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.

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.

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 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.

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.

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 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.

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.

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.

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 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%.

Lord Livermore (Lab)

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

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 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 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 Livermore (Lab)

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

Lord Livermore (Lab)

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

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 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.

Baroness Neville-Rolfe (Con)

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My Lords, I will speak first to Amendments 12 and 24, which would exempt small and medium-sized enterprises, charities and social enterprises from the salary sacrifice pension contribution cap introduced by the Bill. I also welcome Amendment 27, tabled by the noble Baroness, Lady Kramer, requiring a review of the ability of SMEs to recruit and retain staff.

Small and medium enterprises have been hammered under this Government. They have introduced policies that will cost businesses £25 billion annually in tax compliance alone, according to the firm Together Accounting. Their previous NICs hike added a further £25 billion burden and there are business rate hikes, minimum wage increases and the Employment Rights Act. Is it any wonder that 52 businesses per 10,000 are entering insolvency, nearly double the rate from just five years ago? The Federation of Small Businesses reports that 63% of businesses now cite tax as their primary concern. Business confidence has plummeted. This is something that I have spoken about many times, and the Conservative Party stands with small businesses. They are the lifeblood of our communities, our jobs market and our economy.

Our amendment tries to shield SMEs and charities from what is effectively yet another damaging tax by exempting them from this policy. Given the onslaught SMEs have suffered under the Government, the rationale for this needs little explanation. SMEs operate on thin margins, often without sophisticated accounting mechanisms or payroll and accounting teams. They will be disproportionately affected by this policy and should be exempt.

Turning to charities, before the Budget was even confirmed, the Charity Finance Group ran a survey of the sector specifically on the question of salary sacrifice. It found, and I urge the Committee to note these figures carefully, that 81% of charities reported that the salary sacrifice change would have a negative impact on their ability to offer competitive benefits to staff. Nearly seven in 10 had already started to reduce headcount or expected to do so in the near future, and that was before this further measure. It is not surprising that they are worried, as in my experience charities often have more complex employment arrangements: seasonal working, moving jobs, and weekly rather than monthly pay. They also often have much less sophisticated payroll systems.

CFG warned explicitly that, for charities operating on tight margins, salary sacrifice has been a critical tool and a way both to support staff and to achieve meaningful savings on employer national insurance at the same time, stretching limited resources further while enabling employees to build better pension provision. To cap that mechanism is to remove one of the few cost-efficient tools available to organisations that cannot increase prices, raise equity finance or easily diversify their income when grant funding or public contracts do not keep pace with costs.

The wider context of what has happened to charities under the Bill matters here, too. Last year, on Report, the House of Lords carried amendments to the then national insurance contributions Bill that would have protected small charities with revenues under £1 million from the main NICs rise. However, the Government rejected them, and we have seen what happened there. The Government have said that they want to build a stronger economy and a thriving civil society. That ambition is not well served by a policy that removes from smaller employers and civil society organisations one of the most effective tools that they have to compete for talent and support their people in saving for retirement.

Amendment 26 asks that, within 12 months of this Act coming into force, the Government commission and lay before Parliament an independent review of its impact on small and medium-sized enterprises, including administrative costs, compliance burdens, employment costs and the ability of SMEs to attract and retain staff—and, crucially, that this be assessed in the context of the cumulative changes to employer national insurance since July 2024.

Time and again, the Government’s approach has displayed a worrying lack of understanding of how small firms actually operate, how thin their margins are, how sensitive they are to cumulative costs and how easily confidence can be shaken. We saw it with the previous national insurance hike and in the rushed recalibration over pubs, and we see it all over again in this Bill and the rush to pass it when the vital detail is still to be settled. We know that the revenue collected will almost halve in the second year of implementation, so there will be lots of new compliance costs and an uncertain future.

If the Government are confident that this measure will not materially damage SMEs, they should welcome the opportunity to demonstrate that through an independent review. If they are serious about growth, entrepreneurship and avoiding further damaging U-turns, they should look at the cumulative picture. Given the scale of pessimism now facing the small business community and the stakes for employment and growth, I urge the Government to accept this amendment. SMEs do not trust the Government to act in their interests. If the Treasury were to adopt such an amendment—as well as the associated one for Northern Ireland, where there are so many SMEs—perhaps this trust might start to be rebuilt. I beg to move.

