Second World War—although I confess that my mum’s uncle was not really sure where he was when he came to Europe to fight in the First World War.

I start by acknowledging, as my noble friend Lord Clement-Jones did, that I support the broad objectives of this legislation. As we have heard from other noble Lords, it is entirely reasonable for the United Kingdom to seek to ensure that our investment in medical education strengthens the NHS workforce and benefits patients here at home. Prioritising those who have trained and worked within our NHS is a legitimate aim. However, the way that principle is delivered matters greatly.

My first concern relates to the breadth of ministerial discretion in the Bill. It has not been covered by others, but it is really important. As drafted, the Bill will allow future changes on prioritisation to be made with limited parliamentary oversight. Decisions about who is prioritised for medical training places are not just technical adjustments; they shape careers, determine workforce supply and directly affect patients. Such decisions should therefore be subject to proper scrutiny and democratic accountability. This House has a principal responsibility to ensure that powers of this significance are exercised transparently and proportionately.

Many noble Lords have raised concerns about the timing of the Bill. As it makes its way through the legislative process, final-year students have seen their foundation training allocations paused. Thousands of graduates now face waiting until the last minute to discover where they will be working later this summer, potentially having to move across the country, as we have heard, with little notice. That uncertainty is deeply unsettling for graduates at the very start of their careers.

As we have heard from many noble Lords, including the noble Earl, Lord Howe, and the noble Lord, Lord Patel, the intention to introduce new prioritisation rules part way through the 2026 specialty training cycle also risks causing real harm. More broadly, we must be clear-eyed about the workforce challenges and what this Bill can and cannot deliver. On its own, it will not resolve the problem, which is the critical shortage of training places, as we heard earlier. The noble Lord, Lord Stevens of Birmingham, talked about it as the bottleneck. Without a significant expansion in this, there is a real risk of this being only a partial fix. Indeed, in many respects, this feels like closing the stable door after the horse has bolted.

In recent years, the number of domestic undergraduate medical school places has expanded, while at the same time the GMC has registered a large number of overseas graduates. Staff-grade jobs that were difficult to fill even five years ago are now inundated with applications, and the appetite among NHS employers to actively recruit candidates overseas has already disappeared. All of this sits against the background of a highly restrictive government cap on the number of medical and dental students that UK universities are permitted to train—caps to which international partners are not subject. Because of these constraints, medical schools have developed partnerships with overseas institutions and Governments to help cover the increasing cost of teaching UK students. Therefore, I ask the Government to reflect carefully on any unintended reputational damage the Bill may cause to UK’s medical education sector and to those international relationships, as we heard from the noble Baroness, Lady Hollins, and others.

Malta has been mentioned, but I will not mention it further. My noble friend Lord Clement-Jones and the noble Baroness, Lady Gerada, both made that point forcefully.

I want to mention the emails that we have had from Newcastle, but there are also other universities out there that have partnership arrangements with Malaysia in particular, and I just want to talk about Nottingham and Southampton. I know that, in the past, the university that I attended, the University of Sheffield, also had that working relationship where the first two years of the medical degree were done in Malaysia and then the students came across here.

I am also concerned about the wider workforce consequences and shortages not confined to one area of medicine. Radiology has been mentioned, but mental health services and other specialties are already under intense strain, with evidence that professional bodies are linking workforce gaps directly to potential patient safety concerns, particularly in the cancer care area. Any reforms of training prioritisation must therefore be accompanied by a clear and ongoing assessment of their impact across specialties.

At the same time, the Government are hastily implementing the Leng review without adequate consultation, which risks placing additional long-term pressures on resident doctors during their postgraduate training through an unanticipated reduction in the number of medical associate professionals supporting doctors in their clinical workloads.

Finally, I wish to raise a fundamental question about the Government’s chosen mechanism for prioritisation. The Bill places significant weight on immigration status, as we have heard from other noble Lords, particularly indefinite leave to remain. I struggle to understand why this is the most appropriate or effective measure. The NHS, as we have heard, already has a robust system in place through the Oriel recruitment platform, which records where doctors have trained, how long they have worked in the NHS and their progression through the system. That data speaks directly to commitment, experience and contribution to our health service.

Prioritising doctors on the basis of time worked in the NHS, clinical excellence and demonstrable service to patients would seem far more closely aligned to the Bill’s stated purpose than relying on immigration status, which, as we heard, with the recent changes potentially coming through as well, is shaped by factors beyond an individual’s control. Therefore, I urge the Government to explain why they have chosen this route and whether they have fully considered the unintended consequences for recruitment, retention and morale within the medical workforce.

The Bill seeks to address real challenges and its objectives are worthy. I just want to pick up on the point that the noble Baroness, Lady Coffey, raised about the grouping of applicants from around the world in just one group. It is only right and proper that, if we are scrutinising the Bill, we see data that I am sure the NHS holds about the origin of some of those students. To succeed, the Bill has to be fair and transparent and firmly rooted in the realities of the NHS workforce. Above all, it must sit alongside a serious commitment to expand training and capacity. I hope that the Government will reflect carefully on the issues that we have raised in your Lordships’ Chamber tonight as the Bill progresses through the House.

The Earl of Effingham (Con)

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My Lords, I thank all noble Lords who have made such valuable contributions to this debate. I greatly enjoyed hearing the maiden speech of the noble Lord, Lord Roe of West Wickham. He mentioned ham, egg and chips, and I can assure him that he will enjoy himself very much in your Lordships’ House, but it is the staff in this House who are amazing. I know they are going to look after him as well. They do an incredible job, and they are part of the package; they will do everything they can to make his experience an enjoyable one. He mentioned that he had served over half his life in the fire brigade, which is an incredible achievement, as well as his Army service. I think when he referenced boxing, it was incredibly appropriate, because fitness, discipline and mutual respect will greatly assist him in making a real difference in your Lordships’ House, and we are really looking forward to hearing his future contributions.

I must say the same for the noble Lord, Lord Duvall. It was most interesting to hear his background. The noble Lord is obviously an expert in local and regional politics. He was made in Woolwich. He then went on to lead Greenwich council, and I think the noble Baroness, Lady Thornton, was entirely correct when she said, back in the 1980s, that Len was going places. I think it is a huge testament to the NHS that the noble Lord, Lord Duvall, has had a double bypass and he is standing before us, fighting fit. He is going to enjoy constructively challenging His Majesty’s Government —and, I am sure, His Majesty’s loyal Opposition—and we are very much looking forward to hearing his contributions as well.

As many noble Lords have put it so well, there is a great deal to think about in this Bill, and there are a number of areas where His Majesty’s loyal Opposition and other noble Lords will wish to press the Government further. The Bill is intended to address a situation that is universally recognised as both serious and unsustainable, and precisely because there is such broad agreement on the problem, it is all the more important that your Lordships’ House scrutinises the Bill with a laser focus to ensure that the final proposals will be hallmarked as best market practice.

The interventions thus far have already highlighted the value of that scrutiny, with noble Lords identifying a number of areas that would benefit from further consideration. The noble Baroness, Lady Finlay—who is, of course, widely respected in this area of legislation—the noble Baroness, Lady Gerada, and the noble Lord, Lord Mohammed of Tinsley, all spoke about unintended consequences. In attempting to solve the problem, there may always be unintended consequences. Our desire is to stress-test the potential outcomes to resolve that the end result is indeed beneficial for those who need the help and does not formulate a situation where more harm is done than good.

The noble Baroness, Lady Coffey, referenced the fact that this is a pressing issue and time sensitive, but that is no excuse for poorly drafted legislation, which may have serious ramifications for both questions of fairness and trusted relationships with our international allies.

His Majesty’s loyal Opposition support the core principle and intended purpose of the Bill but are clear that there are areas that would benefit from constructive challenge and a moulded consensus as we progress. We have had the opportunity today to discuss some of the practical effects that the Bill will create. Certain groups will, for a variety of reasons, fall outside the mainstream. The noble Lord, Lord Clement-Jones, said that the situation Malta was a “manifest absurdity”. The noble Baroness, Lady Finlay, rightly recognised that routes for overseas doctors to train here have multiple ancillary benefits. The noble Lord, Lord Patel, likened this situation to being “thrown to the wolves”. So those studying on accredited programmes as part of agreements with third countries, and British citizens who have done the majority of their training abroad for legitimate reasons such as military service, are two examples where we need further scrutiny.

In light of the potential unintended consequences of the Bill, where Parliament has had a limited opportunity for detailed analysis both in your Lordships’ House and particularly in the other place, it is vital that it contains robust mechanisms for review and accountability. Clear duties to review and report on the operational and “lived experiences” impact of this legislation will provide a pivotal safeguard, ensuring that Parliament retains a meaningful and proactive role in holding the Government to account as this framework is implemented. This would seem an entirely proportionate and sensible approach, allowing the Bill to work effectively while minimising potential unforced errors. We are confident that noble Lords will be keen to embed such provisions in the Bill.

Workplace confidence and consistency were mentioned. The noble Lord, Lord Clement-Jones, said that the execution is “flawed”, and the noble Baroness, Lady Hollins, said that there is a great risk of undermining confidence. So we must address the question of confidence among individuals for whom this legislation contains far-reaching consequences and whom it directly affects. Doctors make long-term, often irreversible, decisions about their training, specialisation and careers. Those decisions are shaped not only by pay or conditions but by their confidence that the system is fair, predictable and stable. They need to know what the rules of engagement are and that their career paths will be, within reason, clear, coherent and consistently applied.

No one likes uncertainty and, whether for government, business or relationships, everyone needs stability. Doctors are no different. Knowing that the goalposts will not shift unexpectedly part way through training is a must-have. Where legislation is rushed or where its effects are uncertain, that very confidence can be undermined. Even reforms that are well intentioned can have negative knock-on consequences if doctors feel that eligibility criteria are opaque, that established pathways may suddenly be reclassified or that decisions affecting their future are taken without sufficient forethought or scrutiny.

That matters because confidence and morale are central to retention in every aspect of life. If talented doctors harbour doubts that the system they are held to may not treat them fairly, or doubts about whether their own significant investment in training, as mentioned by many noble Lords, will be recognised, they may choose to take their skill set elsewhere—not because they lack commitment to our National Health Service but because they lack confidence in the framework governing their progression. A lack of confidence in any system will lead to pitfalls.

This is precisely why the detail of the Bill matters so much. Getting it right is not simply a technical or procedural exercise; it goes right to the heart of whether doctors feel valued, supported and willing to commit their careers to the National Health Service. An open and transparent workflow of prioritisation will only strengthen confidence. A rushed or overly rigid one risks doing the opposite.

Many former Members of the other place would suggest that helping health and social care in some small way is critical because it provides a unique opportunity to do the right thing through debate and constructive challenge, which should result and positive outcomes for everyone living in the United Kingdom. Our National Health Service, while not perfect—indeed, nothing is—remains based on the founding principle of providing universal care that is free at the point of use, and our doctors are at the heart of that premise.

This Bill aims to make provision about the prioritisation of graduates from medical schools in the United Kingdom, and His Majesty’s loyal Opposition look forward to working constructively with the Government and all noble Lords in facilitating that desired outcome.

Baroness Merron (Lab)

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My Lords, I am most grateful to all noble Lords who contributed to this debate for the support given, including just now by the noble Earl, Lord Effingham, to working with us, because I think there is general recognition that we have a problem that needs to be dealt with. I am very glad, as I said at the outset, to have been the Minister at the Dispatch Box when my noble friends Lord Duvall and Lord Roe made their moving maiden speeches. They both have many years of distinction in public service, and I know that that will continue as they bring their own unique experiences and views on the world to your Lordships’ House, which will be much enriched by their presence.

A strong and consistent theme has come through today’s debate: a shared concern for the well-being of NHS staff, recognition of the importance of workforce planning and the need for a sustainable health service. I am grateful for the thoughtful questions, and I will endeavour to answer as many as possible—I have already referred to some in my opening remarks. I will of course review the debate, as always, and I will be pleased to write to noble Lords on those matters I was not able to get to.

This legislation is about giving future generations of doctors trained in the UK a clearer and more secure pathway into NHS careers. It is about sustainable workforce planning and, as the noble Earl, Lord Howe, referred to, about fairness—to those who train here, to taxpayers who fund that training and to patients. As many noble Lords acknowledged, significant public investment goes into medical education every year, so it is right that we ask ourselves how that investment can be best aligned to what we need.

I have listened closely to the concerns raised today, particularly about the Bill’s impact on those who will not be prioritised. To reiterate, the way I look at this is that the Bill is about prioritisation, not exclusion. I assure your Lordships’ House that all eligible applicants will still be able to apply, and they will be offered places if vacancies remain after prioritised applicants have received theirs. We absolutely expect that to be the case; that is our experience. To be more specific, there are likely to be opportunities in specialties such as general practice, core psychiatry and internal medicine, which historically attract fewer applicants than the groups we are prioritising for 2026. We still need those people.

The noble Baroness, Lady Hollins, asked about possible unintended consequences for the UK’s international reputation. I believe our proud history of welcoming colleagues from across the world will continue and, as I have just said, international colleagues can, of course, continue to apply after prioritisation has taken place and there are vacancies.

On new specialty training posts, we have committed to creating 1,000 of these new posts over the next three years, focusing on specialties where there is greatest need. This is on top of creating 250 additional GP training places each year. The noble Earl, Lord Howe, raised questions about the availability of training places. Expansion will be matched with training capacity. We have not yet confirmed which specialties will receive the new posts, but we will ensure that expansion is targeted where patient demand and workforce pressures are the most acute.

I am glad that the noble Lord, Lord Stevens, made reference to the cancer plan. It was a bright spot in today’s news—I am sure all noble Lords will understand —and has not had the airtime it ought to have had, so I am most grateful to him. What I can tell the noble Lord about the creation of new specialty training posts is that there will be a focus on those with greatest need. We will set out steps in due course and I look forward to keeping the noble Lord informed. Non-prioritised graduates will also continue to have routes into NHS careers through locally employed doctor roles, gaining experience that can support future progression and prioritisation.

Let me turn to some of the specific points that were raised by noble Lords. The noble Lord, Lord Patel, asked about British citizens who have graduated from medical schools outside the UK and will not be in the priority group. I understand why these concerns are being raised but, going back to the core of the Bill, to prioritise them would undermine our aim to build UK-trained capacity while ensuring we do not provide any more foundation programme places than we need. To reiterate, UK-trained doctors are more likely to work in the NHS for longer, and retention is an issue that is much discussed in your Lordships’ House. They will be better equipped to deliver tailored healthcare that suits the UK’s population because of what they understand. Reference was made to the provision extending also to the Republic of Ireland graduates. Their inclusion ensures consistency in workforce planning across both jurisdictions, which reflects the long-standing protocol rights for movement and employment. That was something in which the noble Lord, Lord Clement-Jones, was particularly interested.

On specialty training places starting in 2026, British citizens will be prioritised, because that is one of the prioritised immigration statuses being used as a proxy to indicate someone who is likely to have significant experience of the NHS. Why? Because applications for posts starting in 2026 have already been made. Prioritisation is only at offer stage because shortlisting is under way, so it is a timing matter about implementation. From 2027, immigration status will no longer automatically determine priority, but we have the ability to set out in regulations the persons who will be prioritised based on criteria which indicate they are likely to have significant NHS experience, or based on their immigration status. As I said earlier, we will be engaging with our partners to work out how best to define that.

On the point made by a number of noble Lords, including the noble Earl, Lord Howe, and the noble Lords, Lord Clement-Jones and Lord Stevens, about graduates of overseas campuses, including Malta, which I will turn to presently, having heard the noble Baroness, Lady Gerada, the UK foundation programme applications for 2026 show that there are almost 300 applicants from these overseas campuses, of whom 152 are UK nationals. This is a substantial number and, if we were to do what is being asked—to prioritise graduates of UK overseas campuses—our estimation is that this could encourage universities to establish further international partnerships which would simply increase pressure still further. It also risks creating a loophole that would encourage new overseas partnerships to seek preferential access to the foundation programme across the UK. The noble Lord, Lord Clement-Jones, picked out Liechtenstein in particular, but, as the noble Baroness, Lady Coffey, referred to, we are talking about the EFTA countries, which include Liechtenstein, and they are prioritised simply because of existing international agreements that we are obliged to honour. However, in practice, not all these countries are going to have eligible applicants.

Lord Clement-Jones (LD)

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I hope the Minister does not mind. Does the Minister think that the agreement with Malta should be honoured as well?

Baroness Merron (Lab)

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I am coming on to this, but the agreement in respect of Malta that I would refer to is a reciprocal health agreement. It does not apply in this area. It is about the reciprocal provision of healthcare. I will turn to Malta, however, after saying a brief word about overseas campuses generally.

Just to re-emphasise, overseas campus students are not part of the numbers that the Government are setting. We do not have that control. If we prioritised those graduates as well, that would eat away at the very core of the Bill and the things people actually want us to do.

The noble Baroness, Lady Finlay, and the noble Lord, Lord Clement-Jones, wanted an indication of how this would all align with the international education strategy. The Bill does not conflict with this, because the international education strategy supports universities expanding internationally. It does not prevent UK universities delivering medical degrees overseas. That strategy stays in place.

I turn to Malta for the noble Baroness, Lady Gerada—

Baroness Hollins (CB)

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Can I just a question? The Minister has suggested that these students could come and work in non-training posts. But the problem, as I understand it—do correct me if I am wrong—is that, for example, St George’s students must complete their foundation year in the UK to be eligible to apply for full registration. Therefore, it means that they cannot complete their medical education without being eligible to apply for the foundation training. While a different contract could potentially be negotiated for future students at an overseas campus, the current students who have this contract and expectation in place need to have that honoured. I do not feel that the Minister has responded to the concerns that have been raised eloquently around the House.

Baroness Merron (Lab)

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As I said at the outset, I will endeavour to answer all questions, but where I do not have an answer, particularly where I want to look at them in closer detail, I will be very pleased to write, of course, as always.

Still turning to Malta—which is a pleasure—let me say straight away that we do have a long-standing partnership with Malta on healthcare. It is valued and it will continue. Doctors who are training in Malta will still come to the UK, as they do now, to gain NHS experience to support their training, for example through fellowship schemes. This is not affected by the Bill.

As I discussed with the noble Baroness just yesterday, senior officials in my department have met with the High Commissioner of Malta to the United Kingdom in order to assure him of this. But it is important to prioritise in order to ensure a sustainable workforce that meets its health needs. Again, that is at the core of the Bill. Malta has its own foundation school. This is not part of the UK foundation programme: it is affiliated with the UK foundation programme office which administers the UK programme. That means—this point has been made to me—the Malta Foundation School delivers the same curriculum and offers the same education and training as the UK foundation programme. The Bill will not impact this affiliation or the other ways in which work carries on closely with the Government of Malta when it comes to health.

The noble Earl, Lord Howe, also made the point that he believed small numbers of students were impacted. I have referred to the 300 applicants from overseas campuses. I hope it is understood that that is why there is a significance there.

If there are other matters that I have not addressed to the satisfaction of the noble Baroness, Lady Gerada, I will be very pleased to review this, because I suspect there were some more points to address. I will be very pleased to write to her to give her comfort in this regard.

I move on now to the impact on doctors who were part way through the application process—a point spoken to by noble Lords, Lord Patel, Lord Mohammed, Lord Clement-Jones, and other noble Lords. As I stated earlier, delaying implementation of the Bill until next year, which would be required if we were to respond as requested, would mean another full year where we are not tackling the issue of bottlenecks in medical training. It seemed to me that the feeling in the House was that we did need to do that.

I understand the discomfort of noble Lords around this. It is important that I recognise that, but it is also important to recognise when introducing legislation that sometimes it will not work perfectly for everybody. This is about prioritisation, not about exclusion.

Following that point, the noble Lord, Lord Stevens, the noble Baroness, Lady Coffey, and the noble Earl, Lord Effingham, asked about emergency legislation. They asked: why now? As the Health Secretary set out in the other place, he has listened to resident doctors and their concerns about a system that does not work for them. He agreed to bring forward that emergency legislation as quickly as possible, rather than wait—this is key for a number of the points raised—another year to do so.

The noble Earl, Lord Howe, and the noble Baroness, Lady Coffey, asked about the Bill’s commencement and why it will not commence at Royal Assent—that is a very fair question. We are introducing reforms for a large-scale recruitment process. I know that noble Lords will understand what a major undertaking this is. We do not want to create errors or more uncertainty. To make sure that it is effective in commencement, we must have clear processes for delivery across the health system, and I am sure that all noble Lords appreciate that these elements cannot be switched on overnight. As the Secretary of State said in the other place, there is a material consideration about whether it is even possible to proceed if the strikes are ongoing. He is concerned—I share this concern, as I am sure all noble Lords do—about the disruption that strikes cause and the pressure they put on resources, which would make it so much harder operationally to deliver the measures in the Bill.

Lord Mohammed of Tinsley (LD)

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I will press the point I made earlier about uncertainty. Not having a commencement date creates a lot of uncertainty for the current batch of students, who are really worried about whether they will they gain a place and, more importantly, where. I want to impress this issue on the Minister; it was raised by the Russell group medical school admissions head with me personally.

Baroness Merron (Lab)

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I completely understand the point about uncertainty. Uncertainty exists in the current system, and uncertainty may transfer for different reasons. We are keen to get on with this. I am just indicating some of the circumstances—strike action—that would cause difficulty for us in terms of commencement. I hope we can proceed. I think the noble Lord will understand exactly what I am saying.

The noble Baroness, Lady Coffey, asked about the release of more granular detail. I draw noble Lords’ attention to the fact that NHS England already publishes a wide range of recruitment data, including data on country of qualification and nationality groups. It will publish further granular data when possible and monitor the implementation of the Bill, should it pass—that, for me, is the most important point. If the noble Baroness is referring to other information, she is very welcome to raise that with me.

I am of course very happy to meet with my noble friend Lord Stevenson. In general, the 10-year health plan commits to working with professional regulators and educational institutions over the next three years to overhaul education and training curricula.

To answer the question from the noble Baroness, Lady Coffey, on prioritisation, if I can put it in my language: you either are or are not prioritised. There are no tiers of priorities within priorities; it is as it is written in the Bill.

The noble Lord, Lord Mohammed, asked about the impact of prioritisation on harder-to-fill specialties. This approach will not negatively impact recruitment. In fact, it will ensure that priority groups are considered first, while keeping the door open for when we need people. I think it will help get people into the areas in which we need them, because it will direct people to where we do not have sufficient applicants.

At its heart, the Bill is about the UK-trained medical graduates on whom the NHS heavily relies. We are grateful for their skill, commitment and professionalism. It is our responsibility to ensure they are trained, supported and treated well at work. This is a more sustainable and considered approach to the allocation of medical training places. A number of noble Lords said that this is a problem that has been around for years. We are grasping the proverbial nettle. The Bill is a measured step towards the goals of clarity, fairness and opportunity. It will not, on its own, resolve everything—I am fully aware of that—but it will help us with a pressing problem. With that, I beg to move.