Lord Livermore (Lab)

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My Lords, I am grateful to all noble Lords who have spoken in this debate. First, I will address Amendments 18 and 24 in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, which would exempt small and medium-sized enterprises, charities and social enterprises from the Bill.

The Government agree on the importance of supporting small businesses and ensuring that they are not unduly impacted by these changes. Small and medium-sized enterprises are far less likely to offer pension salary sacrifice than larger businesses. According to Nest Insight, around 33% of small businesses offer pension salary sacrifice to their employees, compared with 83% of large businesses. In addition, employees of small and medium-sized enterprises are far less likely to have contributions exceeding the £2,000 cap; only 10% of employees in SMEs have pension contributions through salary sacrifice exceeding the cap. Exempting small and medium-sized enterprises in the way suggested by the amendment would therefore introduce significant additional complexity into the tax system and would be disproportionate given the limited impact that this policy is expected to have on these businesses. The Government are engaging with employers and other industry stakeholders ahead of these changes coming in.

Similarly, Amendments 26 and 27 in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham, Lord Londesborough and Lord de Clifford, would require a review of the impact of the Act on small and medium-sized enterprises. As I have already said, the Government agree about the importance of supporting small businesses. The changes in the Bill will mainly impact larger employers, which are much more likely to use salary sacrifice and to have employees who are contributing above the £2,000 cap.

More widely, the Government are delivering the most comprehensive package of support for small and medium-sized businesses in a generation through the small business strategy, unlocking billions of pounds in finance to support businesses to invest and removing unnecessary red tape. Ahead of the cap coming into operation, the Government will continue to work closely with employers, payroll administrators and other stakeholders to ensure that the changes are implemented in the least burdensome way for businesses of all sizes currently using salary sacrifice.

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, if the Government truly wish to support SMEs and charities, they should not press ahead with a measure that those enterprises have told us—I gave a great deal of evidence, and we have heard this from others as well—will damage them, increase their operating costs and complexity and reduce their ability to offer options to their employees. The noble Baroness, Lady Altmann, put the case well.

The noble Lord, Lord Londesborough, with his unique experience of SME businesses, reminded us of the dire situation facing SMEs, with significant numbers closing down, as one can see on almost any high street. My noble friend Lord Ashcombe emphasised the cumulative effect and rightly added energy prices to the problems that SMEs and charities are facing. The Bill will raise employment costs at a time when companies are already stretched to boiling point.

The noble Lord, Lord de Clifford, illustrated the problem with information drawn from the impact of NICs on his business, which I found particularly compelling. He is very keen to have the hope—I think that is the right word—that will arise from the proposed review. My noble friend Lord Mackinlay reminded us of the large number of NEETs who are out of work, as well as of how we now have higher youth unemployment than the EU, generating what he referred to as a tipping point.

My noble friend rightly raised—I hope that the Minister will come back on this—the key unanswered question of whether the £2,000 cap will apply per employee across multiple employments. We must have an answer on that because it will make a great deal of difference, especially to smaller operations. I am impressed by the fact that, for the first time, my noble friend has agreed to support a carve-out for SMEs and charities, on which I have campaigned for the past 11 years.

The Minister and I have often exchanged views on SMEs, but this is an opportunity for him to make a concrete change to the Government’s policy on this matter, do something to show that the Government listen to SMEs and small social enterprises and provide them with a bit of relief from the mountain of complexities piled on them. I urge the Government to think again and make a positive change to the Bill in this area. It would not be expensive, but it would protect jobs and businesses, help our economy and, above all, reduce compliance costs for both this vital sector and the officials who are taxed with policing the changes and gathering revenue.

Lastly, I reiterate my support for the review of SME recruitment and retention proposed by the noble Baroness, Lady Kramer, in the light of the cumulative NICs changes that we have seen over the past 18 months. Like her, I hope that the Government are listening. For now, I beg leave to withdraw the amendment, but we will, I think, want to revert to the position of SMEs and charities when we come back on Report later in the spring.

Lord Livermore (Lab)

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My Lords, I am grateful to all noble Lords for their contributions to this debate.

I turn first to Amendment 28, tabled by the noble Baroness, Lady Kramer, which seeks the publication of illustrative projections of lifetime pension saving values before and after this change. The Government do not agree that this amendment is necessary to provide the required information on personal pension saving outcomes. The impacts of the measures in the Bill, including on employees and employers, are already set out in the tax information and impact note published alongside the Bill’s introduction.