Lord Livermore

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That the Bill be now read a second time.

The Financial Secretary to the Treasury (Lord Livermore) (Lab)

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My Lords, it is a pleasure to open this Second Reading debate on the Bill. It legislates for reforms announced in the Budget in November. That was a Budget to build a stronger, more secure economy that had at its heart three deliberate pro-growth choices. First, by choosing to maintain economic stability, getting inflation and interest rates down, we helped to give businesses the confidence to invest and our economy the room to grow. Secondly, by choosing to reject austerity, we protected £120 billion of additional investment in growth-driving infrastructure. Thirdly, by choosing to back the fast-growing companies of the future, we supported the investment, innovation and economic dynamism that will increase growth in the next decade and beyond.

But these are choices that need to be paid for. That is why the Budget contained a series of reforms to the tax system to ensure that it keeps pace with a fast-changing economy. Those reforms include changes to pension salary sacrifice, contained in the Bill we are debating today. The Government spend over £500 billion each year on various reliefs within the tax system. That is more than double the entire annual NHS budget and nearly five times the annual budget for education. The size of this spend means the Government must always keep the effectiveness and value for money of tax reliefs under review. This Bill addresses just one of these reliefs: pension salary sacrifice, the cost of which was set to treble to £8 billion a year by the end of this decade.

That increase has been driven most by higher earners, with additional-rate taxpayers tripling their salary sacrifice contributions since 2017. This includes individuals sacrificing their bonuses without paying any income tax and national insurance contributions on them. But while those on the highest salaries are most likely to take part in salary sacrifice, others are completely excluded. For example, the majority of employers do not offer salary sacrifice, including many small businesses. Groups who are most likely to be undersaving for retirement, such as those on the national minimum wage and the UK’s 4.4 million self-employed workers, are also completely excluded from using salary sacrifice.

The status quo is neither fair nor fiscally sustainable. We cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners. In this, we agree with the approach taken by the previous Government. In their 2015 Summer Budget, the then Government said:

“Salary sacrifice arrangements … are becoming increasingly popular and the cost to the taxpayer is rising”.


Two years later, the previous Government introduced reforms to salary sacrifice. The Finance Act 2017 removed the tax advantages of salary sacrifice for the majority of benefits in kind—for example, living accommodation or private medical insurance. The noble Lord, Lord Hammond of Runnymede, told the other place:

“The majority of employees pay tax on a cash salary, but some are able to sacrifice salary … and pay much lower tax … That is unfair”.—[Official Report, Commons, 23/11/16; col. 907.]


The previous Government commissioned research in 2023, which included a proposal to cap pensions salary sacrifice at £2,000. This Government are now taking forward that reform to ensure that the tax system is kept on a sustainable footing.

Although some tax experts have called for pension salary sacrifice to be abolished entirely, the Government are taking a more measured and pragmatic approach. The Bill contains two main elements. First, it introduces a cap of £2,000 under which no employer and employee national insurance contributions will be charged on any pension contributions. The cap protects ordinary workers using salary sacrifice and limits the impact on employers while ensuring that the system remains fiscally sustainable. The majority of those currently using salary sacrifice will be unaffected. Indeed, 95% of those earning £30,000 or less who currently make pension contributions through salary sacrifice will be entirely unaffected. It is forecast that 87% of salary sacrifice contributions above the cap will be made by higher rate and additional rate taxpayers. Individuals can also continue to save as much as they wish into their pensions, either through salary sacrifice or outside of it, both of which will be fully relievable of income tax.

Secondly, we are introducing this change with a long implementation period so that it will come into effect in 2029-30. This gives employers and employees over three years to prepare and to adjust. I am pleased that business and industry bodies have already welcomed this lengthy implementation period. HMRC is also engaging with industry stakeholders to ensure this change operates in the most effective way. That will continue as we approach implementation.

Saving into a pension, including via salary sacrifice, will remain hugely tax advantageous under these changes. The Government currently provide over £70 billion of income tax and national insurance contributions relief on pension contributions each year. That spend will be entirely unaffected by these changes. Employees’ pension contributions, including those made via salary sacrifice, will continue to be fully relievable from income tax at the employee’s marginal rate. For example, if a basic rate taxpayer were to put £100 into their pension, it would cost them just £80 of their take-home pay, with the Government providing the remaining £20 in tax relief. For a higher rate taxpayer, that same £100 pension contribution can cost them as little as £60 because they also receive relief at their marginal rate of tax.

For employers, all pension contributions they make for their employees outside of salary sacrifice will remain exempt from both income tax and national insurance contributions. This makes pensions one of the most tax-efficient ways to invest in their workforce. For example, if an employer contributes £1,000 to an employee’s pension, this is worth £150 in forgone employer national insurance contributions.

Since the Budget in November, it has been suggested by some that these changes will negatively impact the overall level of pension saving. We do not believe this to be the case. Salary sacrifice existed in the 2000s and early 2010s, yet there were significant falls in private sector pension saving during this period. In 2012, only one in three private sector workers saved into a pension.

The key factor that has led to an increase in saving in recent years is not the complicated national insurance reliefs available to some employees, but rather automatic enrolment, introduced in 2012, which has reversed the collapse in workplace pension saving. As a result of automatic enrolment, over 22 million workers across the UK are now saving each month.

Evidence also shows that pension contributions have risen in line with regulatory requirements, not with the growth of salary sacrifice. The majority of employers reducing their tax bill by offering pension salary sacrifice did not use the savings to increase pension contributions. Overall, the Office for Budget Responsibility has made it clear in its economic and fiscal outlook that it does not expect a material impact on savings behaviour as a result of the tax changes made in the Budget.

These are fair and balanced reforms. They protect lower and middle earners, give employers many years to prepare, preserve the incentives that underpin workplace pension saving, and ensure that the tax system is kept on a sustainable footing. The Bill builds on reforms by the previous Government to the salary sacrifice system and legislates for proposals first put forward in 2023. It also forms part of a wider package of reforms to ensure that the tax system keeps pace with our fast-changing economy. As a result of these and other reforms, the Government were able to take a series of pro-growth choices at the Budget last year to maintain economic stability, to reject austerity, to protect investment and to back the fast-growing companies of the future. These are the right and responsible choices to strengthen our economy for the long term. I beg to move.

Baroness Neville-Rolfe (Con)

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My Lords, this Bill is deceptively small. It runs to just four pages of text and could be easily mistaken for something minor. But its consequences for working people and for long-term pension saving in particular are serious and far-reaching. We are talking about pensions, not other benefits, which the previous Government reformed.

There is a risk that the Bill’s impact will be misunderstood or dismissed as marginal, but it is neither. In simple terms, it introduces a £2,000 annual cap on the amount of pension saving that can be made through salary sacrifice without attracting national insurance. Above that cap, pension contributions are treated as earnings for national insurance purposes. Because of the way NICs work, employees earning below £50,270 will pay national insurance at 80% on the excess; those earning above that threshold will pay 2% on the excess. That is the policy, and the question for this House is who it really affects and what behaviour it is likely to change. I thank all noble Lords for staying late and look forward to their contributions.

The Government have repeatedly argued that this measure is targeted at those they describe as high earners. Page 2 of the Explanatory Notes makes it clear that this is the Government’s intention, and the fashionable Minister, Torsten Bell, has said that the Bill “protects ordinary workers”. He implicitly recognises that, for those on low incomes, salary sacrifice is the only way to build up a significant defined contribution pension fund.

But what is immediately obvious to the pension providers, employers and experts that we have spoken to is that this is not, in practice, a measure aimed at the highest earners. It hits people squarely in the middle of the income distribution, and in some cases below it. Those saving responsibly through salary sacrifice are most affected. They include younger professionals in high-cost cities and mid-career workers trying to make up pension shortfalls, typically earning between £30,000 and £60,000 a year. Given that the average UK salary is £37,430, it is difficult to see how people earning within this distribution can be credibly described as high earners. They are ordinary working people doing exactly what successive Governments have spent decades encouraging them to do: saving responsibly for retirement.

I will give the House a concrete example. Imagine a young professional who has just graduated and taken up a job in a city—London, Bristol or Manchester—earning £45,000 a year. They decide to do the responsible thing and save seriously for retirement, contributing £5,000 a year through salary sacrifice. Under the Bill, £3,000 of that saving is treated as earnings for national insurance purposes, and that individual will be paying more national insurance, not because their income has increased but because they are trying to secure a decent pension. This represents an additional hit of £240 a year for a young working person, coming on top of student loan repayments at a ridiculously high interest rate, tax, existing national insurance contributions and the high cost of living.

This raises a question for the Minister: quite how are the Government defining a high earner? A graduate in their 20s, living in London and living on £45,000 a year—£40,000 after sacrificing £5,000 for their pension—is not a high earner: not against average income, and certainly not in the context of where they are living. So where has the Treasury decided to draw that line? Unless the definition is clearly set out, it risks becoming a flexible and politically convenient threshold, capable of being shifted over time to suit the Treasury’s needs. Without a fixed and transparent definition, no group can be confident it will not be caught by provisions targeted at high earners.

The example I gave goes to the heart of one of our core concerns with the Bill, which is that the likely behavioural response it will generate risks undermining pensions adequacy. We already know that adequacy is a serious and unresolved problem. Auto-enrolment, introduced on a cross-party basis, has been a major success in bringing people into pension saving. But even so, the statutory minimum contribution of 8% is widely accepted as insufficient to deliver a decent retirement income for many people. The system relies on employers paying over the statutory minimum for their workers to be sufficiently funded in retirement. That is not a controversial point; it is the settled consensus of the pensions world.

The IFS report, Adequacy of Future Retirement Incomes: New Evidence for Private Sector Employees, clearly makes the point that despite the success of automatic enrolment, a large minority of private sector employees are not on track for an adequate retirement income and saving has become more challenging. It found that only 57% of private sector employees saving in defined contribution pensions are projected to hit the Pensions Commission’s target replacement rates, and around one-third of savers are not projected to achieve even the minimum retirement living standard defined by the Pensions and Lifetime Savings Association

Against that backdrop, discouraging additional pension saving is exactly the wrong policy response, yet that is precisely what the Bill does. Evidence published prior to the Budget suggested that nearly 40% of workers would reduce their pension saving if the benefits of salary sacrifice were capped, and the costs and complexities of the new system will almost certainly mean that employers reduce their salary sacrifice offerings altogether. That outcome is a foreseeable consequence of the policy design set out in the Bill.

The effects of the Bill will be felt not just immediately but deeply over time. Lower saving today means lower retirement income tomorrow and greater reliance on the state in future decades. At a time when we are rightly concerned about the long-term sustainability of the public finances, it is deeply troubling to introduce a measure that reduces pension saving, thus storing up higher costs for future Governments.

It would be a mistake to pretend that the Bill bears only on savers. Employers, especially small businesses, will be hit directly by higher costs, new administrative burdens and unpalatable choices about pay and pension provision. It comes at the worst possible time. Businesses are already struggling under the cumulative weight of this Government’s economic choices—minimum wage increases, punitive business rates, an expanding national insurance burden and an economy mired in prolonged stagnation.

Under the current system, salary sacrifice arrangements are a widely used mechanism through which employers support pension saving. They reduce employer NI liabilities, simplify administration and enable employers to offer more generous pension provision without increasing headline wages. The Bill fundamentally damages that settlement.

From April 2029, employers will be liable for employer national insurance contributions at 15% on any salary-sacrificed pension contributions above £2,000. That represents a direct increase in payroll costs for any organisation with meaningful take-up of salary sacrifice arrangements.

Let us imagine an employee aged 50 with a £40,000 salary, trying to make up a potential pension income shortfall before they retire by sacrificing £5,000 per year. Their £5,000 sacrifice is due to trigger national insurance on £3,000 of that amount, costing the employer an additional £450 and the employee £240 per year.

The Office for Budget Responsibility assumes that around three-quarters of those additional costs will be passed on to employees, either through lower wages or reduced employer pension contributions. But even with these anticipated changes in behaviour, employers will still bear substantial transitional costs, ongoing compliance burdens and reputational risks associated with scaling back on pensions.

Employers will also face new administrative and reporting requirements. To administer the £2,000 cliff edge, they will be required to track and report total salary-sacrificed pension contributions through payroll systems, calculate national insurance liabilities on any excess above the cap and communicate clearly with employees about changes to their take-home pay. While the three-year window will allow many to update their payroll software, the complexity should not be underestimated, particularly for smaller employers without sophisticated payroll infrastructure or for employees with more than one job, which is common in the SME sector.

Faced with these costs and complexities, it is entirely rational for employers to withdraw salary sacrifice. The result is likely to be less flexibility, fewer incentives to save, and weaker pension provision across the workforce, making the private sector even less competitive as compared with the generous defined benefit pension provision in the public sector.

This is not mere speculation by the Opposition. The OBR’s own revenue projections already assume significant behavioural change, and evidence suggests that employers are actively reassessing their pension strategies in anticipation of the Bill, meaning that it is increasingly likely that the OBR has been overgenerous in its estimations. At a time when successive Governments have encouraged employers to play a greater role in supporting retirement adequacy, often paying above the statutory minimum, the Bill risks pushing employers in precisely the opposite direction. Higher costs, greater complexity and weaker incentives are not a recipe for stronger workplace pensions, and there could even be a backlash against the Government as individual employees find it difficult to know whether they have hit the cap.

The Government argue that this is a modest measure necessary to raise revenue of £4.8 billion—and, I note cynically, to do so by the end of the forecast period in 2029-30, which is the horizon against which the Chancellor’s fiscal rules are judged. The revenue assumptions depend heavily on people not changing their behaviour, but the evidence suggests that they will. When incentives change, behaviour changes, by both individuals and employers. When behaviour changes, revenues fall, but the damage to pensions adequacy remains. The Bill risks achieving the worst of all worlds: reducing trust in the pensions system, a cap that disincentivises pension saving by responsible individuals, an increase in future dependency on the state, and a failure to deliver the long-term fiscal benefits the Government want.

Tax is a behavioural lever—a powerful one—and should not be considered independently of other pension priorities. The Government are legislating for these changes in isolation today, at a time when the Pension Schemes Bill and the Pensions Commission are likely to transform the whole pension environment. Is this really wise? I believe this House must scrutinise this Bill, its costings and any regulations made under its powers with the greatest of care.

Lord Londesborough (CB)

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My Lords, I accept that this Government, like their predecessor, have little room for manoeuvre if they are to keep within their fiscal rules at a time of sluggish growth, so I am not surprised to see them bearing down on the tax efficiencies of employer pension contributions, which the Treasury believes would generate almost £7.5 billion in tax revenue over the two financial years 2029-30 and 2030-31. Unlike with last year’s NICs Bill, with its growth-sapping and job-depressing £25-billion hike in employers’ NICs, I currently have no plans to table any amendments to this Bill—but I do have two questions for the Minister about Clause 1.

Before asking those questions, let me say that I am concerned that the Bill penalises the responsible working person who is doing the right thing, putting some money aside to fund their retirement and old age, as a pension funding crisis looms on the horizon. For greater insight into that, and the disturbing economics of our ageing society, perhaps I may recommend the latest report, Preparing for an Ageing Society, from the Economic Affairs Committee, on which I sit, as does the noble Lord, Lord Davies of Brixton. It is a sobering read because, quite simply, we are not prepared.

The first area I would like to probe concerns the forecasts for £40 million to £75 million annual losses in tax revenue in the next three years, before the Bill comes into force. I understand that those losses factor in the expected behavioural change that the noble Baroness, Lady Neville-Rolfe, correctly highlighted, but they strike me as undercooked based on what I am seeing and hearing at the coalface. I should declare that I am an adviser to, and invest in, a range of start-ups and scale-ups, a number of which, understandably, have drawn up plans for their staff to increase and front-load levels of salary sacrifice while the three-year window allows, so that both employer and employees reduce their exposure to NICs.

Of course, I accept that that is anecdotal evidence, but it strikes me that the behavioural change triggered by Clause 1 of the Bill may result in nine-figure annual reductions of tax revenues: that is, hundreds of millions, not tens of millions, as suggested by the very brief tax information and impact note. Could the Minister explain how these figures have been calculated? What are the assumptions? The Minister may be interested to hear the advice coming from a leading HR and tax consultant, whose advice to CFOs and CPOs reads as follows:

“There are still more than three years to take advantage of salary sacrifice available and, with another General Election due in 2029, the legislative landscape could change again”.


My second question concerns the rationale for setting the contributions limit at £2,000 per tax year, which, as we have just heard, will hit middle earners the hardest. As we have heard, due to the way that employee NICs work, the deductions will be 2% of the contribution over the cap for higher earners but up to 8% on the excess for people earning below £50,000. Why are we hitting this group, which includes nurses, therapists, teachers, data scientists, young professionals and entrepreneurs, so disproportionately hard? Could the Minister please explain? This has some echoes of last year, when the increases to employers’ NICs disproportionately penalised SMEs with more than three staff, employers in the lower-paid sectors and, especially, part-time workers in areas such as hospitality and retail—and look how that has worked out for job creation and employment prospects in those sectors since.

I finish with a more general point about our tax system. This Bill and last year’s Act highlight why we need to radically overhaul—that is, simplify—our horrendously complicated tax code, which is an accumulation of chopping and changing by Governments on both sides over the last 50 years or so. However, I acknowledge that that is a big subject for another day, and time is short.

Lord Davies of Brixton (Lab)

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I thank my noble friend for presenting the Bill to the House. I speak as a friend of the Bill, although I suspect I will be its only friend apart from the Front Bench.

I do know something about the subject. I am a strong supporter of tax relief for pension provision—it is one of the foundations of a successful pension system—but that does not mean that we provide tax relief without limit. How much tax relief we provide is a question. You cannot logically adopt the line that every extra bit of tax relief is to be justified. The case has to be made.

I have listened to both speeches so far and read the articles in the press, and really the opposition to this change is all a bit overcooked. The total amount of tax relief granted to pension provision, occupational and contract based, is enormous, but the amount that is lost through this Bill is limited: it is marginal. It is obviously a significant amount to the individuals concerned but, looked at as an overall policy objective, the amount that is being reduced here is limited.

I have always regarded salary sacrifice as an illogical nonsense. It really makes no sense. It is a form of regulatory arbitrage and I have always thought that it was vulnerable to changes in government policy. What I had not realised, since I was active in advising members and employers, was how much it has grown in recent years. This is really the point: there was life before salary sacrifice became so popular. People still saved for their pensions and still received good pensions. The argument that this whole structure depends on salary sacrifice is nonsense.

The whole concept of salary sacrifice is based on a false dichotomy: that in some way, employer contributions are distinct from employee contributions. They might have a different label on them but they all come from the same employment package. It is fungible, to use a popular word. There is no real difference and to have one type, the employee contribution, which is subject to national insurance contributions and another form, the employer contribution, not subject to them is and always was nonsense, so I welcome this Bill.

There are practical problems to be addressed. We will have two days in Committee to look at those. Two days in Committee for what is effectively a one-clause Bill seems quite surprising, but maybe there are issues. How does it work for different periods of payment and people who have changing incomes during the year? How does it work for people with more than one job and how do we achieve confidentiality of an individual’s income from one employer rather than another?

There is also something that is a new term to me: optional remuneration arrangements—OpRAs. That appears in some way to limit the extent to which contracts can be changed. I think we will have to look at that carefully because, on the one hand, the way it is being done will lead to attempts to manoeuvre around the legislation; at the same time, we do not want it to cause problems with the jobs market. There will be behaviour change and, again, I would be interested in my noble friend’s views on how that will work.

I have run out of time. I support and welcome the Bill and I look forward to an interesting period in Committee when we will get the details right.

Lord Leigh of Hurley (Con)

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My Lords, it is always a pleasure and a challenge to follow the noble Lord, Lord Davies of Brixton, but I welcome his remarks.

This is the second attempt by the Government to raise money by stealth through national insurance—first on workers, now on savers. Your Lordships will recall the disaster of the last Bill to try to do this and its wrecking effect on the UK economy, so let us have a look at these proposals and the impact they may have.

We are, of course, aware of the Government’s need for cash, not least for their out-of-control welfare bill. Spending on health and disability benefits alone is forecast to reach nearly £100 billion by 2030, and the CSJ shows that around 6.2 million full-time workers—roughly one in four—would now be financially better off on benefits than in work, when you take tax into account. It is a shame that the PM could not stand up to his Back-Bench colleagues and deliver the necessary reform on welfare. As a result, the Government are scrapping around with initiatives such as this, which will have a potentially disastrous effect on people’s desire and ability to save for their pension. It is not just the numbers; it is the message.

This Bill simply punishes people who are trying to do the right thing. We were told by Labour that it would not raise taxes on working people, so perhaps the Minister can explain how this fits in with that commitment, given that the NI will come straight out of people’s salaries, including the salaries of people who are, frankly, on quite modest incomes.

The Bill hits the regular taxpayer very hard. It follows the retrospective tax changes on pensions whereby this Government applied inheritance tax on private pensions. Needless to say, the main group of people not affected by those changes are, of course, those who work in the public sector and, in particular, the Civil Service. The Minister used the word “fair” a lot in his opening remarks, but does he not see how unfair this Bill is? While civil servants’ pensions are protected for life—and, indeed, often for their spouses—the Bill does not impact them at all. It is only those working in the private sector—typically, by the way, much more so on middle incomes than higher incomes—who get attacked by the Bill.

Why are the Government making it so much harder for private sector employers to contribute to the pensions of their employees? Does the Minister recognise that it is the private sector employee who will have to fund the unfunded £1.5 trillion liability of public sector pensions? Perhaps it is because there is so little private sector expertise on the Front Bench, with the notable exception of both Ministers sitting there tonight. The amount raised by the Bill peaks at £4.845 billion in 2029-30 but then, according to the Red Book, falls to £2.585 billion in the following year.

We are told that this is due to behavioural changes. However, I cannot find any explanation as to what this might mean. Could the Minister please elaborate: what behavioural changes? In his opening remarks, I think he referred to no changes in savings behaviour, so how is this extremely dramatic fall explained? Is it a coincidence that the amount generated peaks in 2029-30, which is the year that counts for the Chancellor’s fiscal rule and possibly the year of an election? Do the Government realise that taxpayers will feel that they are taking money out of their pockets just at that moment?

I commend to the Minister the representation from the Chartered Institute of Taxation, of which I am a qualified member. I do not have time to go through it all, but it is clear that the Bill does not explain what is meant by—as the noble Lord, Lord Davies of Brixton, mentioned—“optional remuneration arrangements”. In particular, greater clarity is needed as to which conversations between employer and employees regarding pay and pension provisions could give rise to optional remuneration arrangements.

As noble Lords may well be aware, there are two types of optional arrangements: type A, which the Bill clearly covers, and type B, which it does not. Is the Bill intended to cover type B optional payments, which new subsection (6A) sort of implies? This is a big subject and needs much more work before Committee so that we can all understand what the Government’s intentions are.

Likewise, insufficient thought has gone into how the ridiculous annual £2,000 limit would be applied to employees paid weekly or monthly and those with multiple employments. Has thought been given to the likely impact on some employees where employers might withdraw pension salary sacrifice schemes as an option? What do they do?

Finally, as the Minister knows, I am always happy to be of assistance to the Government and, in this respect, I am happy to discuss other ways of raising revenue in this area, as I have done, for example, in VAT. I would like to understand from the Minister what assessment has been made of the effect of a national insurance charge levied on self-employed and LLP partners, which seems to me to be fair and would raise substantial amounts of revenue. I do not expect an answer on that tonight. We had a debate on it in an Oral Question a few weeks ago. A noble Lord who is a KC suggested that doing so might frighten off the legal profession to other parts of the world. I am not convinced that that is a fair argument, and I would like to see the Treasury’s assessment, perhaps in writing at a later date.

In the meantime, I look forward to the answers to the questions I have raised and a detailed discussion of these issues in Committee, and I just hope the public are made aware of the real effects that the Bill will have on them.

Baroness Altmann (Non-Afl)

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My Lords, first, I need to declare my interests as a non-executive director and a board adviser to pension companies. I understand the Government’s thinking, in theory, about the anomaly, as they probably call it, of national insurance relief, but in practice, this policy will have serious negative impacts. Indeed, I wonder whether it will save anything like the sums expected, as it will have damaging unintended consequences on both pensions and growth.

We seem to have a “push me, pull you” pensions policy, with the DWP setting up a Pensions Commission to review adequacy and improve pensions, while the Treasury increases tax on and the cost of employer pensions, making pensions less attractive and more expensive. This will reduce adequacy and hit growth. It will certainly reduce the take-home pay of a vast number of workers. It is, in effect, a tax on working people, as the noble Lord, Lord Leigh, has said. A rise in the cost of pension provision imposed on employers—but almost exclusively in the private sector—is surely the equivalent of a tax increase on ordinary working people.

If employers are already contributing more than the minimum, their pension costs are bound to rise because of this measure. The likelihood is that they will cut back to the minimum, making pension outcomes worse. The noble Lord, Lord Davies, doubts the scale of this impact. One of the reasons that salary sacrifices have increased so significantly since 2016 is that so many more employers have come into pensions as a result of auto-enrolment. There are hundreds of thousands more which were not there before; if they have advice they are told that it is a no-brainer to have salary sacrifice, because everybody benefits except the Treasury.

If employers are already contributing at the minimum and they cannot cut back, the likelihood is that as the cost of employment rises—because of the costs of pension provision—they will either reduce wage rises or cut employment levels. This is not some theoretical assumption, because all employers have to provide these pensions. The Government see this as impacting only high earners. As the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Londesborough, have already described, this is simply not so. It will hurt ordinary workers, especially middle earners. Reducing take-home pay and pensions will either reduce current pay, or deferred pay, or both.

I have a number of practical questions for the Minister. What happens if someone changes jobs during the year? How will the new employer know how much of the £2,000 contribution limit has been used up so far? Who is responsible for compliance, and for reporting to HMRC? Employers may need to update their pension scheme rules, member booklets, calculators, website information, staff portals, and so on. What is the Government’s estimate of the cost to business of all that? What is the estimate of the cost to employers which need to renegotiate their employment contracts for staff who agreed to a pay cut to accommodate a salary sacrifice that no longer applies? Who will cover the costs of all the increased queries that are bound to arise, including the cost of system and software updates, and member comms? How many employers will decide to abandon salary sacrifice altogether, and do the Government’s estimates of cost savings factor in the reduction in growth, and the reduction in future pensions, to offset the expected savings?

In conclusion, I hope that the Government will think again. There is plenty of time. What do the Government want from our pensions system? Do we want private pensions to improve? Do we want pension assets to support growth? If so, we need to encourage more pension contributions and incentivise holding and investing more for longer. That will not be achieved by increasing taxation on pensions or raising employer pension provision costs. These are important issues to assess in relation to the £80 billion-plus cost of tax and national insurance reliefs. They should be the subject of a holistic review in the round, rather than continuous, ongoing salami-slicing, tax by tax. This leaves workers and pensions potentially worse off and will potentially worsen the growth and living standards of the future.

Lord Ashcombe (Con)

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My Lords, I wish to express deep concern about the Government’s decision to impose a £2,000 cap on salary sacrifice arrangements for pension contributions. This measure may appear technical, but its consequences for retirement saving are anything but trivial. It raises serious questions about the coherence of the Government’s approach to pension adequacy at a time when the nation can ill afford missteps.

Salary sacrifice has long been a legitimate and widely used mechanism, enabling employees to exchange part of their salary for pension contributions, benefiting from both tax and national insurance relief, as we have heard. It is not a loophole. It is not an avoidance scheme. It is a deliberate feature of the system that encourages people to save more for their retirement. By imposing this cap, the Government are restricting one of the few tools that has demonstrably helped individuals to boost their pension savings in a tax-efficient manner.

This decision comes at a time when the UK is confronting a substantial and widening retirement savings gap and when an independent commission is actively considering how best to strengthen pension adequacy. The evidence is stark. The Department for Work and Pensions acknowledged in 2025 that around 14.6 million working-age people are undersaving for retirement. The Scottish Widows Retirement Report 2025 shows that only 30% of the population is currently on track for a “comfortable retirement”, while 39% are at clear risk of falling short. Mercer—I declare my interest as an employee of their sister company Marsh—has repeatedly highlighted, most recently in 2024, the need for higher contributions if we are to close the savings gap.

Against this backdrop, it is difficult to understand how the Government can justify a policy that will, in effect, discourage additional voluntary saving. The commission’s message has been unambiguous: we must help people to save more for their later life, not place fresh obstacles in their path.

The scale of the impact is not marginal. According to the Government’s own explanatory notes, 3.3 million savers—around 44% of employees using salary sacrifice—stand to be affected. Many of these would not be considered high earners exploiting generous tax reliefs. Furthermore, there are lower and median earners who make occasional larger contributions when they can, often after life events or periods of financial stability. This cap will hit them the hardest. It risks undermining the ability of savers to build a secure retirement income at precisely the moment when demographic pressures, an ageing population and rising life expectancy make adequate saving more essential than ever.

There is a fundamental question of fairness. The pension adequacy commission is tasked with ensuring that all workers can aspire to a decent retirement income. Yet this cap risks creating a two-tier system: those who wish to save more are restricted, while those already struggling to save enough continue to face structural barriers. Rather than reducing inequalities in retirement outcomes, this measure threatens to entrench them.

The implications extend beyond individuals. Some 290,000 employers currently use salary sacrifice arrangements, benefiting from reduced employer national insurance contributions. If the cap reduces participation, employers will face higher national insurance liabilities, increasing the cost of employment. The OBR suggests that many employers will shift to ordinary pension contributions, including relief at source schemes.

Under these arrangements, employees will pay full income tax up front and reclaim it later, effectively giving the Exchequer an interest-free loan. In 2029-30, this manoeuvre raises £4.85 billion, before falling to £2.29 billion the following year when individuals reclaim the tax on the previous year. It is hard to avoid the conclusion that the Government are playing cash-flow games with workers’ retirement savings while imposing yet another cost on employers. At a time when economic growth is desperately needed, this policy risks becoming yet another drag on the very companies we rely on to invest, innovate and employ. I urge the Government to reconsider.

A pensions system must be judged by its ability to help people build security for later life. Policies that restrict saving, complicate incentives or undermine confidence run counter to that mission. If we are serious about addressing the challenges of an ageing society, then tax and national insurance policy must align with and not work against the goal of pension adequacy. The Government still have time to correct their course. I hope they will do so, in the interests of savers, employers and the long-term financial health of our country.

Lord de Clifford (CB)

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My Lords, I raised the topic of today’s debate, salary sacrifice, in the Budget debate on 4 December. I am grateful to the Minister for his comments on my questions in summing up that debate. He felt that the changes to salary sacrifice pension arrangements were a proportionate measure that would mainly affect higher-rate taxpayers. I reflected on those comments. They are possibly fair, but the cost of this measure is not fair to all employees, employers and working people trying to save for pensions over their working lives.

I note my registered interest as an SME business owner and employer. For employers like my business that have benefited from NIC savings over the past 10 years, it will be another addition to our ever-increasing tax burden on employers for the privilege of employing people.

The Government have noted that there will be behavioural changes by individuals and businesses with regard to this proposed change. As set out in the explanatory notes, as many noble Lords have mentioned, NIC receipts will increase to just under £5 billion in the first year, reducing by 41% in the second. Of this reduced figure of £2.5 billion, the majority will be paid by employers. As someone who does the monthly payroll for 130 employees, of which 24 will be affected, I am aware that the extra employer NIC would mean an additional £8,500 for our business. This means that I will certainly be investigating, like other businesses, how we can pay employees’ pension contributions via other methods.

One of the benefits of auto-enrolment, as mentioned by others, is that it has encouraged more salary sacrifice to take place. Employees have found it easier to make pension contributions and additional contributions above the minimum of 5%, as it is a lot simpler to contact your employer than a pension provider, plus some employers are willing to match any additional contributions due to NIC savings. One possible outcome is that employers will make only the minimum contribution to auto-enrolment salary sacrifice schemes to avoid additional NICs, therefore creating a barrier for people to save money.

Another concern is that it is unfair on some workers. Medium earners, as my noble friend Lord Londesborough mentioned, will suffer most from this change. According to the Resolution Foundation, 75% of workers will not be affected as they do not pay salary sacrifice. Of the 25% who do, only half will be affected as their salaries are below £40,000, if pension contributions are based around 5%. Therefore, only 12.5% of workers will be affected. The highest-paid individuals—those paid over £100,000—represent 32% of the salary sacrifice contributions paid and 3% of employees, according to the Institute for Fiscal Studies. These are highly valued employees and will have the financial resources, with their employers, to look for other ways to avoid this NIC payment, for example through the optional remuneration agreements mentioned tonight, therefore reducing the tax take from higher taxpayers, which was the aim of this policy.

This change of policy will affect the medium earners of the workforce. It will be an additional stealth raid on their income and future savings. This group of earners is already being dragged into the 40% taxpayer bracket. How are aspiring members of society under 32, as my noble friend Lady Neville-Rolfe mentioned earlier, who are paying student loans at 9%, expected to buy homes, start a family and save for the future with an ever-increasing tax burden on their income?

In summary, this Bill targets employed middle earners who want to save for their future via pensions, and employers who will have to pay even more NIC. This change brings further complexity to an already complex tax system. Is it necessary? Would it not have been simpler not to bring in a change at all, as a lot of the targeted taxpayers will avoid paying this NIC, as noted by Government, or to withdraw pension payments from salary sacrifice in total, therefore making it simpler?

Baroness Maclean of Redditch (Con)

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My Lords, it is a pleasure to follow the noble Lord, Lord de Clifford, who spoke about his personal experience of running a small business, which I also share.

When the Bill was introduced, the Treasury Minister in another place said:

“It is the richest who benefit from these schemes ... it is right that we make the scheme fairer for all”.—[Official Report, Commons, 17/12/25; col. 1023.]


It is a weird definition of “fair” when someone earning £45,000—a basic rate taxpayer—is penalised for saving too much for their pension.

I reject the notion that fairness means endless redistribution from those who contribute to those who do not. A truly fair society recognises that those who work hardest, take the most risk and contribute the most deserve to be rewarded, because it is their success, and the wealth they create, that make it possible to help people who genuinely need the help. You do not lift up the poor by bringing down the rich; you do not make anyone richer by arguing about slices of the pie. Your Lordships do not need me to remind the House that it was Mrs Thatcher who said that. This progressive instinct—to take ever more from those who contribute and redistribute it endlessly—is yet another thing that sounds compassionate but is the opposite.

However, it is not just on values that I differ from the Government. I also differ from them in the practical outcomes. It actually would not matter if we had different values if the evidence showed that their policy was going to be successful and help people and society; but, as we have heard from all across the Chamber, these policies are not successful: they are economically illiterate and self-defeating. You just cannot tax your way to prosperity. Societies around the globe have tried it over and over again and it never works.

Your Lordships should consider this: the top 1% of earners in the country pay approximately 29% of all income tax. The top 10% pay roughly 60%. These are not bad, greedy or selfish people. They are working damn hard and are carrying the entire system on their backs. And what is their reward? To be told they are not paying their “fair share”. To face ever-higher taxes. To see their pension arrangements restricted, and to be demonised while people who choose not to work or who have only recently arrived in this country and never paid in, get benefits paid for by these very taxpayers.

The Government have claimed that this measure targets higher earners who benefit disproportionately from salary sacrifice, but that is just not the case, as we have heard in many other remarks. The Chartered Institute of Taxation found that limiting salary sacrifice will affect basic rate taxpayers more, pound for pound, than higher and additional rate taxpayers. Moreover, this change is likely to cause some employers to withdraw pension salary sacrifice as an option.

I started my business with my husband in a small flat above a former garage in Acocks Green, which is a suburb in inner-city Birmingham. We could not compete with large employers—established large companies—for the kinds of graduates we were trying to hire. We barely even had a flushing toilet in the first years we were starting, so we had to offer something to get people to actually come and work for us. We were able to offer salary sacrifice and pensions: that was one thing that we could do. We could not offer any other fancy perks, but at least we could offer that, and we knew that we were doing the right thing for people.

It is not surprising, unfortunately, that the Government take this approach, because—with a couple of honourable exceptions sitting here tonight—barely anybody in the Government has actually ever started a business or knows what it is like or has even worked in the private sector. Unfortunately, the Treasury’s own figures show that approximately 85,000 basic rate taxpayers will be affected by this. These could be people earning about £45,000 after 20 years in the workforce. The Treasury Minister talks about the rich, but these are not millionaires or billionaires: they are not Elon Musk. They are people who have just worked very hard in ordinary jobs for 20 or 30 years. They are the backbone of our country. They are saving for the future and they do not ask anything from the state. Yet their taxes are going up on absolutely everything and they do not get any of the benefits available to people on lower incomes. They cannot use those benefits and they do not use those services.

This is another restriction on these people’s ability to save, while the Government are subsidising many others who make lifestyle choices not to work and have unlimited numbers of children, while claiming benefits and not working. We are seeing that balloon now, with the two-child benefit cap going. We are providing housing and support for record numbers of illegal migrants at taxpayers’ expense. This is the absolute madness of this system now. The Bill is yet another punch in the guts for exactly the kind of country that we want to encourage and the people who keep this country going.

The Department for Work and Pensions estimates that two-fifths of people are not on track to achieve their retirement incomes, so the solution is to encourage more saving. I am out of time, but can the Government please look at amendments to protect basic rate taxpayers, index the threshold to inflation and require comprehensive review before implementation?

Lord Fuller (Con)

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My Lords, it is not just a capitalist economy that runs on incentives; it is human nature to calibrate actions through the lens of what is in it for us. Encouraging people to work hard, succeed, earn their place in the world, and deliver safety and security for themselves and their families, while generating the taxes that sustain public services, is the right thing. But get that balance wrong by destroying the incentives to do the right thing, or set tax rates too high, and that leads to no tax at all. It is the Laffer curve in action, and Britain is being subjected to a whole-economy experiment on the Laffer curve. At every level, incentives to advance in the UK are being weakened, just as incentives in other countries become more attractive.

Behaviours do change. A close school friend and a substantial British taxpayer has just gone to live in Dubai. Someone in my electoral ward is buying a ranch in Montana, and expensively trained newly qualified doctors and nurses are moving to Australia. Our problem is so bad that, earlier this evening in your Lordships’ House, we had an emergency debate on emergency legislation.

What is the effect of this Bill on those who are left behind? First, it creates a glass ceiling on aspiration—on salaries approaching £100,000. But, as we have heard this evening, it is not just those salaries but middle-class professions that are affected, such as those found in the other place, and mechanics, timber merchants, solicitors and accountants—a whole raft of middle-class aspirational professions.

I am sure the Minister will talk about those with the broadest shoulders, but I will give the example of my daughter’s boyfriend, who works in the West End. He was so proud to come and tell us he had been awarded a £17,000 bonus from his business for having worked so hard and become so valuable to his firm, but I was astonished when he told us that he got to keep only just over £6,000 of that tidy sum. He is paying not 60% but nearly 70% because of the student loan. Why did he bother to work so hard? He has the broadest shoulders only in the sense that he plays rugby at the weekend, but he is no fat cat. He is 28 and at the start of his career. He lives in a flatshare with people he does not know in Brixton—perhaps the noble Lord, Lord Davies, could go round and knock on his door. He is just a young man working hard for long hours, trying to save for a deposit to climb the ladder and better himself.

But at least that option or incentive has been opened to my daughter’s boyfriend to sacrifice some of that bonus to salt away some money into his pension, well over 30 years away, so that one day he might be able to reduce his reliance on the state—and, yes, perhaps look after my daughter—but that option will be slammed shut by this Bill. Earning £17,000 to get around £6,000; that is not right. I say to the noble Lord, Lord Davies: that is what has been overcooked. How much more can the man be expected to give for having worked so hard? Of course, let us not forget his company, which will have had to chip in another £2,500 in its own NIC. It is not right for him, it is not right to drive the brightest and best overseas, and it is not right for our economy or the Exchequer in the long term.

I know that salary sacrifice is not for everyone, but it is for many. As we have heard, it incentivises people who are doing well at the start of their career to invest in themselves, with a second long-term return for the state by reducing their reliance on the taxpayer in later years—both the individual and the state co-investing in our collective future.

We know that limiting salary sacrifice will affect basic rate taxpayers more, pound for pound, than higher rate taxpayers, although I accept that the sums are larger for the higher earners. We have heard, and I confirm, that employers will withdraw pension salary sacrifice as an option altogether. It is going to complicate pensions and HR in companies that are already burdened with extra costs and onerous duties, and will potentially encourage undesirable optional remuneration agreements and avoidance schemes. Further, we will see few practical details around how that £2,000 limit will be applied to weekly and monthly paid employees, and those with multiple years.

Taken together, this Bill is just another example of bureaucratic, counterproductive, anti-growth, incentive-sapping policies: more taxes on employment, inexplicable investment-sapping taxes on private rather than public businesses, existential taxes on pubs, crippling carbon taxes on our heavy industries, discriminatory taxes on private, not public, pensions and—astonishingly—even new taxes on tomatoes that will disproportionately affect those with the smallest means. Now, with this Bill, there are new taxes to discourage people from doing the right thing. This insanity will impoverish us all and the Minister is creating a fresh black hole in his name. The Government will drive tax revenues down into the dirt and impoverish our nation.

Baroness Kramer (LD)

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My Lords, I do not enjoy the same pension expertise as virtually every other speaker tonight; I also do not think, ideologically, that I fit well with the last two speakers, who take a position that is different from mine. However, even I can see that this Bill is another example of the Treasury’s inability to align taxes with its stated economic and industrial goals, including its plans for growth. I note the points made by the noble Baroness, Lady Altmann, and the noble Lord, Lord Ashcombe, that you have one department trying to encourage people to increase their savings and pensions because of pension inadequacy—“push me, pull you” as the noble Baroness described it—and then the Treasury working, it seems, in completely the opposite direction.

On that general growth objective, I guarantee to the Government that capping salary sacrifice NICs exemptions will not add a single penny to the amount that working people save and invest. Yet savings and investments are the key drivers of the prosperity we seek. Some 3.3 million people, which is 44% of those who save through salary sacrifice, will be hit by this change.

Others have made this point, but I particularly noticed that the recent report from the Pensions Policy Institute warned in the strongest terms that people are not sufficiently building their pension during their higher earning years, which is exactly when salary sacrifice comes into play. For many people—this probably particularly affects women who take time out for childcare—higher earnings are typically for only a period of someone’s working life. Therefore, it is during that period that they need to be able to put aside that money for later life and pensions. This capping change works exactly in the opposite direction of letting them push down on the accelerator during that relatively limited period of higher earnings, when they can set money aside.

We are not talking about multi-millionaires, as people have said; this is about incentivising millions of ordinary people to put more aside during those years when their income is just sufficient to allow them to do so. I regret that the Government, rather than encouraging that approach through this Bill, are now discouraging it.

For individual workers, this change comes in the context of frozen income tax thresholds, as well as eye-watering increases in the cost of living. Many who diligently choose to live more frugally and save through pensions have already faced the changes in inheritance tax, and now they have this. The two have to be seen together as changing the psychology of many who are trying to make a decision about what to do with their money. Many will now reduce their saving for old age. How anyone thinks this will help with the demands on or the cost of social care—two of the biggest burdens that we carry as taxpayers—I simply do not know.

For businesses, especially small businesses—the noble Baroness, Lady Maclean, spoke as a living example of someone with a small business, as is the noble Lord, Lord de Clifford—this is just another tax rise at a time when so many other costs have been thrown on to businesses. We debated business rate changes just last week.

While larger businesses may find other ways to help their employees—it has certainly been clear from some of our speakers that there are mechanisms that they can turn to—most small businesses do not have that capacity. The cost of both employee and employer NICs, especially in small businesses, tends to fall on the workers in the end. It creates a real differential between being employed by a big firm or a small one. The Federation of Small Businesses has looked at this Bill and warned of the impact on staff retention. I just wonder: does no one in the Treasury understand that an expanding small business sector is the backbone of the economy, our major source of new jobs, the underpinning of communities and the birthing ground for key industries of the future?

Then we have the investment impact of curtailing pension savings. Only yesterday, in Committee on the Pension Schemes Bill, we were dealing with the Government's concern to direct pension savings into investment in the UK economy, from private equity into infrastructure—absolutely core and key to their growth agenda. How on earth does this Bill help that? In fact, how does it not hinder it? The Mansion House Accord, on which so much of the Pension Schemes Bill rests, applies only to a small part of the pension world: auto-enrolment by low earners. If the Government are seriously looking for a step change in investment into the UK economy and into the riskier parts of the UK economy, it is exactly the money that goes into salary sacrifice schemes that they require to undertake those kinds of ventures.

The noble Lord, Lord Londesborough, talked about the timing of the Bill and the potential for front-loading salary sacrifice schemes over the next few years. That is a point that the Government need to address. The timing of when this comes in is truly weird. I cannot work out whether the change that takes place in 2029 is essentially an actual change or an attempt to game the fiscal rules. We are past the point where any of us want to accept the gaming of fiscal rules anymore. We know what it did under the last Government, and we do not want to see it repeated here.

I give way to others who talked about the practical impacts: what do you do with someone who changes jobs? How do you deal with the paperwork and the systems? I am very conscious that those things that get brushed aside often turn out to be huge stumbling blocks. We need to hear more from the Government on that.

The prize for any Government when it comes to pensions is to get people to save in their times of higher earnings as much as they reasonably can. That is what reduces demand on the taxpayer for social care and benefits in old age. Frankly, with our ageing population, it is increasingly vital, not less vital. This Bill simply pushes in the opposite direction. We need to address that through serious amendment.

Lord Altrincham (Con)

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I thank the Minister for leading this debate and for his customary courtesy in listening to all the observations of noble Lords. There is a common observation that there is nothing new in tax. Maybe this Bill is a small Bill; the noble Lord, Lord Davies, says it is a trivial matter that does not really need our scrutiny. Nevertheless, it is a moment in taxation when we are taxing savings—

Lord Davies of Brixton (Lab)

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I actually said that I was looking forward to discussing it further in Committee. It certainly does require our attention.

Lord Altrincham (Con)

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I stand corrected.

This is a moment in taxation when we move towards taxing savings. It is against a backdrop in which policy has been relatively settled in this area in recent years. There was an understanding that we need to provide private sector pensions. Quite broadly, there was cross-party support for auto-enrolment; it has been quite successful. Against this background of a degree of consensus, we are now introducing—in a small but nevertheless important way—the taxation of savings. We made the changes towards auto-enrolment not just for social benefit reasons but to protect the state. It is important to remember that we are doing this also because the liability for retirement is falling on the state, and it became urgent to do something about this and to make sure that there was private provision to offset this rising cost.

With this Bill, we find ourselves at a moment when the tax system begins to eat itself. It would be illusory to suggest that there will be any gains from taxing savings, because the liability that will accrue to the state will likely be greater. That is because the returns to invested pensions over time will, in almost all cases, exceed the growth of the state, as the noble Lord, Lord Davies, knows from his time in pensions, and it is the growth of the state that provides the tax income that can support people. So the gap will be very wide if people do not save in private sector pensions.

That is the unfunded liability that stands behind this tax change. That liability could be very wide for the cohorts who are affected by this: middle-income earners who might have 30 more years of saving. Quite small amounts accumulating over 30 years can make an enormous difference to their retirement: it is enormously important. But, in the absence of those savings, regrettably, the state will be exposed. Therefore, the Government need to tread very carefully when making these changes, because the credit of the Government rests on securing some stability to future liabilities. Growth in this area of future liability is extremely important for investors in our bond market, and we need to make sure that they do not feel that there is a rebalancing here towards current taxation income against liabilities in the future.

I turn to the themes that have been raised so far, starting with fairness. As my noble friend Lady Neville-Rolfe explained, the Bill is, in practice, aimed not at higher earners but at earners around the middle of the income distribution. Among this group will be a large number of younger workers, already taxed quite heavily, and among them graduates required to repay the student loan. This initiative is a quite specific transfer from the young to the old. These groups are being encouraged to behave responsibly—as the noble Lord, Lord Londesborough, mentioned—and to put aside savings.

For employees, the Bill raises fundamental questions of fairness and coherence. Two individuals may arrive at precisely the same level of pension saving yet be treated very differently for national insurance purposes, depending solely on how that saving is structured. Direct employer contributions remain exempt, while salary-sacrificed contributions above the threshold do not. This difference undermines neutrality in the tax system and distorts incentives away from arrangements that many workers actively rely on to manage affordability and long-term planning.

Quite a few noble Lords mentioned complexity. We should also consider the burden on employers, particularly those operating within tight margins and employing large workforces. Professional advisers in the pensions and benefits sector have warned that increased payroll costs and added administrative complexity may prompt businesses to reconsider pension enhancements and lead to a contraction of workplace pension ambition itself. That was mentioned by my noble friend Lady Altmann.

Businesses that have structured remuneration packages in good faith around existing rules now face not only higher contribution costs but a new layer of administrative complexity. The introduction of a £2,000 cliff edge creates a compliance burden that is wholly disproportionate to the revenue that it is said to raise. For many firms, this is a material increase in payroll expenditure. There is good evidence that employer costs could account for a substantial share of the projected yield.

We have already seen the dampening effect of recent national insurance increases on recruitment and wage growth. To compound that pressure risks discouraging the forms of workplace pension generosity that public policy has long sought to encourage.

The distributional effects further complicate matters. For those earning above the higher earnings threshold, portions of what is, in essence, deferred income are drawn back into the national insurance net at marginal rates aligned with current earnings. The result is a reclassification of pension saving itself. Contributions made today attract national insurance, while withdrawals in retirement continue to attract income tax. Although these are different fiscal instruments, the policy makes pension saving resemble present consumption rather than deferred provision, creating the perception and often the reality of taxation both on entry and exit. This matters because the architecture of pension policy rests upon encouraging individuals to defer consumption, to assume responsibility for the later years. The messaging around this is sensitive, as my noble friend Lord Leigh mentioned.

The Government keep changing pension policy, so we might expect taxpayers to become better at adjusting behaviour. In this case, we have heard that some employers are encouraging employees to increase salary sacrifice now, which will of course reduce tax receipts in the short term and may reduce student loan repayments. The younger cohorts have learned to adjust their student loan repayments using the salary sacrifice scheme. Taxpayers may be hoping for a policy change later and would be rational in expecting some adjustment here, particularly for graduates. Given this uncertainty, we are asking for an independent assessment of the policy.

We have already witnessed the economic cost of uncertainty generated by repeated speculation and late clarification in fiscal policy. To proceed now with a measure that introduces fresh complexity and perceived inequity risks compounding that loss of confidence at precisely the moment long-term saving most requires reassurance.

Lord Livermore (Lab)

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My Lords, it is a pleasure to close this Second Reading debate. I am grateful to all noble Lords for their expertise, their contributions and questions, particularly at this late hour.

The Bill before your Lordships’ House legislates for reforms announced in the Budget last November. It was a Budget to build a stronger, more secure economy that had at its heart three deliberate pro-growth choices: to maintain economic stability, to protect £120 billion of additional investment in growth-driving infrastructure, and to back the fast-growing companies of the future, but, as I have said previously, these choices need to be paid for. That is why the Budget contained a series of reforms to the tax system to ensure it keeps pace with a fast-changing economy. Those reforms include the changes that we are debating today.

As several noble Lords mentioned this evening, the Government spend over £500 billion each year on tax relief. The size of this spend means they must always keep the effectiveness and value for money of tax reliefs under review. This Bill addresses just one of these reliefs, pension salary sacrifice. The cost of that was set to treble to £8 billion a year between 2017 and the end of this decade. That growth has been fastest among higher earners, with additional rate taxpayers tripling their salary sacrifice contributions since 2017. But while those on the higher salaries are most likely to take part in salary sacrifice, others are completely excluded. For example, the majority of employers do not offer salary sacrifice, including many small businesses. Groups who are most likely to be undersaving for retirement, such as those on the national minimum wage and the UK’s 4.4 million self-employed workers, are also completely excluded from using salary sacrifice. The status quo is therefore neither fair nor fiscally sustainable. We simply cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners.

The Bill therefore contains two main elements: first, to introduce a cap of £2,000 under which no employer and employee national insurance contributions will be charged on any pension contributions. Some 95% of those currently making pension contributions to salary sacrifice earning £30,000 or less will be entirely unaffected. Secondly, we are introducing this change with a long implementation period so that it comes into effect only in 2029-30. This gives employers and employees over three years to prepare and adjust.

The noble Lord, Lord Leigh of Hurley, asked about the Government’s commitment not to increase taxes on working people. As he knows, the Budget in November kept our manifesto promise not to increase income tax, national insurance or VAT. It contained a series of reforms to the tax system to ensure it keeps pace with our fast-changing economy. The cost of pension salary sacrifice was set nearly to triple to £8 billion between 2017 and the end of the decade—as I said before, benefiting mainly higher earners.

The noble Baroness, Lady Neville-Rolfe, spoke extensively about the impact on employers. The Government are taking a pragmatic, balanced approach by introducing a cap which protects ordinary workers and limits the impact on employers while ensuring that the system remains fiscally sustainable. The majority of employers—some 61%—do not offer this kind of salary sacrifice arrangement. Of the employers which do, most sectors, including retail, hospitality and leisure, have salary sacrifice contributions well below the £2,000 cap and are largely protected. Everyone using salary sacrifice will still benefit from the tax advantages available up to the £2,000 cap, this includes employers, which can make up to £300 of employer national insurance contribution savings through salary sacrifice per employee. These changes will not be implemented for over three years. In comparison, the previous Government gave just one year’s notice from announcing their changes to salary sacrifice in 2016 to implementing them from 2017.

The noble Baroness, Lady Neville-Rolfe, also spoke about employers potentially stopping offering salary sacrifice schemes. The Government do not expect significant numbers of employers to stop offering salary sacrifice arrangements. Everyone using salary sacrifice will still benefit from the tax advantages available up to the £2,000 cap.

The noble Baroness, Lady Altmann, asked about the cost to employers. The majority of employers do not offer salary sacrifice arrangements, and most sectors, including retail, hospitality and leisure, have salary sacrifice arrangements well below the cap. Everyone using salary sacrifice can still benefit from up to £300 employer national insurance contribution relief under the cap, and the full national insurance contributions relief is available on employer pension contributions outside of salary sacrifice. The Government are working closely with employers and the payroll industry to operationalise the change in the most effective way.

The noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lord, Lord de Clifford, spoke about the impact on small businesses. Small businesses are far less likely than larger businesses to offer pension salary sacrifice. Only 10% of employees in SMEs have pension contributions through salary sacrifice exceeding the cap, compared with 18% of employees in larger firms. The noble Baroness, Lady Neville-Rolfe, also spoke about the impact on retail, hospitality and leisure businesses. As I have said already, most firms in this sector have salary sacrifice contributions well below the £2,000 cap and are therefore largely protected.

The noble Lords, Lord Londesborough and Lord de Clifford, spoke about the impact on low earners. Higher earners are most likely to be using salary sacrifice and the majority of those currently using salary sacrifice will be unaffected by the changes. The Bill impacts only employees who use salary sacrifice to make pension contributions, which is around 35% of employees. Those earning at or near the national living wage cannot use salary sacrifice at all. The noble Lord, Lord Londesborough, also asked about basic rate taxpayers. The £2,000 cap is worth up to £160 a year for basic rate taxpayers. Those earning below £30,000 making pension contributions through salary sacrifice are overwhelmingly protected, with only 5% making pension contributions above the cap.

The noble Baroness, Lady Neville-Rolfe, asked about individuals earning around the £50,000 mark. The Government are taking a pragmatic, balanced approach by introducing a cap which protects ordinary workers and limits the impact on employers, while ensuring that the system remains fiscally sustainable. Everyone can still save up to £2,000 via salary sacrifice free of national insurance contributions. Amounts sacrificed above £2,000 will continue to be fully relievable from income tax, but we must continue to ensure that the £500 billion of tax reliefs provided each year are effective and provide value for money.

The noble Lord, Lord Leigh of Hurley, asked about the profile of the costings, also mentioned by the noble Lord, Lord Ashcombe. The costings reflect independent OBR scrutiny and use the best available data on current salary sacrifice and bonus sacrifice behaviour. Employees will respond to the changes in a number of ways. One way is that many employees will switch to making ordinary pension contributions, some of which will be to relief at source schemes. Where an employee contributes to a relief at source scheme, they will initially pay higher rate and additional rate income tax on their pension contributions and then reclaim this through their self-assessment tax return in the next year. This creates a temporary timing effect. Beyond the forecast period, this effect becomes very small.

The noble Baroness, Lady Maclean of Redditch, asked about indexing the £2,000 cap. The Government have no plans to index the cap, but we will keep the £2,000 level under review to ensure that it continues to meet its objectives and remains fair across the labour market. This is consistent with the approach to other pension tax reliefs, including the annual allowance.

The noble Baroness, Lady Altmann, and the noble Lord, Lord Londesborough, asked about the costings of this policy and about the savings generated from this change. The costings for this policy have been scrutinised and certified by the Office for Budget Responsibility in its economic and fiscal outlook. They already account for changes in employer behaviour, including employers providing higher employer pension contributions to replicate the national insurance contribution benefits of salary sacrifice. We remain confident of these costings.

The noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lord, Lord Leigh of Hurley, suggested that this was designed only to meet the fiscal rules in 2029-30. The reality is that the Government are giving employers sufficient time to prepare and adjust their systems by implementing the changes from April 2029. That is over three years’ notice before the changes take effect. We are also engaging with employers, payroll administrators and other stakeholders on the administration of the cap to provide certainty ahead of implementation.

On that specific point, also raised by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lords, Lord Leigh of Hurley and Lord Fuller, about the administration of this policy, HMRC is engaging with a wide range of stakeholders in the payroll, employer and software developer industries to work through exactly how the cap will be implemented. This will be vital to ensuring it is implemented in the least burdensome way possible for employers. Engagement will also help inform the secondary legislation, in which the detail of the operability will be set out and further consulted on.

My noble friend Lord Davies of Brixton spoke about how salary sacrifice is just one part of the pension landscape, and I say that to the noble Baroness, Lady Neville-Rolfe, who did not mention during her contribution that saving into a pension, including via salary sacrifice, will remain hugely tax advantageous even under these changes. The Government currently provide over £70 billion of income tax and national insurance contribution relief on pension contributions each year. That spend will be entirely unaffected by these changes. Employees’ pension contributions, including those made via salary sacrifice, will continue to be fully relievable from income tax at the employee’s marginal rate. For employers, all pension contributions remain exempt from both income tax and national insurance contributions. This makes pensions one of the most tax-efficient ways to invest in their workforce.

The noble Baronesses, Lady Neville-Rolfe, Lady Altmann and Lady Kramer, spoke about the impact on pension savings. The Government do not believe that these changes will negatively impact the overall level of pension saving. Salary sacrifice existed in the 2000s and early 2010s, yet there were significant falls in private sector pension savings during this period. In 2012, only one in three private sector workers saved into a pension.

As I said in my opening, the key factor that led to an increase in saving in recent years is not the complicated national insurance reliefs available to some employees but rather automatic enrolment, which the noble Baroness, Lady Neville-Rolfe, spoke about, and which has reversed the collapse in workplace pension savings. As a result of automatic enrolment, over 22 million workers across the UK are now saving each month. The Office for Budget Responsibility has also made it clear in its economic and fiscal outlook that it does not expect a material impact on savings behaviour as a result of the tax changes made in the Budget.

The noble Baronesses, Lady Altmann and Lady Kramer, spoke about the impact on individuals who are currently undersaving. The groups that we know are undersaving for their pension, including low earners, women and the self-employed, are the least likely to use salary sacrifice. Workers on the national living wage are excluded entirely from salary sacrifice, and so are the 4.4 million self-employed people across the UK. By contrast, these changes overwhelmingly affect higher and additional rate taxpayers. In 2030, 87% of affected salary sacrifice pension contributions made from earnings will be from higher and additional rate taxpayers.

The noble Baroness, Lady Altmann, also mentioned the Pensions Commission. There is cross-party agreement on the importance of the work of the Pensions Commission as it examines questions of adequacy and fairness. The Government will not prejudge the commission’s work.

The Budget in November contained pro-growth choices to maintain economic stability, reject austerity, protect investment and back the fast-growing companies of the future, but these are choices which need to be paid for. That is why this Bill reforms pension salary sacrifice to ensure that our tax system is kept on a sustainable footing. The Bill protects lower and middle earners, gives employers many years to prepare, and preserves the incentives that underpin workplace saving. These are fair and balanced reforms. They build on the steps already taken by the previous Government to reform salary sacrifice and strengthen our economy for the long term. I beg to move.

Baroness Neville-Rolfe (Con)

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My Lords, I am delighted to open proceedings with my noble friend Lord Altrincham on our first day in Committee and to be joined in this group by my noble friend Lord Leigh and the noble Baroness, Lady Altmann.

This is not a Bill we welcome. Contributors to research done by HMRC published last year were critical of all the hypothetical scenarios put forward by the Government, including the £2,000 cap, which I believe was seen as the most complicated option presented. This proposal will add to administrative burdens on business, as will become clear when we debate later amendments, especially where people have multiple jobs, start or change employment or vary what they do seasonally.

We are also greatly concerned that it will limit incentives to save, punish normal working people for making prudent and sensible decisions, and reduce pension adequacy. Pensions adequacy is one of the central long-term economic challenges facing this country and, under this Government, it is only set to get far worse. Today we are looking at another small nail in the coffin of such adequacy. Of course, the proposal was not in the Labour manifesto, which I think promised not to raise taxes on working people.

The research by HMRC has shown that employers were seriously concerned that

“changing the pension system could inevitably cause confusion and risk people becoming more disengaged with pensions”.

Against this unsatisfactory background, Amendments 1 and 14 make a simple but very important clarification, which is to exempt basic rate taxpayers from the £2,000 cap. According to the Society of Pension Professionals, one-quarter of the people who enjoy salary sacrifice, and who will be hit by the changes that this Bill will bring in, are basic rate taxpayers. Around 850,000 basic rate taxpayers will be affected by the cap, with possibly greater numbers joining them, as the cap is not indexed. The Minister might dispute those specific numbers, but even he conceded at Second Reading that people earning under £30,000 would be affected by this change.

Not only does this contrast starkly with the Government’s stated ambition, as set out in the Explanatory Notes and by the Minister at Second Reading, to affect only higher earners; it also disproportionately affects lower-paid workers. Salary sacrifice, as we know, allows an employee to give up a portion of their pay so that it is paid directly into their pension. That does not just attract income tax relief, as all pension contributions do; it also enables national insurance contributions to be saved on the amount transferred. So it is the contribution that working people pay every month that lies at the heart of this issue. Higher rate taxpayers continue to benefit from relief related to their tax rate of 40%. Basic rate taxpayers benefit less, since their tax rate is only 20%. We are talking, on Treasury estimates, about 850,000 basic rate taxpayers.

For a basic rate taxpayer, the 8% national insurance loss amounts to two-fifths of the value of their income tax relief. In absolute terms, the marginal cost of this policy is four times higher for lower-paid workers than for those on higher incomes. The problem goes further: this is a harsher blow to certain groups of savers than many had anticipated, particularly those repaying student loans. That is why I very much support Amendment 3 in the name of my noble friend Lord Leigh, which would prevent those repaying student loans from being hit by a double whammy. I will leave it to him to explain the detail.

Graduates begin repaying their loans once earnings exceed £28,745, at a rate of 9% if they are on the plan 2 scheme. If the Bill is unamended, graduates using salary sacrifice will no longer see that 9% effectively redirected into their pension via salary sacrifice once they exceed the £2,000 cap. For those individuals, the effective loss is not just 8% in national insurance but 17% at the margin.

This comes at a time when the newspapers are full of furious comment about the high interest rates—inflation plus a huge 3%—payable on plan 2 loans. The announcement over the weekend by Kemi Badenoch to support a cut in the rate of interest charged on some student loans issued in the decade up to 2023 is therefore most welcome and is a clear step toward addressing this problem, which the Government, distressingly, seem content to live with.

The interaction between that major issue of public concern today and this Bill on salary sacrifice comes through clearly in a comment from the director of the Chartered Institute of Taxation. She said:

“The change will disproportionately affect basic rate taxpayers because they will pay at 8% NIC on contributions over the £2,000 cap, compared with a 2% charge on higher earners. It will also disproportionately impact those with student loans who earn above the repayment threshold, as they will have incurred an extra 9% student loan deduction from their pay”.


At a time when we are urging people to do the right thing—to save, to plan ahead and to take responsibility for their retirement—the Government are choosing to hit lower-paid workers harder. That is the unavoidable consequence of how this policy operates in practice.

Worse still, it falls most heavily on a younger generation who already face higher housing costs, who paid for their university education and who now find work taxed more heavily under this Government’s jobs tax—last year’s £25 billion NICs changes, which we discussed in this Room and which we rightly warned would devastate youth employment. Because that prediction has proved accurate, especially for young people, the Government would be wise to listen to the concerns aired today and outside and make changes to this Bill. It is ironic in a way that we are considering this at the same time as the Pension Schemes Bill, which is designed to improve pension saving and the incentive to save. We are doing the opposite here: making pension saving harder, less attractive and less fair.

Our amendments provide a simple solution for the Minister. By exempting basic rate taxpayers from coming under the cap, we would ensure that the Government’s stated aim is achieved and that we modify what is in effect a regressive tax. Our amendment offers a simple, targeted means of mitigating the harm that this policy will cause to some of the more financially vulnerable people in our society and I urge the Minister to accept it. If he cannot, he should explain to the Committee why his Government are choosing to disincentivise people from taking responsibility for their own future at precisely the moment when state pensions are under significant strain, which is set to intensify in the years ahead. Lower savings today means lower retirement income tomorrow and greater reliance on the state for future needs.

I turn to my Amendments 2 and 15, which ask the Minister a very simple question. What precisely does the Treasury mean by a “higher earner”? Throughout the passage of this Bill, the Government have repeatedly justified this policy on the basis that it is targeted at higher earners. At Second Reading, the noble Lord, Lord Livermore, described the reforms as “fair and balanced” and said that they,

“protect lower and middle earners”.—[Official Report, 4/2/26; col. 1684.]

Similarly, the Explanatory Notes state plainly that the Bill

“limits the NICs relief available to higher earners”.

Those are the Government’s words, but nowhere in the Bill, in the Explanatory Notes or in the Minister’s speech is the term “higher earner” actually defined.

That is a serious matter, because the practical effect of this policy suggests that it reaches well beyond any intuitive understanding of what a “higher earner” might be. The Minister has already acknowledged that individuals earning £30,000 and below will be affected. Industry experts have warned that those earning between £30,000 and £60,000 are likely to feel the impact most acutely. Median earnings in the UK are around £37,000 and, in London, they are £10,000 greater. Given this, who are these “higher earners” to whom the Treasury refers?

Since the election, we have heard a succession of phrases from the Treasury: working people, ordinary earners, higher earners. The language shifts, but what has remained constant is the refusal to define these terms. When this House considered the national insurance Bill last year, we warned that the burden would ultimately fall on working people. That proved correct; and the same risk arises here that rhetoric about protecting lower and middle earners does not align with the actual distributional impact of the policy, and the Government are allowed to get away with it because they never set the goalposts in the first place. If the Government’s objective is generally to protect those on lower and middle incomes, that objective must be capable of scrutiny. Scrutiny requires definition. Without definition, we cannot assess whether the Government are meeting their own stated aims. That seems a basic requirement of transparency in fiscal policy-making. I look forward to the debate, and I beg to move.

Lord Leigh of Hurley (Con)

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My Lords, I shall congratulate my noble friends Lady Neville-Rolfe and Lord Altrincham and the noble Baroness, Lady Altmann, on Amendments 1 and 2, then I will speak to my Amendments 3 and 16.

This Bill has a number of disadvantages to the economy and society, as it penalises pension saving and retirement security while, of course, leading to higher costs and a higher administrative burden for employers. It may also lead to some employers reducing pension generosity or even scrapping salary sacrifice schemes altogether, so it may well discourage and disincentivise good behaviour. One has to question whether the limited expected tax yield justifies the cost, particularly as we know that behavioural response will reduce the amount of tax generated, and it simply is not fair for many people, disproportionately affecting certain groups such as savers and lower-income earners.

However, the Government cannot argue that it was in their manifesto, because it was not. In fact, it was the reverse—the manifesto pledged no increases in tax, including national insurance. We can argue that it is important that we have a very good look at certain aspects of this Bill and try to point out its shortcomings, together with making some constructive and, I hope, helpful amendments. After all, it looks like some 44% of employees using salary sacrifice for pensions will be impacted by this measure. It is important that we look at the Bill in detail, as the Society of Pension Professionals—SPP—has warned the Government that planned restrictions to salary sacrifice could reduce retirement saving and increase costs for hundreds of thousands of employers and millions of workers. The SPP has warned that the changes are likely to reduce pension savings at a time when government figures already show that 15 million people are not saving enough for adequate retirement; that rises to 25 million if the state pension triple lock is removed.

The Reward and Employee Benefits Association has warned that this Bill will put strain on businesses and push millions of people into poorer retirement. In a survey it undertook, an overwhelming 99% of businesses said the organisation would be affected by the cap and 70% said this Bill would increase the administrative burden. Furthermore, a third of businesses expect the change will make it difficult for them to attract and retain talent. It has been described as a change from sleepwalking into a retirement crisis into speedwalking into one.

I appreciate that all I have said is somewhat of a preamble, but it needs to be said, and it will be said by me only once, although it applies to all the amendments we will discuss today and possibly on Thursday—although I gather the plan now is to curtail debate today if at all practical. Is the noble Lord waving at me? Does he not know either? Fair enough. I always pay attention to Government Whips waving at me.

I turn to Amendments 3 and 16—parallel amendments because of Northern Ireland—in my name and that of the noble Baroness, Lady Altmann. They deal with the complications this Bill brings in respect of student loans. I appreciate this is a little technical and complicated and may not be best resolved by debate in this Committee so much as by discussion between all relevant parties before Report. I thank my noble friend Lady Neville-Rolfe for setting me up to explain it all. I will do my best but, as I say, this may be a difficult format in which so to do.

Lord Mackinlay of Richborough (Con)

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My Lords, let me make my declaration. I am a chartered accountant and chartered tax adviser, so such legislation is the thing I live for on a daily basis.

My noble friend Lady Neville-Rolfe has laid out the ambitions of pensions. Unfortunately, in the first 18 months of this new Government, pensions are seemingly no longer protected as something desirable—that is, something we wish on our population so that they can build for the future and have a good, well-funded retirement.

Let us consider what this new Government have already done. One of their first moves in their first Budget in 2024 was to lay out the framework for bringing private pensions into the net of inheritance tax. As an adviser, I have to say that, when my previous Government introduced a measure to take personal pensions out of IHT, it was a very generous measure, but it has, I think, proved its worth. I was somewhat sceptical— I am one of those people who likes a low tax regime—but having IHT-free pensions was always quite a generous measure. Over time, it has shown itself to be a very good measure, because people are contributing towards pension funds in a way they may not have been encouraged to do. That has to be to the good.

I am sure that I do not need to tell this Committee about a lot of the planning behind pensions and why people do it. The reason outlined by my noble friend Lady Neville-Rolfe for exempting lower rate taxpayers from this regime is a good one. I say this as a practitioner: if the thought is that this is some loophole that is massively exploited by the great body of UK taxpayers, that has never been my experience, I am afraid. I do not see levels of salary sacrifice that would be sufficient to have even put this on the radar in the first place, frankly.

Why do basic rate taxpayers pay into pensions? I am afraid that not enough do. Thankfully, the implementation of auto-enrolment under our last Government will, I think, bear fruit as one of the most positive footprints that we left. We will, in time, have hundreds of billions of pounds put aside in good funds. Nest has been a great success, offering a variety of funds that taxpayers can choose, from lower risk to higher risk, and there is even a sharia fund, which was news to me. No matter what, the whole spectrum of the UK taxpaying base in auto-enrolment will be building up a fund for the future. During our time in government, we thought pensions were a good; they will restrict the number of people who may be looking for or needing pension credit in the future, because they have built up a decent amount for themselves.

For the 40% taxpayer, of course, putting aside for a pension is almost a no-brainer, because the tax saving is a good in itself, even if one is putting into a slightly riskier equity-based fund. Because you protected it through a good amount of tax relief, the downside still makes taking a bit of a risk worth while. Again, over time, risk usually means a potentially higher return. For those stuck over that £100,000 to £125,140—whatever it is—threshold for the 60% rate, one does not really need to be a rocket scientist to know that using pension planning to try to get back below £100,000 is a good deal. Beyond that, at 45%, pension planning is a very good way to go. For the higher rate taxpayer, it is so obvious to do that type of pension planning. That follows some of my noble friend Lady Neville-Rolfe’s thinking that the higher rate taxpayer does not particularly need that additional help, even though I am never one to say that more taxes should be paid.

For the basic rate taxpayer, however, we need to encourage as much as we can. There is not much encouragement from the 20% relief; that is not very dynamic or exciting. Dare I say that if one stays a basic rate taxpayer, the risk of inheritance tax will potentially not fall on that type of family, given that you have two £325,000 thresholds and the relief for domestic property, potentially allowing £1 million for a couple? It is a broad-brush but perhaps reasonable guess that, if one stays a basic rate taxpayer throughout life, the £1 million threshold will probably be exempt from inheritance tax. It is exactly those people who need the help and support.

What we see with this legislation is not any grand plan for pension planning; there is a grand plan to take a little more money from a lot of taxpayers for the benefit of the Treasury. In so doing, I am afraid that this Government are in serious danger of destroying those really good foundations that we laid—with the support of the Labour Party at the time, broadly—in personal planning, particularly in auto-enrolment, and all that good work done over many years.

In support of my noble friend Lord Leigh of Hurley’s very clever observation, which had escaped me, about the recognition of income for the purpose of calculating income for the student loan, it may be that the Financial Secretary to the Treasury’s interpretation is that there is nothing to worry about and this is already covered and will never be pursued. If that is the case, a statement from the Floor today would be helpful in that regard. Even if there is some ambiguity, which I have no doubt that there is between this multitude of regulations —for national insurance, student loan and taxation purposes—I see no reason why the Government would not adopt this amendment as very sensible. I thank my noble friend for pointing out something that the drafters had perhaps not seen in the first place.

I will be speaking, no doubt, at regular points during the day, but these are my initial observations. The Government should be very careful: they are destroying a very good bedrock, which we created, of pensions that were to benefit many millions of people across this country. This is a small tax-raiser too far, which will bear dreadful fruit into the future.

Lord Londesborough (CB)

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My Lords, I support all the amendments in the first group but will restrict my comments to Amendment 1 in the name of the noble Baroness, Lady Neville-Rolfe. This concerns the £2,000 cap in Clause 1, which unfortunately hits a crucial cohort of workers: those going through the gears, where their earnings are moving up from around £25,000 per annum to £50,000. There is a disproportionate impact on the younger end of the workforce—those getting promotions and taking on added responsibilities —whom we as a nation need to encourage to increase their pension contributions, given our rapidly ageing population. This cohort’s life expectancy may be nearer 90, if current trends continue.

There is also a disproportionate impact on our SMEs, which I will address in more detail later. Given the high preponderance of basic rate taxpayers in their workforces, the Bill will, as it stands, make growth, recruitment and retention of staff that much harder, at a time when they are still absorbing the £25 billion hike in employers’ national insurance contributions.

My final point at this stage is on bonus payments, specifically bonus sacrifice arrangements, which are a particular target of the Bill. This really is not smart economic policy, given our need for a performance-driven workforce, where bonuses on merit play a critical role in improving productivity, especially in the private sector. Frankly, they should also feature more, not less, in the public sector.

Lord Ashcombe (Con)

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My Lords, clearly there remains a tension within government between the Department for Work and Pensions and the Treasury. As we heard at Second Reading, the DWP is focused on encouraging people to save more for their retirement, yet the Treasury continues to pursue measures to fill its coffers, while increasing the burden on both employees and employers yet again.

The Minister spoke of protecting ordinary workers yet, in many cases, the Bill does the opposite. It penalises individuals who are trying to act responsibly, and prepare for a secure and dignified retirement, by removing the very tool—national insurance relief—that was put in place to assist saving for a pension. With the average salary, as we have heard, being around £37,500, anyone on that income who sacrifices more than £2,000 into their pension will face an additional national insurance charge of 8% above that £2,000. That will be a penalty and the reality for all basic taxpayers.

It is difficult to imagine that the DWP can view this outcome with enthusiasm. Once again, the Treasury appears to be prioritising short-term revenue over long-term stability, leaving future Governments to address the financial consequences created today. It is precisely these workers—those on modest incomes who are doing the right thing by saving—who need the most support in building their pensions, rather than being pushed towards greater reliance on the state in the future.

For that reason, I strongly support, and I believe the DWP would agree—I have not spoken to the department —Amendments 1 and 14 in the names of my noble friends Lady Neville-Rolfe and Lord Altrincham, and the noble Baroness, Lady Altmann. Briefly, I also support my noble friends in their Amendments 2 and 15, having heard the arguments this afternoon concerning the definition of higher earners. It is simplicity to me that transparency is essential, as opposed to opacity, which can lead only to confusion. Therefore, I believe that this issue should be tied down.

Finally, I would also like to offer my support to Amendments 3 and 16 in the names of my noble friend Lord Leigh of Hurley and the noble Baroness, Lady Altmann. Many graduates, including my two sons, already shoulder a significant and in many cases unnecessary burden in repaying their student loans at interest rates that feel wholly disproportionate. It is not until they are paid about £66,000 that they start to pay down the interest. There are few graduates—probably even fewer in the current hiring climate—who reach this sort of pay quickly. I suspect it takes at least five years —that is the case for one of my sons on the fast track in the Civil Service—and much longer for the majority.

Baroness Coffey (Con)

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My Lords, I somewhat understand where the Government are coming from in trying to get rid of salary sacrifice entirely—by the way, it is still available for employees of the House of Commons or the House of Lords for the on-site nursery. One thing that the Government seem to have missed out is that they have not provided a lot of information on how they have reached the figure of £2,000. It feels as if they are looking for £4 billion or £5 billion to pay for things such as getting rid of the two-child limit on universal credit—not child benefit; every child gets child benefit. It feels like a short-term measure, as one of my noble friends has just pointed out, to hit certain policy objectives before the next general election. The challenge here is the long-term consequences of where people are putting into their pensions today. The other thing the Government do not seem to have considered is that it is not usually employees who decide the percentage that they are required to contribute to the salary sacrifice scheme. That is normally decided by the employer.

More generally, we are starting to see this awful approach of people on rather modest earnings reducing the amount of money they put into a pension for the future, with all the knock-on costs that other noble Lords have pointed to, but I would go further. How much money is paid towards housing costs and similar is increasing at a significant rate, so it becomes this odd sort of choice where people are trying to do the right thing. Admittedly, this may currently benefit lots of people. That is why Amendment 1 is so important, instead of “How can I take from Peter to pay Paul?” We know the other significant cost of pension tax relief is to make sure that we do not have doctors and consultants reducing their number of hours. So those sorts of policy changes have already been made, and this Government decided not to do that, even though it applies to bankers and all the other people who earn significant amounts of money.

Before Report, I think it is worth the Government setting out in more detail where they got their figures from and why they have ended up at this point instead of just, fairly glibly, saying this will not affect earners. We need more detail. The information put forward by HMRC is basically an insult to everybody reading it by trying to suggest that somehow it gives us a proper tax impact and information notice. It really does not. If we approached this in a more evidence-based way, there would start to be more support and understanding of what the Government are trying to achieve. The Government are trying to find some more money, but at the moment it feels as if they are hitting younger people, people still at certain parts of their career who are already stretched, and this is the way that they are able to make a contribution to their future. As has already been pointed out, it may not be so good for higher rate—and that is okay; people make policy choices when they vote for parties, although, as my noble friend Lord Leight of Hurley pointed out, this was not in the manifesto. I would be grateful to the Minister if he could commit to a more detailed assessment to share with the Committee before we return to this on Report.

Lord Davies of Brixton (Lab)

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I support the Bill. It is an eminently reasonable approach to the difficult financial situation in which we found ourselves when the Labour Government took office. No one likes increases in taxation—it is easy to say “No, no, no”—but given the outcome of the election, some increase in taxation was required.

I listened to the debate with interest, including the points raised on student loans in relation to Amendments 3 and 16. I do not understand it, but I hope that my noble friend the Minister does and that he can give a satisfactory response.

I am a bit concerned when people talk about the Bill “penalising” people. Taking away an advantage struggles to be a penalty. The idea of salary sacrifice makes no sense; it is regulatory arbitrage and a sort of kludge that has no real justification. It is also unnecessary. The idea that the pension system will suffer greatly from the removal of this particular tax relief is fanciful. Some people regard the golden age of pensions as having been 10, 20 or 30 years ago; virtually no one then had salary sacrifice and yet schemes boomed and people saved for retirement. We cannot sustain an argument that providing an adequate pension for most people requires this form of salary sacrifice, particularly when £2,000 is being allowed.

As I said at Second Reading, I disagree with the idea that this is, in some way, a mortal blow to pensions— I may exaggerate slightly, but there was continual suggestion that this was a severe blow to people’s attempt to provide themselves with a decent pension. It is interesting that people who are arguing to keep this salary sacrifice are those who, at the same time, oppose the triple lock, and yet the triple lock is doing far more than this would do for people on low incomes to secure an adequate income in the future, so I do not accept that argument about impact.

The important issue is that this bit of tax relief on pensions should be seen in the context of the overall tax relief on pensions. What is the right level overall of providing relief through the tax system for pension provision? We all know it is substantial; it is enormous. If you count all the different forms it could take, it comes to about £90 billion. When the scheme has matured, this will take away £2.5 billion. That is why I said at Second Reading that it is marginal; it is not crucial for the future of pensions.

The issue of tax relief on pensions is controversial. Think tanks love a report on tax relief on pensions. None of them is proposing an increase in tax relief on pensions, yet this is the way that we are heading. The Government’s figures—which no one has disputed—suggests that more and more people will seek more and more salary sacrifice to get more and more tax relief on pensions. Yet when the think tanks look at these issues, they say, “Well, no, it should be targeted towards the lower paid”. If anyone thinks that this will cause problems—I am looking at the noble Baroness, Lady Kramer; I think the Liberal Democrats have supported, or toyed with, the idea of having a flat-rate tax relief on pensions—I suggest that moving to a flat-rate tax relief on pension contributions will cause an absolute nightmare.

There is one point here that I accept. My noble friend the Minister can take it as a helpful suggestion rather than a criticism, but the use of the term “higher earner” could have been judged better. Noble Lords will be pleased to know that I have a spreadsheet, which calculates the impact that people suggest this measure is going to have. Of course, the 2% and 8% feature means that there is a kink in the line of the relief that you get from salary sacrifice because, up to a certain level, you pay 8% contributions through national insurance and you are getting the relief at 8%. Then, after that, it is 2%. It is not that the Government are seeking out people to charge more money; it is the structure of the system.

Let us look at the figures. I sometimes have problems in these debates when other speakers quote figures because it is difficult to understand them without seeing them in writing with some explanation. I think that, in general, there should be a ban on quoting figures in these sorts of debate. However, I am going to quote some figures. The median level of contributions to a pension scheme is 5%—that is, between 4% and 6%—on median earnings below £40,000. Now let us take the higher figures: someone paying employee contributions of 6% with earnings of £40,000. They are using salaries in full on their contributions. For them, the change will be an extra £32 a year. Those are the figures we are talking about for those on median earnings and those on median contributions.

As has been mentioned, bonus sacrifice is clearly a separate issue. This is where the legislation is required. It is being exploited in these circumstances. The bonus should be enough. The bonus is of great value. Some people in the City get vast bonuses. The idea of using that money to exploit this illogical tax relief through salary sacrifice is abhorrent.

I support the legislation. The term “higher earnings” could have been handled better but the whole issue—people on median earnings paying very little more and complicating the system in order to remove basic rate taxpayers; perhaps my noble friend the Minister can tell us about the impact it would have on income—has been over-egged; that was, I think, the phrase I used before. This is an eminently reasonable measure to address the country’s financial problems.

Lord Fuller (Con)

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My Lords, the noble Lord said that he cannot see the sense in this. Why do we have this incentive in the tax system? The answer is that it is the role of government to incentivise good behaviours, which include saving for your retirement, trying to climb the ladder and trying to do better for yourself, not least because, in so doing, you reduce your reliance on the state in later life. That is the sense of the salary sacrifice process.

This Government have perpetrated a series of attacks on youngsters at the start of their careers, graduates and people making a start in their working lives. The Renters’ Rights Act has driven up rents. The Employment Rights Act has made it harder for businesses to take a chance on somebody who may be unqualified or changing role. The Government are putting youngsters into unemployment with the jobs tax. Now this slim Bill will add many more cases—I am going to list them in a minute—of intergenerational unfairness. Let nobody say that Labour is on the side of the youngsters who want to get on.

Baroness Kramer (LD)

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My Lords, I made my views on this Bill fairly clear at Second Reading, so I am going to try to observe the discipline of not repeating my Second Reading speech. I am sure that I will not be absolutely 100% on that, but I am going to try.

I want to look first at this group of amendments. Amendments 1, 2, 14 and 15 put forward by the noble Baroness, Lady Neville-Rolfe, are particularly relevant because I do not think that at Second Reading we came away with a clear understanding that basic rate taxpayers were going to be significantly caught by the changes in this Bill. The focus on higher earners— I agree very much that we need “higher earners” to be properly defined—leaves us with a mistaken impression. I hope very much that the Government will provide some degree of clarity—the noble Baroness, Lady Coffey, called for the evidence—on who is impacted and how they are impacted. We ought to have that information in front of us. I will be troubled if this captures people on basic rate tax, given the pressures that they already face.

I would like to focus much more strongly on Amendments 3 and 16, because I do not think that at any point at Second Reading we addressed the impact on graduates repaying student loans and the impact on their take-home pay. I want to thank a gentleman called Tim Camfield who did some calculations and forwarded them to me because, as I worked through his calculations, it seemed to me that he had to be right. He wrote in the context of reading a response from the OBR to what I understand was an FOI in which it said that it did not believe that the Bill had any impact on student loans. It seems to me that very evidently it does and we need to know that. If the Government do not intend it and are going to have a workaround that will prevent it, then frankly we need to know that as well.

We all know that students have been under extraordinary pressure and that the Government openly have frozen the starting repayment threshold, but this, in effect, if Tim Camfield and others are right, would be a backdoor, further blow to this group. Whenever people say “student loans” and you are a Liberal Democrat, it is important to say—and I do not want to give a speech on our new policy—that my party recognises its role in creating the student loan repayment scheme. But frankly, the scheme is so changed, and graduates are under such pressure, that we now recognise that it is broken. I will not go through our policies—they are extensive—to completely reform that system.

I look now to the Minister to give us some real clarity, both on who is impacted and how extensively—how a normal person might read that as being an ordinary worker on a relatively modest income, rather than just a higher earner—and on the issue of student loans. I have some information on the distributional analysis that I will use in group 3 but, on the principle of trying not to repeat myself constantly, I will wait until then.

Lord Leigh of Hurley (Con)

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My Lords, prompted as I am by my noble friend Lord Mackinlay, may I just take a moment to remind the Committee that I am a member by qualification of the Chartered Institute of Taxation and have received very helpful briefings from it?

The Financial Secretary to the Treasury (Lord Livermore) (Lab)

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My Lords, it is a great pleasure to respond to the debate on this first group of amendments. I thank all noble Lords who have contributed.

This first set of amendments, in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, seeks to exempt basic rate taxpayers from the Bill. I have listened closely to the points raised and the concerns expressed during this debate. The Government have ensured that the measures in the Bill do not affect the majority of basic rate taxpayers. Around 74% of basic rate taxpayers currently using salary sacrifice will be protected by the £2,000 cap, and almost all—95%—of those earning £30,000 or less will be protected. The small number of basic rate taxpayers with contributions above £2,000 will continue to benefit from employee national insurance relief, worth £160 a year, in addition to the full income tax relief that they receive on their pension contributions. Of the small number basic rate taxpayers who are impacted, half will face an annual additional national insurance contributions liability of less than £50.

While we recognise the intention behind the amendments laid by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, exempting basic rate taxpayers would, in practice, be operationally challenging and add significant further complexity to the tax system. That is because the tax system can confirm which band an individual is in only at the end of a tax year, when reconciliation of their income tax liabilities has taken place. Adding complexity to the system would also likely lead to an increase in costs for employers, as they would be required to bear the burden of identifying the full extent of their employees’ potentially multiple sources of income.

This leads me to the amendments in the names of the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, which seek clarity on the basis on which the Government consider certain employed earners to be “higher earners” for the purposes of the national insurance charge, as well as how the contributions limit reflects that assessment. The Explanatory Notes set out that the policy rationale is to limit

“the NICs relief available to higher earners on employer pension contributions made through salary sacrifice arrangements whilst protecting lower earning pension savers by introducing a £2,000 threshold. Most employees and their employers who make typical pensions contributions via salary sacrifice will be unaffected”.

This is indeed the effect of the Bill. Some 87% of pension contributions made via salary sacrifice above £2,000 are forecast to come from higher and additional rate taxpayers. Some 74% of basic rate taxpayers using salary sacrifice will be protected by the £2,000 cap, and almost all—95%—of those earning £30,000 or less will be protected.

Let me turn lastly to the amendments in this grouping tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann. They seek to exempt salary sacrificed pension contributions over the limit from being included in student loan repayments definitions to employees making student loan repayments. The salary sacrifice changes made through the Bill equalise the national insurance contributions treatment of salary sacrifice above the cap with other types of employee pension contribution, which are counted as earnings when calculating student loan repayments.

There may or may not be good arguments for or against that, but we do not consider this Bill an appropriate vehicle through which to amend the basis of student loan repayments. The basis of calculating income from student loan repayments is set out in separate regulations, and we do not believe that this Bill should seek to vary that. It is also the case that, of employees making contributions via salary sacrifice, younger people are much more likely to be fully protected by the £2,000 cap than those over the age of 30. Some 76% of those in their 20s who use salary sacrifice are protected by the cap, compared to half of those aged 30 and above.

In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.

Baroness Neville-Rolfe (Con)

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My Lords, I am pleased that we have begun Committee by addressing this issue and grateful to all noble Lords who have spoken. I am grateful to my noble friend Lord Leigh of Hurley, who seemed to be saying—I think with support from outside bodies—that the Treasury’s financial estimates were over-optimistic. That may, of course, be true of the figures that the noble Lord, Lord Livermore, has kindly given us, which we will obviously need to have a look at, on the effect of the change.

The difficulty as I see it is that the policy remains vague. Its impacts are largely unknown and the income group it is intended to capture is undefined. The Treasury’s assessment of how it will operate in practice has been inadequate. It is a complex mechanism by which to raise a relatively modest amount of revenue and does not take effect until 2029. It is a tool, if not a very sensible one, designed to make the Chancellor’s sums add up, rather than a longer-term policy. Even if the Government succeed in raising anything like the figure set out in the Treasury note, the projected yield declines sharply within just a few years of implementation.

There is also an issue of definition. I think the potential cost is greater. As the noble Baroness, Lady Kramer, said, there is a risk that middle and lower-income workers, and those paying basic rates of tax, will be drawn into scope. After all, this is a dynamic situation—we will come on to discuss whether there are ways of tackling that—but it could have serious consequences, and we would need to come back to the point about pension saving, long-term adequacy and, ultimately, future liabilities for the state. There is also an issue about irregular payments—“bonuses” was the word used by the noble Lord, Lord Londesborough. The majority of bonuses, in my experience, are small, as I know from my time at Tesco, but they can be used usefully to invest in pensions.

The absence of any safeguard in the Bill to prevent basic rate taxpayers being captured is a significant omission. If the Government are confident that such individuals will be protected, they should be willing to put that protection in the Bill. The noble Lord, Lord Ashcombe, rightly supported the need for transparency, and of course Amendment 2, which requires Ministers to define “higher earners”, would achieve just that. Even the noble Lord, Lord Davies of Brixton, agreed that there was a “kink in the line”.

Her Majesty’s Opposition are very concerned about the unfair impact on those struggling to pay their student loans at a rate of interest which is impossible to justify. The Government must look seriously at how to mitigate this, as my noble friend Lord Leigh of Hurley explained with his customary vim, and to do this in the Bill—not promise to do something elsewhere. This is a big issue that has been raised and it has to be solved. We are very sympathetic to those with big debts, which they will have to pay off under the loans scheme, so a way needs to be found to help them.

There is an ambiguity, as my noble friend Lord Mackinlay of Richborough said from his position as a tax expert, and we need to listen to him. He also warned of its damaging implications, on top of those already introduced for IHT on pensions. This is part of a wider attack on pensions which it is important to do something about if we are to tackle the problems of long-term pension sustainability.

I beg leave to withdraw my amendment, but I may need to come back to this on Report, as it is at the heart of the acceptability of this Bill.

Lord Leigh of Hurley (Con)

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The purpose of the Bill is to catch salary sacrifice schemes. As we discussed in the previous group, this is where an optional remuneration arrangement has been made, but there are instances when an increased pension could be offered to an employee and no option is offered for the cash increase in salary. That is the area that I am exploring in my amendments.

In these circumstances—according to the Labour Party’s manifesto, the drafting of the Bill and all the Explanatory Notes—I do not think there is an intention to change the national insurance treatment. Indeed, this is clarified in the policy background sections of the Explanatory Notes on the Bill issued by the Government. This amendment, tabled by me and the noble Baroness, Lady Altmann, seeks to make that clear and cannot be seen as controversial.

Amendment 4 is easier to explain than Amendment 3, so let me have a go. I accept that Amendment 3 is not easy to understand, and I am not sure I understood the Minister’s response to it. It would be very helpful if, before Report, he could clarify whether he agrees that, as I suggest in Amendment 3, the definition of earnings will be affected by the Bill, and whether the Government will address that issue.

The Bill is predicated on the definitions of optional remuneration arrangements. They can include company cars and—as the noble Baroness, Lady Coffey, said—assisted places in nursery, medical insurance and other areas, but the Bill makes it clear that we are focusing here on salary sacrifice. The reason for my amendment is that there may be some people who achieve an increase in pension contributions but not through salary sacrifice. In my view, an optional remuneration arrangement has not been properly scoped or defined for the purpose of the Bill.

Perhaps it is easiest to understand this concept when thinking about a new employee. Such a person will be negotiating their compensation with a potential employer. Let us say they are offered a salary of £50,000 and a £5,000 pension contribution. They might feel that this is insufficient payment and seek a higher salary. The employer could refuse that on the basis that all people of that rank in their organisation receive a sum of £50,000 and they have no flexibility—but they may offer an increased pension of £10,000 rather than £5,000 to reach an agreement. How is that negotiated figure of £10,000, which was previously £5,000, to be treated? What if the employer said, “I will reduce the salary to £45,000 and give you £15,000 in pension”? Is this an optional remuneration arrangement, particularly with a prospective, rather than actual, employee?

Similarly, let us look at termination settlements. An employee may receive a lump sum in lieu of any other claim and might be offered an excess amount over the normal £30,000 to be paid directly to the pension scheme. Is that an optional remuneration arrangement?

Let us consider something perhaps closer to home for the Minister: cases where collective bargaining takes place. There might be two offers on the table: one is for a 5% increase in pay but will keep employer pension contributions at 8%, and the other is for a 4% increase with an increased employer pension contribution of 10%. If the collective bargaining unions agree on the latter, are we to assume that this is an optional remuneration agreement? I would assume not, but it is not clear.

In the negotiations of remuneration, what if a person agrees with an employer that they will not take any increase in salary but they want a greater pension payment? That is not salary sacrifice—which is in the heading of the Bill and peppered throughout the definitions used in the Bill and the Explanatory Notes—but does it qualify as an optional remuneration arrangement?

This is a probing amendment to try to get some clarity into the Bill. Clarity is needed because there is so much in the Bill that, frankly, does not seem to have been considered as it relates to people’s working lives.

Amendment 33, in my name and that of the noble Baroness, Lady Altmann—and, yes, in this group—deals with the very difficult situation where a person has a number of employments. It seems a bit disappointing that the Bill does not address this obvious problem. Perhaps the draftsman had only one job—I do not know. National insurance contributions are typically calculated weekly or monthly for most employees, and calculated separately by different employers, assuming such employees are not part of the same group; if it is all one group company, it is done by one head office, typically.

The question arises: how will the £2,000 limit be applied across different periods and employments? This could be covered in regulation later, I suppose, which seems the Government’s favourite approach to much of legislation, but it is right to discuss this in Committee and encourage the Government to put their thinking cap on now to try to get it right so that there can be proper consultation and scrutiny before the legislation is enacted.

Where employees are paid monthly, should that employer apply 1/12th of the £2,000 to each month’s salary-sacrificed earnings or wait until the month in the year in which that amount has exceeded £2,000? Likewise, as the noble Lord, Lord Londesborough, questioned, what happens when an annual bonus is paid? Does that distort the £2,000, which I assume is for the year to 5 April? The bonus could be paid in May or June, completely distorting all the figures. If an employee changes employment part way through the year, how does that work in practice? Does the amount sacrificed in the old employment carry over to the new employment, or should the employee benefit from two separate caps, which will be the requirement for information to be passed from one employer to another? How will HMRC cope with this? Currently, no information exchanges are available.

Then, of course, there are a number of us—I include myself—who hold down more than one job at a time. I declare that interest, although I am not caught by the Bill. Will the £2,000 annual cap be split between each employment, or can employees benefit from two separate caps so that each employer can offer £2,000—which might encourage some slightly unexpected behaviour of people taking lots of jobs, or with subsidiaries or associates, as a clever avoidance trick? There is already incentive within the NI system to do this, as separate allowances exist for separate employers.

We also have to think about financial privacy here, as information would need to be shared across different employers. I raised earlier the problems facing us where an employee does not actually sacrifice salary but still makes a pension contribution, and it is not clear what happens if an employee enters into a bonus waiver in exchange for an increased employer pension contribution. It is complicated, because the employee has no legal rights to the bonus, so there is nothing to sacrifice. What is the Government’s view in these circumstances?

All in all, one can see an administrative nightmare all around. It would be extremely helpful if these issues could be addressed by the Treasury in guidance, setting out the basis on which the Treasury considers how the Bill will apply before it comes into force, hence my amendment.

While on my feet, I support the amendments tabled by the noble Lord, Lord Fuller, which seem pretty clever to me. I am somewhat annoyed I did not think of them myself, because it is pretty obvious when you read his amendments that it must be right—I am supposed be the chartered accountant—that there should be some spreading to allow for circumstances where one year was not a good year and another was. That seems only fair. I beg to move.

Lord Fuller (Con)

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My Lords, I rise to speak to my Amendments 4A, 4B, 17A and 17B, and the associated review clause, Clause 29A. I will also speak to support Amendment 33 in the name of the noble Lord, Lord Leigh of Hurley.

Taken together, these amendments try to address the practical workability of proposals for employers with employees who have multiple employments and fluctuating income, and to ensure consistency with other parts of the taxation system while being consistent across Great Britian and Northern Ireland.

How easy it must be for the huddles of Ministers and civil servants sitting in their little meeting pods in that ground floor cafe at 1 Horse Guards—or perhaps dialling in from home, having taken the dog for a walk—to tinker with their spreadsheets and to come up with policies viewed through the lens of their personal experiences but which do not stand up in the real world. We have new tax policies that have damaged the national economy and growth. This Bill in particular, however, damages incentives for individual employees and companies for which they work; these are incentives to work hard, to climb the ladder, to improve yourself and to save for a secure retirement, and incentives for employers to attract the best talent.

As we have heard, it is not just the people on 100 grand that this policy affects—although it raises their marginal tax rate to 70% if they are paying off a student loan—it affects a whole raft of people. With the minimum wage now set at over £26,000, millions of ordinary hard-working people—the sort of people this Government say would escape higher taxation—will now be snared in this net, as the Daily Telegraph has reported. It amounts to a new tax on workers; this much we know. But my amendment focuses on the potential unfairness to a particular type of hard-working employee that makes it nearly impossible for their employers to administer it: an employee juggling several jobs.

How do the Government intend to deal with this and make fair the practical unintended consequences and perverse outcomes? Let us take the example of the employee who works several jobs. How will her employer know when or if she has maximally sacrificed her two salaries without reference to the other? That point was made very ably by the noble Lord, Lord Leigh of Hurley. The noble Lord also identified the privacy issues that come with this—which I wish I would have thought of.

Let us take another example, of an employee engaged in seasonal work who wants to save monthly into a pension on salary sacrifice. How does he set his regular contribution at the start of the year without knowing whether he will bust his allowance later on? In his winding on the previous group, the Minister said that you will never know the band until the end of the tax year--well, quite.

What about the employer who wants to do the right thing by his graduate employees and knows how difficult the job market is for them right now? Let us say he wants to attract the best talent by offering accelerated repayments of student loans by way of a salary sacrifice opportunity. We have a colleague in this House who is a graduate, and his graduate loan is running away; he is paying off £400 a month and still the debt is getting larger. We must help these people.

What about the youngster saving for a pension? As I said at Second Reading, my daughter’s boyfriend is no fat cat; he is living in a flat share with people he does not know in Brixton—I do not know whether the noble Lord, Lord Davies of Brixton, ever knocked on his door as I invited him to do at Second Reading. But ask his opinion on this and he will say that instead of improving his own financial security—and perhaps that of my daughter in due course—by reducing his dependence on the state in later life, his ability to save for his future and to progress now is weakened. These are practical and personal examples; each of them damages that incentive to work hard and save hard. That is bad enough.

However, this Bill further discriminates against the private sector worker who needs to save for his own retirement under the direct contribution system, when public sector employees have the taxpayer pitching in another 20% to their pot. The ham-fisted way this Bill ignores the real-life complexities for these real-life people and their real-life examples that exist outside the comfortable, monthly-paid final salary pension world shows how the Treasury views these things through its own particular lens.

Lord Mackinlay of Richborough (Con)

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Perhaps I may make some comments on Amendment 33 put forward by the noble Baroness, Lady Altmann, and my noble friend Lord Leigh. My noble friend recommends that there be some Treasury advice on this. I do not think Treasury advice is good enough. Surely we are in the thicket of drafting legislation. Let us have those rules very open and clear within the legalisation before us.

I am confused about what is intended here. It is intended to be a £2,000 limit for the employee across all employments? At the wind-up of the previous group, the Minister, the Financial Secretary to the Treasury, quite correctly said that there would be excess complication in the system proposed by my noble friend Lady Neville-Rolfe’s amendment because an employer would have to know about their employees’ tax arrangements and whether they had rental income or income from other employments or investments. That was a very reasonable observation by the Minister. However, this legislation is, as it stands, somewhat silent on a similar complication that would exist across multiple employments.

There is an attempt to smooth out monthly variations in the directors’ arrangements for national insurance calculations, because directors are obviously able to adjust their income a bit more fluidly. I am sure that the Minister is aware that if a normal employee has a very big bonus, potentially in one month, the monthly threshold for maximal class 1 deductions for national insurance will be breached for that month and there will be technically an avoidance of national insurance, because the following month, when employment income goes back to a normal level, full national insurance would be taken. For those able to manipulate their income—and I use that advisedly in a broader sense, but directors can have a little more influence on how they are remunerated—there is a procedure within legislation to iron out those peaks and troughs on an annual basis.

Accepting within the tax and national insurance legislation that a normal employee should be able to benefit from a big peak one month and avoid national insurance, is it the intention that across multiple employments that £2,000 per year will be available to each employment? I think that, as the Bill stands, it does, and I welcome that, because it almost matches what happens in other national insurance legislation applying to an employee. However, it will not be good enough simply to have Treasury advice post-legislation. I would rather that that be clarified today so that we can discuss it further and amend as appropriate on Report. However, my thanks, as ever, go to my noble friend Lord Leigh and the noble Baroness, Lady Altmann, for highlighting the point in question, because it is what life is all about. Currently, it is not uncommon for people to have a multitude of employments.

The main things that I want to discuss on this group are the amendments put forward by my noble friend Lord Fuller—Amendments 4A, 4B, 17A and 17B —which all cover aspects of a similar theme. Call me simplistic, or perhaps old-fashioned, but I would prefer there to be similarities in different parts of the tax system. We have accepted in the tax system the three-year carrying forward of unused pension contribution relief within income tax. It used to be £40,000 a year; now, it is £60,000, and it remains unaffected thus far by two Budgets. I do not want to give Chancellor Reeves any ideas for the future but that sum of £60,000 seems to have survived two Budgets, so perhaps we may live in some hope. In income tax regulations, we have a situation where you can carry forward three years of unused relief, so, in year 4, one could—if one had sufficient income and this was a sensible thing to do in the tax regime in which one found oneself for that year—make a contribution of £240,000. The Treasury is very comfortable with that and, so far, there have been no efforts to amend that in the Budgets we have seen.

I go back to our discussion of the basic rate taxpayer, who may have multiple employments, who may be between employments and who may have both good and bad years. It would seem to stand to reason that we should have a similar idea of carrying forward to allow that sum of £2,000, as it currently stands. Obviously, I would rather it were higher; other amendments laid by noble Lords seek to amend it to £5,000 or £10,000, but I am talking just about the £2,000 limit. I know that my noble friend Lord Leigh gave some examples from real life but there may be situations where, for whatever reason, a pension contribution or a salary sacrifice cannot be made because the taxpayer—for example, a student, and potentially a newly employed one at that—simply needs the cash that year and is prepared not to have the tax and national insurance relief.

Again, this would be neither a difficult nor unusual situation. Someone’s child may be getting married, or they may need private healthcare because the NHS is not providing what is needed. Whatever it is, there are a multitude of real-life situations where cash may be king for a year. Following the income tax arrangements, surely it cannot be unacceptable for that small £2,000 limit to go forward for three years in exactly the same way so that the national insurance shield—that is, the benefit of making a contribution—is at least maintained for years when it was not needed.

Drawing on my professional experience, I can be absolutely sure that many of these brought-forward years are never used. They are used on a “first in, first out” basis, so year 1 carries forward to year 4. If it is not needed to be used, that falls out of bed, then you have years 2 and 3; in the fourth year, if any years are unused, you are carried forward to year 5, whereafter year 2 disappears. It is extremely rare for the full carry-forward to be used. The amounts involved in this sensible carry-forward measure proposed by my noble friend Lord Fuller seem very reasonable and not that costly for the Treasury, whose demand in all this has nothing to do with pensions but is about raising cash. I ask the Minister to look at this carefully—not today, obviously, as I am sure he will say no to most everything—on Report, to see whether we can consider this matter more carefully.

Finally, I go back to the amendments in the names of my noble friend Lord Leigh and the noble Baroness, Lady Altmann. If there is an intention behind the multiple employment arrangement, let us please see it in the Bill, not just in guidance from HMRC at a later date.

Baroness Altmann (Non-Afl)

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My Lords, first, I need to declare my interests as set out in the register as a non-executive director of a pensions administration company and as a board adviser to a pension provider.

I believe that the Bill is premature—the extent of the amendments being proposed to it is evidence that it has been rushed, and I do not quite understand what the rush is, given that the policy is not intended to start until 2029. I must admit that I immediately thought at the Budget, when the measure was announced, that it was simply a means for the Chancellor to find some revenue to make the books balance in the way that she had hoped. That is not necessarily a criticism, I just felt that it seemed to be the reality. Then suddenly, a few weeks, effectively, after that Budget, we get the primary legislation.

I apologise to the Minister because I have enormous respect for him and I know that he has a very difficult task. I think he understands very well a number of the points we are making, but so many of the issues we are covering here do not seem to have been thought through. The list of potential banana skins and uncertainty seems to be growing by the day, and the practical issues simply have not been recognised, let alone resolved, as has already been evident. We will come to more as we go through Committee.

Let us just consider the risks highlighted in some of the amendments. For example, Amendments 4 and 17 from my noble friend Lord Leigh, to which I have added my name, are trying to clarify what is actually caught by the Bill. If an employer increases workers’ pension contributions, will it automatically be assumed that that was in some way a salary sacrifice? The employer may just have decided to increase its contributions for some other reason. How will we know? How will anyone know?

The uncertainties do not stop there. What about Amendment 33, to which I have also added my name? If someone has multiple jobs, how will anyone be able to track the salary sacrifice pension contributions made through a tax year? We will come on to what happens when someone changes jobs.

We saw in the previous group the effect on student loan costs for students. I know the Minister said that can be dealt with elsewhere in regulations because those student loan rules are set in other regulations, but if they are not in the Bill then they will be caught, it seems to me. I did not hear an argument that says they will not be.

Who is responsible for compliance? Who is responsible for reporting to HMRC? Again, we have heard about the problem with privacy. They are just the uncertainties that we are trying to sort out with some of these amendments.

Then we have the unknowns, which seem to be skirted over. We certainly know that take-home pay will fall for a number of workers who currently get salary sacrifice, either by the 2% or the 8% of the national insurance contribution offset they will potentially lose. Employer costs will rise.

I have huge respect for the noble Lord, Lord Davies, and all the calculations he does, and I recognise that, in some ways, the amounts of money, as he correctly calculated, perhaps seem rather small to us. However, as an economist, I know that decisions, incentives and behavioural changes occur at the margin. It is marginal changes, however small, that can make a significant overall impact over time. If employer costs are rising because they are paying extra national insurance on the pension contributions that they have always been making, it is bound to affect future pay rises and employment levels. We have no modelling of how much that impact might be.

Lord Davies of Brixton (Lab)

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I spend most of my time in these debates about tax relief on pensions defending the existing system, because the people I tend to mix with regard that tax relief as grossly unfair. It obviously gives far more to the higher paid than the lower paid, and that is why there is widespread discussion of having flat-rate tax relief on pensions. If we were starting from scratch, I think we could do that, but we are not. We have to start from where we are.

Where we are is in having extremely high levels of, effectively, government subsidy for people to save for retirement, but that begs the question: what is the right level of tax relief for pensions? Does it just happen to be that we have alighted at the correct level, or is that an issue we are not allowed to discuss? Putting words into the mouth of the noble Lord, Lord Fuller, he seems to be adopting the argument: “The more the merrier—let’s increase it by even more”. No, there is a genuine question here. What is the right level of tax relief to encourage people to save for their retirements? It is a reasonably practical debate and, on this side, we have come to the conclusion, possibly as an interim measure, that it should be a bit lower than it is currently. That certainly does not justify the doom and gloom about this particular change—I have made my point several times.

I am no longer a small business person, but for 30 years I was and I employed people who had multiple jobs. It is not a new issue. There is nothing new about the idea of employers having to cope with the complications of the national insurance system for people who have multiple jobs, particularly where, even with two jobs, their total income is more than the £1,250 that it is at present. It is not a new issue that employers are going to have to deal with. In principle, there is an additional complication; they have to sort out where the £2,000 limit applies. However, it is reasonable to expect employers to undertake those tasks. To be honest, I do not think that an ice-cream salesman is really a genuine example, but I may be wrong.

Lord Fuller (Con)

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I take my territorial designation from Gorleston-on-Sea. When I was a boy, there was nothing better when the sun was out than going down to Della Spina’s, the ice-cream place. It is not just about ice cream; there are stately homes and all sorts of things that work with the weather. That is why I chose the example of the umbrella salesman or the ice-cream vendor. There is a whole part of the UK economy that depends on the weather. We have the most unpredictable weather, there are the most turbulent income and costs associated with that, and that boils down into variable emoluments. It is not just the market gardener or the farmer; it is the people involved in hospitality or whatever. To say that it is trivial demeans the pubs, the restaurants, the stately homes and that wider part of the visitor economy, which is particularly visited on the coast and in coastal communities. I wonder whether the noble Lord would like to reflect on the somewhat dismissive way in which he put that huge part to one side. Millions of people work in these sectors; they would be disadvantaged by the Bill and that needs to be recognised.

Lord Davies of Brixton (Lab)

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I accept the noble Lord’s reprimand. I was actually making another point, which is about how many ice-cream salespeople are operating salary sacrifice arrangements. That may not be immediately germane. In fact, the remarks that the noble Lord just made support my point. Those part-time employees and part-time employers are already having to cope with the problems that arise from multiple employments and how the national insurance system is not, in truth, tailored very well for those circumstances. I accept that.

Lord Mackinlay of Richborough (Con)

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I would like to assist the noble Lord, Lord Davies, on multiple employments. For an employer faced with an employee with multiple employments, which is not uncommon, it has no reference at all to the individual employer—it is of no interest. An employer runs a payroll scheme only for the amounts that that employer pays that employee. If there is a second employment, it is for that employer to deal with how much they are paying that employee. There is no interaction between the employers to say, “Do a management of NIC”. This goes to the heart of the problem with Amendment 33.

There is only one example where an employer has to take any notice of multiple employment, which is when their employee may have a second employment that is above the ceiling for paying the maximal national insurance. That is where you have a system of form CA72A, which is supplied by the employee to the DWP. The DWP may not actually do anything about it; I have found in most cases in my professional career that the DWP seems to lose the paperwork and the employee has to make an after-year claim for the excessive NIC that has been deducted. That is the only example where the second employment may receive advice from the DWP to say, “Ah, only deduct 2% from this employee because they are paying maximal amounts on a primary employment”. I wanted to clarify the current situation across national insurance administration for double or triple employments. I hope that is of assistance.

Lord Davies of Brixton (Lab)

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Yes; I thank the noble Lord for his advice. As I said, I have operated the system myself, and so he is really just making my point: the structures are there to deal with multiple employments. It is not being introduced to the issue by this particular measure. Obviously it would be more complicated with this measure—I accept that, and I look forward to my noble friend the Minister’s response on that issue—but it is not a new issue.

Baroness Kramer (LD)

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My Lords, as with the previous group, the noble Lord, Lord Davies of Brixton, made a comment on what he thought was Lib Dem policy; it might be—I am just not sure. We have discussed simply kicking out all this complexity and having a flat rate of relief on pensions. After listening to the last debate, I think that that has probably accumulated a lot of votes from around this Room, because the complexity that we have had described under this group of amendments is absolutely extraordinary. The noble Baroness, Lady Altmann, referred to the banana skins, and I think the noble Lord, Lord Leigh, talked about it being a nightmare. I am troubled that all of this is being left to consultation with the industry and to future regulation and future guidance, as if it can all be absolutely sorted with a bit of quiet attention. But we have heard the problems of how you deal with the many cases where people have multiple employers.

The noble Lord, Lord Mackinlay, made it clear that it is a relatively small handful of people who at present have to be dealt with through the Department of Work and Pensions to make sure that there is not a complexity. However, this would now apply to all kinds of people across a very wide range of activities and income. Trying to deal with the complexity of all these measures and delaying that has got us very disturbed. It is a bad principle for legislation. It is not that there is not a role for regulation and guidance, but that essentially should just be doing the finesse on a policy that has been clarified, whether it is in primary legislation, through evidence put before Parliament or through Statements made by the Ministers.

I think we have a real concern that this is going to turn out to be absolutely unworkable. The consequences of that, both for public finances and for individual decisions made by people, probably means that this legislation will collapse at some point. We ask the Minister to go back to the department and make it clear that clarity is absolutely necessary. If there are problems here that can never be reasonably and sensibly resolved, they should be recognised at this stage.

Baroness Neville-Rolfe (Con)

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My Lords, I shall speak first to the amendments in this group that stand in my name and then to those tabled by my noble friends. The noble Baroness, Lady Altmann, helpfully outlined a list of banana skins or uncertainties from her experience, such as the cost of changes in employment contracts and payroll software and of dealing with employees concerned about the change. She was right to ask whether we need to legislate so rapidly given the complexities that seem to be thrown up by today’s useful debate.

My amendments, Amendments 5 and 18, helpfully supported by the noble Baroness, Lady Altmann, chiefly concern the principle of parliamentary oversight. Nothing is more central to our work. Under Clauses 1 and 2, the Bill quite properly provides that regulations reducing the £2,000 contributions limit must be subject to the affirmative resolution procedure. That is right. If the Treasury lowers the cap, Parliament must be given the final say. What the Bill does not provide is affirmative scrutiny where the Treasury alters the methodology by which the cap is calculated or applied. That omission is significant because new subsections (6C) and (6D) do not deal with minor technical points but determine how the policy will operate in practice for thousands of earners whose pay patterns do not fit a neat monthly model.

Let us look at new subsection (6C). It permits regulations to prescribe an equivalent contributions limit for those paid weekly or at other intervals. That phrase “other intervals” is remarkably broad. It covers shift workers, contractors, seasonal workers, gig economy participants, those on irregular pay cycles and those with multiple employments. People in these forms of employment make up a large and growing segment of the modern labour market, yet the detail of how the limit will be translated for those individuals is not in the Bill. It is left entirely to regulations and consultation, as the noble Baroness, Lady Kramer, said. The annual cap is scrutinised in primary legislation, but, inconsistently, the translation of that cap into weekly, irregular or non-standard pay structures, the arrangements when an employee moves and other detail of importance to both workers and those operating payrolls, are to be set out later in regulations without the same degree of parliamentary approval. These points can be material in terms of compliance costs and fairness. In other words, those whose circumstances fit most neatly within the annual framework benefit from full parliamentary scrutiny, while those whose pay patterns are more complex do not. We submit that if the methodology by which the cap is applied to those workers is altered in a way that materially changes who pays and how much, that is a policy decision and one which requires greater scrutiny from your Lordships’ House and the other place.

The same concerns arise under new subsection (6D). There, the Treasury is given powers to determine by regulation when amounts treated as remuneration are deemed to be paid, in prescribed cases to treat a figure other than the amount foregone as remuneration and to calculate that alternative figure in such manner and on such basis as may be prescribed. These are extremely broad powers. They allow the Treasury not merely to administer the cap but to redefine how remuneration is attributed and calculated for NICs purposes. If such methodological changes can be made without returning to Parliament for affirmative approval, the House will have ceded oversight of important mechanisms that determine the real-world effect of this new policy.

My amendments simply make the point that where the method by which the contributions limit is calculated or applied is altered, Parliament should have the opportunity to approve the change. The Committee is currently scrutinising the Bill line by line. We are examining the consequences. It would be inconsistent if, once enacted, substantial changes could be introduced through regulations subject only to the negative procedure. If the Government are confident that any such changes would be technical and uncontroversial, they should have no objection to subjecting them to affirmative scrutiny.

These provisions will affect real employers and real employees. They will determine compliance burdens, payroll calculations and the effective tax treatment of pension saving. They are not trivial matters. In short, where the substance of the policy shifts, Parliament should be asked to approve that shift. I hope the Minister will recognise that this is a sound and serious constitutional point and give it proper consideration.

Amendments 4 and 17, tabled by my noble friend Lord Leigh of Hurley, make an interesting case. The Government’s policy intent, as set out in the Explanatory Notes, is to apply a national insurance change where pension contributions are made pursuant to optional remuneration arrangements—in other words, where an employee has chosen to forgo cash pay in return for an employer pension contribution. However, there are some workplace pension arrangements where no such option exists: the employee is not offered a cash alternative, there is no choice between salary and pension, and the employer contribution is simply part of the structured remuneration package.

In these circumstances, it is difficult to see how the arrangements can properly be described as optional. There is no alternative compensation available and there is no optionality. The amendment therefore makes clear that where no cash alternative is offered, the arrangement should not be treated as an optional remuneration arrangement for the purposes of the new NICs charges. I would therefore be grateful if the Minister could clarify whether arrangements with no genuine cash alternative are intended to fall within the scope of the Bill. If not, I hope he might look favourably on this clarification.

My noble friend Lord Leigh’s Amendment 33 makes a further important point that the Bill should not come into force until the Treasury has published clear guidance setting out how the contributions limit will apply in cases of multiple concurrent employments. This is a matter of basic administrative clarity and fairness. The question about two caps for two jobs came from my noble friend himself, and it would be interesting to know the answer.

My noble friend Lord Mackinlay doubts whether guidance is the right route, and wants to know what the arrangements will be today, with amendments to the Bill if we believe—in the light of the answers—that that is needed. We certainly need clarity, a change to the scrutiny of regulations to the affirmative, and perhaps guidance when we have the answers.

Finally, I turn to Amendment 4A in the name of my noble friend Lord Fuller. As drafted, the Bill introduces a flat £2,000 annual limit, above which salary sacrifice to employer pensions will attract national insurance. It is a hard cap. But real earnings do not operate in neat annual instalments; for many people, remuneration fluctuates significantly from year to year. Without any carry-forward mechanism of the kind well articulated by my noble friend Lord Mackinlay, which is apparently not very costly, the Bill creates a cliff edge. An individual who sacrifices modestly for several years but has a single high-earning year will be treated as if that year existed in isolation. That is not how pension saving works elsewhere in the tax system.

The pensions annual allowance regime already provides a three-year forward framework. Amendments 4B and 17B would align the national insurance treatment with that established precedent. The alternative amendments, Amendments 4A and 17A, simply provide the Treasury with a permissive power to introduce such a mechanism. They offer flexibility should Ministers be concerned about immediate fiscal implications.

Amendment 29A would require an independent review within 18 months of implementation. The Bill introduces a new compliance framework affecting payroll systems, remuneration design and pension planning. Therefore, it is entirely reasonable that Parliament should require evidence of its real-world impact, particularly on fluctuating earners and on employer administrative burdens. I do not agree with the noble Lord, Lord Davies of Brixton, that the extra burden of complexity on employers can be dismissed, particularly now we have heard that currently there is so little interaction between second and third employers. We want fewer burdens, not more. Enough is enough, and I look forward to a proper and detailed response on these very important technical points.

Lord Livermore (Lab)

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My Lords, I am grateful to all noble Lords who have spoken in this debate. I begin by addressing Amendments 4 and 17, tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann. These amendments relate to the technical and operational detail of the legislation, including the definition of “optional remuneration arrangements” and procedure. I fully understand the concern underlying them, which is to ensure that the Bill operates in a targeted, proportionate way and does not inadvertently affect ordinary employer pension contributions. The Government share this objective and I am grateful for this opportunity to clarify our intent.

The Bill before the Committee already relies on the established definition of “optional remuneration arrangements” set out in the Income Tax (Earnings and Pensions) Act 2003; this is the same framework that has applied since the optional remuneration arrangement rules were introduced in 2017. Under that definition, the rules apply only where an employee is given a choice—for example, a choice between receiving earnings or receiving employer pension contributions instead. This includes salary sacrifice arrangements, where an employee agrees to a lower cash salary in exchange for a pension contribution, or situations where an employee chooses pension contributions in place of a cash allowance.

Importantly, the Bill does not affect employer pension contributions where no such choice exists. Where an employer makes pension contributions as a standard part of the remuneration package and there is no alternative of cash or earnings available to the employee, those arrangements do not fall within the definition of “optional remuneration arrangements” and are, therefore, outside the scope of the Bill. In those cases, standard employer pension contributions will continue to be fully exempt from national insurance contributions, exactly as they are now. Nothing in this legislation changes that position.

Baroness Altmann (Non-Afl)

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May I ask for some clarification? The Government’s intention is to try to encourage higher pension contributions. If an employer decides to increase their pension contributions, how would one know that that had not been at the expense of some salary they might otherwise have paid? Would it just never be caught? Can we safely assume that increased employer pension contributions will not be caught unless there is some official paper that says, “This was instead of salary”?

Lord Livermore (Lab)

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I suppose I would ask the noble Baroness: who does she mean when she asks, “How would one know”? Who is “one” in that instance? HMRC? That would be reported to HMRC, would it not?

Lord Mackinlay of Richborough (Con)

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HMRC.

Noble Lords

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No.

Baroness Altmann (Non-Afl)

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As what? It would just be an increase in pension contributions because the employer has decided to increase the amount they will provide for their staff from, say, 6% to 8%. It is nothing to do with what they are paying the staff; it is not the result of negotiation. Their standard contribution was 6% and is, perhaps, going to 8%. Some people might be concerned that that would be considered by HMRC as an optional arrangement because the pensioning contribution has gone up, although that may not have been intended. The Government’s intention is, I hope, to get employer contributions to increase.

Lord Livermore (Lab)

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The example given by the noble Baroness is not a salary-sacrificed pension contribution. What she is describing is exactly what you would want to happen. Surely you want the pension contribution to go from 6% to 8%.

Baroness Altmann (Non-Afl)

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Yes, absolutely.

Lord Livermore (Lab)

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I do not understand where the problem is, because that is a good thing.

Baroness Altmann (Non-Afl)

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The issue is that there seems to be a risk. Can we somehow—I am not quite clear how—clarify in the Bill in case HMRC might decide that that is caught by the Bill?

Lord Livermore (Lab)

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I am happy to take this away and look at it, but I cannot see any way in which that would be the situation. Employers presumably increase their pension contributions all the time. That is a good public policy outcome. There is no way in which that would be caught by these regulations. I have made that extremely clear in what I am saying.

Lord Mackinlay of Richborough (Con)

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My Lords, I will ask the question in a slightly different way, which may flush out what I think we are trying to get there. Say, for instance, that there is an inflationary rise by an employer every year—there always has been and, one would have expected, always will be—and, in the world post this legislation, the employer has decided not to give a salary increase, for the first time ever, but the equivalent amount has gone into an additional employer contribution to a pension. If HMRC was to come in and investigate the payroll records of that employer, would it conclude that this was a contrived arrangement that fell within this legislation, or would it just be something that the employer can do, which the Minister seems to be describing as being perfectly good and dandy?

Lord Livermore (Lab)

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It is a perfectly good outcome if the employer increases their contribution into an employee’s pension. That is something we want to achieve. On specifically how HMRC would view that, I am very happy to take that away, but I do not believe in any way, in what I am saying, that that is the intention of what we are doing.

I will finish what I was saying. In those cases, standard employer pension contributions will continue to be fully exempt from national insurance contributions, exactly as they are now. Nothing in this legislation changes that position. For these reasons, the Bill already draws the correct boundary by relying on a well-established and familiar legal definition. It targets only those arrangements where an employee is given a choice between cash and pension provision, and it does not interfere with ordinary, non-optional employer pension contributions.

I turn to Amendments 5 and 18 in the name of the noble Baroness, Lady Neville-Rolfe, and supported by the noble Baroness, Lady Altmann, and the noble Lord, Lord Altrincham. These amendments relate to parliamentary scrutiny and procedure. I agree with noble Lords about the importance of maintaining strong parliamentary scrutiny, particularly where changes could affect individuals’ national insurance liabilities. That is an important principle and one that the Government share. That is why the Bill contains a series of safeguards to protect scrutiny and transparency.

The Bill explicitly provides that, where regulations are used to reduce the generosity of the £2,000 limit—that is, where changes would lower the contribution limit and thereby increase the amount of earnings subject to class 1 national insurance contributions—those regulations would be subject to the affirmative procedure. This ensures that any change which tightens the policy or increases liability is brought before Parliament for full scrutiny and approval.

By contrast, where regulations are made simply to implement the policy, to set out administrative arrangements or to increase the £2,000 limit, thereby resulting in less national insurance being payable, it is standard practice for those regulations to be subject to the negative procedure. That approach reflects the well-established distinction between substantive policy changes and regulations which deal with administration or confer additional relief.

This is not a new or novel approach. It follows the established precedent for regulations made under the existing powers in Section 4(6) and Section 4A of the Social Security Contributions and Benefits Act 1992 and the corresponding Northern Ireland legislation. In those cases, regulations of an administrative or beneficial nature have routinely been subject to the negative procedure.

I also note that the Delegated Powers and Regulatory Reform Committee has carefully scrutinised the powers in the Bill, including the proposed level of parliamentary scrutiny. The Committee has confirmed that there is nothing in the Bill that it wished to draw to the special attention of the House.

Taken together, these provisions ensure an appropriate and proportionate balance: robust parliamentary oversight where the policy is made less generous, and a well-established, efficient procedure for setting out administrative detail and making changes that operate in favour of contributors.

Baroness Neville-Rolfe (Con)

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Before the Minister moves on, would he consider making an affirmative regulation on the very first occasion? The discussions that we have had this evening show that there is quite a bit of complexity here, and that has compliance costs for employers and employees. It seems odd to take the precedent of the social security Act on something new and difficult. I wonder whether that would be worth considering. Perhaps the Delegated Powers and Regulatory Reform Committee did not have the benefit of the experts here who have explained some of the problems. I am sure the Minister cannot say anything today, but could he at least have a look at whether the first such regulations could be by affirmative resolution, which is a practice that I have encountered with lots of other Bills that we probably worked on together?

Lord Fuller (Con)

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If I may interject, especially with such a load of—

Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)

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Can we just let the Minister reply to that?

Lord Livermore (Lab)

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I have set out very clearly which will be approached with the negative procedure and the affirmative procedure, and I do not think it is our intention to deviate from that very clear precedent.

Amendment 33, tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann, relates to the operability of the contributions limit for those with multiple concurrent jobs. Amendments 4A, 4B, 17A, 17B and 29A, tabled by the noble Lord, Lord Fuller, also relate to operability of the contributions limit, with a focus on those with fluctuating earnings and their employers.

I fully understand the concerns that noble Lords have raised about how this measure will operate in practice, particularly for those with more complex employment arrangements and irregular patterns of remuneration. While the Bill provides the necessary powers, the full operational detail of the £2,000 cap will be set out in regulations that are yet to be published. The purpose of this two-stage process is to ensure that when the cap is introduced, it operates effectively across a wide range of real-world circumstances, including for individuals with multiple jobs, complex payroll arrangements, changing employment or fluctuating remuneration patterns over the course of a year.

Lord Mackinlay of Richborough (Con)

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Is the Minister’s understanding of the Bill that the £2,000 threshold will be in the entirety of a single employee or across each employment? At the moment, with NI regulations the employee benefits from different thresholds in each employment that is held. That means that with less than £12,570 in each multiple employment no employee national insurance is paid at all. Is the intention for it to be £2,000 in total across any number of employments, or £2,000 per employment?

Lord Livermore (Lab)

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That intention will be set out in the regulations once we have fully consulted relevant employers.

Lord Fuller (Con)

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There is a transfer of risk, of prejudice, from the individual, who is responsible under the current arrangements, to the employer. That has not been fleshed out at all. If you have a salary sacrifice that is processed by the employer, all of a sudden that employer trespasses on the duty at the end of the tax year for the employee to put in his tax return. There has been a muddying of the water here between the employee and the employer. I know we are going to come back on Report, and I hope we will get it done in a day, but the Government should lay out their approach to this and state where the liability sits and where the penalties may be applied for honest mistakes made in that interface between the employer and the employee. That is not at all clear, and it should be.

Lord Livermore (Lab)

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I am grateful to the noble Lord for his further thoughts. The carryover feature—

Baroness Kramer (LD)

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I do not want to be problematic here, but I wonder whether the Minister can understand that we are looking at a very different Bill and very different implications if the £2,000 contribution limit is per individual across a range of employments, or per job, and perhaps they have three or four. It is a fundamental difference, and while the details of how things would be done in the future and the operational issues may well have to wait for regulation, guidance and consultation, it seems to me that that core issue defines this Bill, and we should know that before we complete its passage.

Lord Livermore

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Obviously, I hear what the noble Baroness says.

The carryover feature of the pensions annual allowance, referenced in the justification for the amendments tabled by the noble Lord, Lord Fuller, sets the maximum amount of tax-relieved pension savings an individual can build up in a tax year without triggering a tax charge, which for most people is £60,000. The carryover feature is intended to accommodate one-off irregular spikes in pension saving or defined benefit accrual. The annual allowance carry-forward requires individuals to hold or obtain accurate records to track usage and eligibility and is not intended for day-to-day retirement planning. The Government do not consider it suitable to introduce a similar mechanism in the context of the cap on national insurance contribution-free pension saving in the Bill.

Before the detailed regulations that support the introduction of this change are finalised, HMRC will work closely with employers, payroll providers and software developers to ensure the policy operates smoothly for businesses and individuals. This engagement is not a formality. It is a necessary step to ensure that we collaboratively identify the best and most workable way to apply the £2,000 national insurance contributions-free limit, minimise administrative burdens and avoid unintended consequences, particularly for those whose earnings are spread across more than one employment.

Taking the time to engage properly and test implementation options is the best way to ensure that the policy works as intended from the outset. That is why the Government have committed sufficient time to work with stakeholders, up to and including the preparation of the important guidance for operation that the noble Lord, Lord Fuller, has raised in Amendment 29A.

On Amendment 29A, which proposes a reporting provision on the administrative cost borne by employers, I note that, upon the introduction of the Bill to Parliament, a tax information and impact note was published by the Government, setting out the impact of this policy’s operationalisation on employees and their employers. Supporting those who will implement this change within their organisations is vital, but we do not agree that that support should take the form of additional reporting requirements.

In light of all the points I have made, I respectfully ask noble Lords not to press their amendments.

Lord Leigh of Hurley (Con)

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My Lords, this debate has been very helpful because it has sort of blown a hole in the Bill. The noble Baroness, Lady Altmann, summed it up rightly: what has happened is that the Government started with the answer and then tried to find the question. In other words, they were desperately looking to find £4 billion from somewhere and came up with this random salary sacrifice idea. Why salary sacrifice? Why not say that NI on pensions does not apply over X amount and limit it that way? I am afraid that the Bill just does not work.

For example, in the case I raised about a new employee where an employer is negotiating over X amount of salary or Y amount of pension, is that a salary sacrifice? The Minister could not answer that. On the £2,000 cap, the Minister could not answer. He could not answer on the collective bargaining point or whether a bonus applies. On how we deal with multiple employments, I do not think that was satisfactorily answered. I also think that the spreading point was not satisfactorily answered.

I take the point that this provision is not scheduled to come in until April 2029. I respectfully make the point that we might all be busy then on other matters but, given that the earliest is April 2029, is it not right now to pause the Bill, work constructively with us and many others who have much greater knowledge, certainly than people on this Bench, and to think through how we might find a constructive way forward? Just hoping that we might get it right in regulation is bypassing democracy. It is the purpose of the House of Lords to examine Bills, make constructive suggestions, identify and highlight holes and issues, and seek to amend them. It is fair enough that this is what the Government want to do, but they have to be clear as to how it works before the Bill goes through.

I suspect the Government will find fierce opposition to the Bill as it is on Report from a large number of people in the House, so one would hope that the Government will pause, reflect, consider and consult—on the Bill, not in regulations—to enable us to get this right. The Minister is very good at putting himself in our shoes and has done so to some extent, and I hope that he will do so again in respect of these amendments. I particularly hope that Amendment 29A comes in, so that a future Chancellor can produce a report. I beg leave to withdraw Amendment 4.

Lord Altrincham (Con)

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I thank the Minister for his customary courtesy in hosting our Committee and for his patience with us as we move to group 3. I will open on this group, which is on contribution limits and indexation, and comment on those after the Division.

Lord Altrincham (Con)

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I thank noble Lords for their patience. I will resume the opening of group 3, on contribution limits and indexation, and will comment on Amendments 6, 13, 19 and 25 in my name and that of my noble friend Lady Neville-Rolfe. We also have a wide range of other amendments, many of which speak to the same set of concerns. I will not address the other amendments in this group in great detail, therefore, but I want to note that I am glad that the same issue has been largely echoed not only on this side of the Committee but across it.

We have already debated the principle of whether this measure is wise, but even those who are broadly sympathetic to the Government’s intentions ought to look carefully at what will happen if the £2,000 cap is left to stand unindexed year after year. The answer is that the Government will end up taxing people twice: once through the cap itself, and again through the quiet, insidious effects of inflation. The Government have chosen £2,000 as their figure. Let us take them at their word that this is intended to protect those on low and middle incomes while bearing down on very high earners; that is what the Minister has told us, in effect, and we should judge the policy against its stated purpose.

The problem is this: a cap that is not uprated in line with inflation does not stay in the same place. It moves, and in one direction only, pulling more and more people into its reach as wages and prices rise while the threshold stays frozen. We have seen this story before in our tax system. We know precisely how it ends. Fiscal drag, by any other name, is still fiscal drag, and, when it operates on a cap that limits pension saving, it is particularly harmful.

Consider an employee today contributing 5% or 6% of a salary that sits just at or above the threshold. Over three years of even modest inflation before the cap comes into force in 2029, then year after year thereafter, that same real-terms contribution will be clipped a little further each time. The worker has not become richer in any meaningful sense. They have simply been caught by a fixed line in the sand that the Government have chosen not to move. A number of different options set out in this group could mitigate this, such as raising the cap by different amounts or applying a percentage. I would like to hear from the Minister what impact these would have. For now, I believe that our amendment on uprating by CPI is the most realistic, but all have some attraction.

Given the complexities of administration already discussed—and apparently reflected in compliance costs in the years running up to the introduction of this new regressive tax—there may be a case here for providing for sensible indexation from day one. When we reformed salary sacrifice in government, we decided to continue it uncapped for pension purposes for a very good reason: we need to incentivise people to pay into their pensions to improve retirement adequacy and, indeed, to build a habit of saving. Sadly, the Bill goes in the opposite direction.

I appreciate that pensions adequacy will be debated more fully later on in our proceedings, but it is too important not to be addressed at this stage. If an increasing number of people find themselves caught by a cap as they sacrifice what are, in real terms, ever more modest sums through salary sacrifice, the inevitable consequence will be a reduction in retirement saving, affecting, as we have already discussed in Committee, people on modest earnings or, as the noble Lord, Lord Londesborough, mentioned, the cohorts over £25,000. Absent any uprating mechanism, the policy will steadily draw in those on lower and middle incomes, penalising individuals, in effect, for doing the responsible thing and saving for their retirement. As we made clear at Second Reading, improving retirement adequacy ought to be a central objective of government policy, not something undermined by it.

We must also be candid about the long-term implications. When people save less today, the shortfall does not disappear; it re-emerges later as a greater pressure on the state and, ultimately, on future taxpayers. I remain unconvinced that the Treasury has properly grappled with these behavioural and fiscal consequences, and the increasing cost of unfunded future retirement liabilities. The Government are taking significant risk with long-term savings behaviour by making even marginal changes, as was noted by my noble friend Baroness Altmann, or the expected behavioural changes by employees and employers noted by the OBR. I look forward to the contributions from other noble Lords with amendments in this group and the response from the Minister. I beg to move.

Lord de Clifford (CB)

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My Lords, my Amendments 8 and 21 seek to simplify the changes to salary sacrifice and link it to NIC, which is a tax that will be applied to the pension contributions. I note my interest in the register as an employer who currently runs a salary sacrifice scheme for our auto-enrol pension scheme.

In my Second Reading speech, I talked about the attack on the middle-income employees, and this amendment seeks to make a small adjustment to those middle-income earners. I support other amendments in this group in principle, especially those trying to increase the limit. I would welcome a higher limit than the one I am proposing, but this is a practical change and will help many. I tried to create equality by increasing the NIC free limit for all employees up to a proposed limit of £50,000 to £170,000. This NIC threshold would allow them just to pay 2% on salary sacrifice pension contributions. The noble Baroness, Lady Neville-Rolfe, and my noble friend Lord Londesborough mentioned this inequity in their speeches at Second Reading, and it has also been mentioned a lot this afternoon.

As the Bill currently stands, anyone who has a salary of £40,000 or above and who is making salary sacrifice contributions of 5%, which is the auto-enrolment employee contribution, would start paying national insurance at 8% up to the national upper earnings limit—of which the current annual threshold is £50,270. At this amount, employees would then only be charged at 2% for further pension contributions. This amendment seeks to increase the limit to that figure of £50,270, thereby removing inequity for some employees paying 8% on their pension contributions and others paying only 2%—the majority being higher earners.

Another benefit of the Government linking it to the NIC threshold is that when they wish to make changes to the threshold—to freeze them or increase them, subject to fiscal requirements of the economy—it would automatically change the NIC-free contribution within salary sacrifice, meaning they do not have to make any specific changes to the limit. It would also allow the NIC non-contribution to automatically increase with some sort of link to inflation and wage growth.

It could also help with the implementation of these changes as it would simplify some of the changes for software developers, with all national insurance already set up in the programme. As we covered in the last group, the Government could treat salary sacrifice in the way NIC deductions are currently calculated—on either a weekly or monthly basis. This, however, does not cover someone with several jobs and how it will be applied to them. I look forward to the Government’s research, and possibly some clarity before Report.

A further small benefit is that it would make it easier for employees to try to calculate their take-home pay and what pension payments they can make on a monthly basis to help plan for the future. The amount this amendment would save for employees paying NIC is a maximum of about £41 a year—as the noble Lord, Lord Davies, has covered—but these small amounts, if put into savings, would grow to a large amount by retirement age. Also, small amounts will make the running of a family home better.

Employers will still pay the bulk of the NIC to be collected, with this being 15% on these types of pension contributions. The maximum charge for employers will be about £77 a year, so not of significance with regards to what is trying to be raised by this change. The Government set out that this change was to focus on higher taxpayers, and this amendment would ensure most basic taxpayers would not have to pay NIC on their salary contributions. It would also solve one of the issues mentioned in Amendment 1 tabled by the noble Baroness, Lady Neville-Rolfe.

Will the Minister say where the £2,000 NIC-free amount come from? We know it was based on independent research commission by His Majesty’s Revenue and Customs. We know that three hypothetical options were offered to employers for feedback and that the response was that, of the three options, £2,000 would have minimal impact on business. How did the researchers produce this £2,000 figure as it appears to be an arbitrary amount?

This practical amendment does not change the principle of the Bill or what the Government are trying to achieve. It closes a loophole for some who are making pension contributions without paying NIC. This change does not change the focus from removing the allowance from the target group—higher rate taxpayers and additional taxpayers—who, according to the Minister, account for about 87% of salary sacrifice contributions. The estimate of the sum raised by this change will not reduce significantly.

Finally, this change would support workers and working families in the UK, who are the target of the Government. I very much hope the Government will have a positive approach to this amendment, and I look forward to the Minister’s response.

Baroness Altmann (Non-Afl)

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I will speak in support of my Amendment 9, as well as the amendments to which I have added my name, Amendments 7 and 20.

I have proposed my amendment so that—if we are to go through this exercise, which I hope we will not—no basic rate taxpayers would be likely to be caught by the measure. If the minimum contribution on which they can have national insurance relief is £10,000 a year, they are unlikely to be caught, unless they get a very large bonus. I hope that we will be able to deal with some of these issues.

The reason for suggesting a £10,000 per year pension contribution is based on the minimum amount that the very top earners are able to contribute to pensions. Under the tapered annual allowance, for example, £10,000 seems considered to be, if you like, an acceptable level of pension that is not egregious in some way.

My preference would be that, if we are to go down the route of capping the national insurance reliefs available to anyone who is paying into a pension, we do that in the way that I have just suggested, which is the same as one does with tax relief. If you pay in more than £60,000 a year, you do not get any extra tax relief; but if you pay in, for example, more than £10,000 a year, you do not get any national insurance relief on the amounts on top of that. That would be so much simpler.

I stress to the Committee that I believe that the Government and the Minister have not realised the complexity—the sheer scale of the administrative tasks—that will be involved if the Bill proceeds as it is. I liked the idea suggested by my noble friend Lord Leigh to put this on hold and do the work that we are trying to get the Government to do straight after the Bill passes before we finish and finalise the legislation, so that we have a better idea of what we are doing.

I also have a lot of sympathy with the approach that the noble Lord, Lord de Clifford, has outlined. We all seem to be trying to make the Bill operate in practice in a rather less difficult, complicated and costly administrative manner. The amendments tabled by the noble Baroness, Lady Kramer, to which I added my name, on £5,000 are just another way of trying to square this circle. I look forward to hearing the Minister’s thoughts.

I must confess that the idea of inflation linking this limit, if we were to get it, each year would probably just add to the complexity of an already incredibly complex set of changes that we are thinking of making to the Bill. We would not know, from one year to the next, what the new limit will be, because it will not be £2,000 or £10,000—I hope we will not end up there. I hope the Minister understands the spirit in which I am trying to suggest the £10,000 figure and the people I am trying to help: the basic rate taxpayers. I really do fear that they will have a much worse pension outcome if this goes ahead.

Baroness Kramer (LD)

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My Lords, this is the group of amendments on which I have been the most focused. I will not repeat my Second Reading speech, in which I talked about the importance of growing pension savings to fuel the growth agenda, but the Government must realise that this policy just does not align with that. However, I hope that the Government are beginning to understand that life today is long and it is not easy to put aside enough from the working years to achieve a decent retirement without depending on the state. According to the Resolution Foundation, changes made under the Bill will hit at least half of those who use salary sacrifice, affecting a large number and a wide range of households.

Different noble Lords, as we see in the amendments here, have proposed different increases to the contributions limit. Amendments 7, 10, 11, 20, 22 and 23 are in my name, and I thank the noble Baroness, Lady Altmann, and the noble Lord, Lord Londesborough, for signing some of them. The core of my amendments would increase the contributions limit from £2,000 to £5,000, preferably with a further annual increase linked to RPI. I confess that there is not a lot of science behind my choice of £5,000, but running it past people who deal with pensions, I began to think I had hit a sweet spot with that figure. The response was that it would support people making the rather difficult choice of what to do with their money and provide a little more of an incentive to save in a pension rather than to spend.

As part of this process, my colleagues in the other place were able to obtain some research from the Commons Library, using PolicyEngine and its interactive dashboard. That work is not definitive but it provides a useful picture of the distributional effects of raising the contribution limit. An uplift of £5,000 would give the greatest gains to the two top income deciles—we would all expect that. But just a shave behind those two deciles, the next highest gainers are the second decile, which is not, I expect, the result that the Government would have predicted. This group would have within it a cohort of young people, probably in their early to mid-20s, perhaps one pay rise into their careers, still willing to live in shared accommodation and to live quite frugally, and not yet trying to pay off student loans, get a mortgage or support children. Surely this is the group that any Government should target to get into saving for a pension in a big way.

Early investment enables a pension pot to grow, but it is a narrow window. As people move into the age of families and mortgages, they cut or even stop pension savings, and women are even more affected if they reduce work to care for children. Only later in life do people return to significant savings and by then it is very late in the day. Frankly, we should make sure that they also have strong incentives to save at this point in their lives to avoid sharp drops in living standards in old age. I think the Government have looked at earners as if they belong to fixed blocks: low earners, middle earners and high earners. In reality, most people’s profiles as earners and savers change as they go through life, and the incentives therefore have to be shaped to maximise and to meet that profile.

Some of my amendments would increase the £5,000 contribution limit annually by RPI. The noble Baroness, Lady Neville-Rolfe, discussed increasing the £2,000 limit by CPI. I know that the noble Baroness, Lady Altmann, considers this an additional complication but, frankly, we have to tackle this issue of frozen thresholds, which in eras of inflation have just such a negative impact.

Lord Londesborough (CB)

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My Lords, I will speak to Amendment 6, tabled by the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, which I have signed, and to Amendments 7, 11, 20 and 23, tabled by the noble Baronesses, Lady Kramer and Lady Altmann, to which I have also added my name. I am broadly supportive of all the amendments in group 3, including the very practical suggestions that we have just heard from my noble friend Lord de Clifford.

I will start with the very reasonable proposal in Amendment 6 to uprate the £2,000 cap by the percentage change in the CPI. I will not get involved in CPI versus RPI, which has just been very well covered by the noble Baroness, Lady Kramer. Without one of these mechanisms, we are allowing inflation and fiscal drag, as the noble Lord, Lord Altrincham, pointed out, to diminish the real contribution value of what will be for many significantly reduced salary sacrifice. These amendments address that and I believe they are hardly controversial.

Amendment 7 in the name of the noble Baroness, Lady Kramer, is more material in terms of the numbers, changing the contribution limit from £2,000 to £5,000, but, again, it has my support. My overarching concern about this £2,000 cap is that it will compound the existential problem of inadequate pension provision in this country. I encourage the Minister, if he has not already done so, to read carefully the latest report from the Economic Affairs Committee, Preparing for an Ageing Society. On that committee, I sit with the noble Lord, Lord Davies of Brixton, although we are both about to be rotated off, and one of us possibly removed entirely from this place—but that is a separate issue.

During the inquiry, expert witnesses warned us that, despite the success of automatic enrolment, we are in a situation where we have created an awful lot of small pension pots that are hard to find, hard to keep track of and, crucially, do not add up to enough, including those pension plans deemed to be in the upper quartile. UK people currently outlive their pension savings by about eight and a half years and, of course, the gap is even greater for women. As life expectancy increases, this problem will only grow worse.

Lord Ashcombe (Con)

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My Lords, the amendments in this group either increase the level of pension contributions exempt from national insurance or seek to prevent fiscal drag. Both aims are very welcome. In many respects, the higher the exempt amount, the better; on the face of it, Amendment 9, in the name of the noble Baroness, Lady Altmann, is the most attractive in that regard. Although it does not provide protection against fiscal drag, she did explain why. That said, assuming inflation remains under control, it would take many years for average contributions to reach the equivalent of £10,000, one hopes, just as it would take a fair amount of time—half, obviously—to reach the £5,000 level proposed in Amendment 7 by the noble Baroness, Lady Kramer, and others. Both would, however, offer meaningful support to average earners who receive a windfall. My noble friend Lord Leigh of Hurley addressed the issue of bonuses earlier. Those earners may wish to act prudently by making a significant one-off pension contribution, without being caught by this punitive tax charge.

The amendment in the name of the noble Lord, Lord de Clifford, offers a simple and workable approach, which he explained, yet this modest uplift would not be free of any fiscal drag, as we already know the basic tax rate on which the salary sacrifice threshold will be based. However, the amount would move if the tax bands increased—if only. I fear that, in the long term, this would work against the very employees the noble Lord seeks to protect, but it is better than the £2,000 mentioned in the Bill.

Finally, I turn to the amendments designed to counter fiscal drag, a mechanism that, as we all know, is one of the least transparent ways in which Governments of all colours raise revenue. Who does it fall upon most heavily? Once again, it is the middle and lower earners of this country: the teachers, nurses, engineers and shop owners—the list goes on—the people on whom the nation depends. Yet the Bill risks penalising them for doing exactly what we encourage: saving responsibly for a decent pension in retirement. The amendments in the names of my noble friends Lady Neville-Rolfe and Lord Altrincham anchor the thresholds to the consumer prices index, while those in the names of the noble Baroness, Lady Kramer, and the noble Lord, Lord Londesborough, use the retail prices index, and we have just heard why.

However, taken together, this group of amendments is of real importance and I support them all, to a greater or lesser extent. We have to try to move this absurdly low number. Each of them, in different ways, seeks to protect the middle and low earners who are trying to do the right thing and save for their futures.

Lord Mackinlay of Richborough (Con)

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My Lords, I support a number of the amendments within this group. Obviously, the one that catches my eye the most is the one in the name of the noble Baroness, Lady Altmann, which proposes the highest increase to £10,000. But I am very reluctant that we put into legislation more figures that become fixed and then become fiscal drag in future.

I write a regular column in the Money section of the Daily Telegraph—I am not sure it is declarable for this particularly, but it is on issues of tax. I wrote an article just a couple of weeks ago on inheritance tax. The threshold has been fixed at £325,000 since 2009, and I say with no great enthusiasm that we had 14 years of government, from 2010 to 2024, where we did not increase that. The Government with the blue flavour have not been good at increasing and uprating thresholds in line with inflation.

As has been said quite widely, it becomes the quiet hand that just increases more money to the Treasury in a fairly underhand way, you could say, because the Government have done nothing new: they have simply sat with the legislation that they have and, lo and behold, the magic of inflation cuts in and more money is raised from the same tax. If the 2009 threshold of £325,000 for IHT had been uprated to today, it would now represent £569,000, reflecting that in parts of the country, a house at £325,000 in 2009, which was intentionally free of inheritance tax, is not free of inheritance tax today. With this legislation, we are potentially implementing a fixed £2,000, which, with fiscal drag and inflated or inflating wages over time, will drag more and more people into the net.

The Financial Secretary to the Treasury has said in glowing terms during the course of this debate how good pensions are. I have no doubt that everyone in the Room thinks that pensions are a good thing. Unfortunately, it seems that that good thing is being whittled away. It does not take much for people to change their behaviour. I am concerned that the £2,000 threshold will mean those on the edge will only ever make a £2,000 salary sacrifice. They will not, under any circumstances, particularly if they are a basic rate taxpayer, ever go to £2,001—with an additional pound —or beyond. They will simply have smaller pension pots, as was very adequately described by the noble Lord, Lord Londesborough, in his good contribution.

There is the magic of compounding—I believe that Einstein even called it the eighth wonder of the world. It is the magic by which, just with plain inflation, £1 is put away in a very dull, FTSE-based equity plan—or even, should one wish, into government gilts over a very long period—and it goes up. By receiving just 4% or 5% of interest per year, those small pounds from years ago become very big pounds by the time one comes to retirement. As the noble Lord, Lord Londesborough, very ably said, people have small pots. Even with the great success of auto-enrolment, those pots still remain pretty small; they are not quite enough to supplement a long retirement as people live longer.

I support the good things that the Minister said about pensions. There always seems to be a bit of a cover from a Government who say “Well, only 26% of people will be caught”—I think the Minister said 74% of basic rate taxpayers will not be caught—as if that 74% is more than half and so we need not worry. I am afraid that I do worry about the 26% who will be caught and may do different things—namely, they will not put money away for their savings. For administrative ease, I think the higher the better, so that we do not implement into our tax and national insurance legislation yet another fiscal drag that gets worse and worse over time.

The plea repeated by many in Committee today is to pause and wait, because this will not come in until 2029. Our wide-ranging debate has highlighted a lot of flaws and problems. One of the big flaws seems to be that the Minister who has drafted this legislation remains a little unclear, dare I say it, whether this applies per person or per employment. That seems to go somewhat to the heart of what we are debating. I would almost suggest that we draw stumps and come back another day when the Minister is clear on that, after having asked somebody—I suppose someone in HM Treasury—what is intended. Is it £2,000 per person or per employment?

On the basis of that ambiguity, however, I recommend that we have an uprating to £10,000 at the highest level. Given all the uprating measures that noble Lords have described today—whether an inflationary index is applied or a flat £5,000 becomes the new base level, as the noble Baroness, Lady Kramer, proposed—I am afraid that the £2,000 threshold is looking very threadbare. It drags far too many basic rate taxpayers—the normal end of taxpayers—into its potential net. The danger is that they will not save and will not grow their own pots into the future. People on low pension income in the future will become reliant on the state.

What we are doing here is trying to get a bit of sugar today into the Treasury coffers. A sugar rush, where the future will have to be paid for as more people fall into pension credit and other forms of retirement benefit payments, could so easily be avoided by introducing every measure we possibly can, here and now, to get people saving for their own future.

Lord Leigh of Hurley (Con)

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My Lords, it is worth reminding ourselves that this legislation was prompted by a document published in May last year with this eye-catching title: Understanding the Attitudes and Behaviours of Employers Towards Salary Sacrifice for Pensions. It concluded:

“All the hypothetical scenarios explored in this research”,


including the £2,000 cap, were “viewed negatively” by those interviewed. It said that the changes would cause confusion, reduce benefits for employees and disincentivise saving for a pension. The report came to the conclusion that, of the three proposed hypothetical options for change, the £2,000 cap was no more than the least bad option.

As has been discussed here, even the OBR has stated that, in the first year in which this measure bites, there will be an estimated revenue of £4.48 billion from the Bill, but it will drop in the next year to £2.6 billion. That is a massive fall in revenue. Should HM Treasury not be worried about this? Should it not be asking itself, “How can we bring in something that leads to a drop in revenue of 50% in year 1?”? The taxpayer wants to know. Could an assessment be done of whether this is likely to be the case in some of the scenarios set out in these amendments—in particular, the £5,000 and the £10,000? I do not know this, because I do not have the resources to do that, but I suspect that, although bringing the cap in at £5,000 and £10,000 would not lead to the £4.48 billion in year 1, it would lead to a much more consistent figure in the subsequent years, for the long-term benefit of the country. As my noble friend Lord Mackinlay said, it will be a bit of a sugar rush and will force people to make most unfortunate changes in their patterns of savings, which the Government cannot be keen to see happen.

Lord Livermore (Lab)

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My Lords, I am grateful to noble Lords who have spoken in this debate.

First, I will address Amendments 6, 10, 11, 13, 19, 22, 23 and 25 in the names of by the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham and Lord Londesborough. These amendments seek to uprate the cap by the percentage change in the consumer prices index or the retail prices index. The Government agree on the need to keep the level of the cap under review to ensure that it continues to meet its policy objective: keeping the cost of salary sacrifice tax reliefs on a fiscally sustainable footing while protecting ordinary workers. However, we disagree with the approach set out in these amendments because it would be inconsistent with the approach taken in respect of other pension tax reliefs, which are not routinely indexed with inflation.

For example, in 2023, when the previous Government made changes to the annual allowance, they increased it by a set amount rather than indexing it; the annual allowance was otherwise not routinely uprated or index-linked. The Government are taking a pragmatic, balanced approach to ensuring that the cost of tax relief on salary sacrifice pension contributions remains fiscally sustainable. The future level of the cap in the next decade and beyond is for future Budgets in those decades.

This leads me on to Amendments 7 to 9, 20 and 21 in the names of the noble Baronesses, Lady Neville-Rolfe, Lady Kramer and Lady Altmann, and the noble Lords, Lord de Clifford and Lord Londesborough. These amendments seek to increase the cap beyond £2,000. It is important to consider the level of the cap in the wider context of the objectives of this change, which are about keeping the tax system on a sustainable footing while protecting ordinary workers. Without reform, the cost of this tax relief is now set to almost treble in cost, from £2.8 billion to £8 billion, with the vast majority of the benefit going to higher earners because around 62% of salary sacrifice contributions come from the top 20% of earners. Although some tax experts have called for pension salary sacrifice to be abolished entirely, the Government are taking a more measured and pragmatic approach.

As I said earlier this afternoon, the £2,000 cap protects 74% of basic rate taxpayers using salary sacrifice. This means that three-quarters of those earning up to £50,270 a year who use salary sacrifice will be protected by the cap. Almost all—95%—of those earning £30,000 or less who use salary sacrifice will be entirely unaffected by the changes. Some 87% of salary sacrifice contributions above the cap are forecast to be made by higher and additional rate taxpayers. Increasing the level of the cap in the way proposed by these amendments would cost additional money and would undermine the objective of putting this tax relief on a sustainable footing for the future. Such changes should also be considered in the wider context of pension tax relief, which amounts to more than £70 billion each year; that spend will be entirely unaffected by this legislation.

In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.