Additionally, the Government published a policy costing note, which includes detail on the tax base and static costing as well as a summary of the behavioural responses expected by individuals and employers. The Office for Budget Responsibility has set out impacts in its economic and fiscal outlook, making it clear that it does not expect a material impact on savings behaviour as a result of the tax changes made in the Budget. Similarly, there are already a number of existing tools and services that individuals can use to understand their personal financial position and estimate their potential retirement income.

Amendments 29 and 30, tabled by the noble Baronesses, Lady Altmann and Lady Neville-Rolfe, and the noble Lords, Lord Altrincham and Lord de Clifford, would require the Government to take advice examining the impact of this change on employers, pension adequacy and workers’ pay. They also seek to make commencement of the Act conditional on the publication of an independent review of its effects, including on pension adequacy. The impacts of this measure have already been set out across the range of usual publications for changes to national insurance; these include the published tax information and impact note and policy costings note, as well as the Office for Budget Responsibility’s economic and fiscal outlook.

These amendments raise a wider point about the role of salary sacrifice in the pension salary saving system, particularly in relation to incentivising saving and improving pension adequacy. It is important to place this measure in context. Salary sacrifice existed in the 2000s and early 2010s, yet, during this period, there were falls in private sector pension saving. The key factor that has led to an increase in saving in recent years, as many noble Lords have noted in this debate, is automatic enrolment. As a result of automatic enrolment, more than 22 million workers across the UK are now saving each month.

Although all of us here share a commitment to improving pension adequacy, many groups at higher risk of under-saving—including the self-employed, low earners and women—are not the most likely to benefit from salary sacrifice. Only one in five self-employed people save into a pension, but they are entirely excluded from salary sacrifice. Low earners are most likely not to be saving, but higher earners are more likely to be using salary sacrifice. Many women are under-saving for retirement, but many more men use pension salary sacrifice.

The pensions tax relief system remains hugely generous, and there remain significant incentives to save into a pension. The £70 billion of income tax and national insurance contribution relief that the Government currently provide on pensions each year will be entirely unaffected by these changes.

Given 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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We will finish at 7.45 pm.

Baroness Neville-Rolfe (Con)

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Sorry—I was advised that there is no agreement beyond 7.45 pm.

Baroness Neville-Rolfe (Con)

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Well, I have been told that there is no agreement beyond 7.45 pm. I do not have a Whip in here.

Baroness Neville-Rolfe (Con)

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What happens if we do not finish this group?

Baroness Neville-Rolfe (Con)

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My Lords, my amendment in this group seeks to make the commencement of this Act conditional upon the publication of an independent review of its impact on employers.

The Government’s decision to cap national insurance relief on salary sacrifice pension contributions at £2,000 per year has been presented as a measure targeted at higher earners, but the reality, as those of us who have spoken to businesses up and down the country know, is rather more complicated than that. This is not simply a matter of adjusting the tax affairs of a few well-paid executives. This measure hits employers directly and in ways that Ministers have not thus far adequately costed or explained. For small and medium-sized enterprises in particular, the costs are not trivial. Many have structured their entire remuneration and pensions offerings around salary sacrifice arrangements. They have done so because it is administratively straightforward, it benefits their staff, and it has had the backing of the previous Government as a sensible way to encourage workplace pension saving. Those businesses now face not only higher employer national insurance costs but also the compliance burden of unpicking arrangements that may have been in place for years.

Let us be plain about what this means for a small business. We are talking about firms with perhaps 20 or 30 staff, businesses that do not have large HR departments or in-house tax teams. They will need to review every employment contract, revisit their payroll systems and, in many cases, seek professional advice to understand their new obligations. What is particularly troubling is that we have not seen from the Government anything approaching a comprehensive assessment of these impacts. We know that HMRC consulted last year, but it got a dusty answer. The OBR has produced some high-level revenue estimates, which do not reassure us, and we know from the Treasury note that it expects this measure to raise several billion pounds by the end of the Parliament. But what we have not seen, and what employers and employees alike are entitled to expect, is a proper independent analysis of what this means in practice, especially for SMEs and middle-income employees.

There has been no serious attempt to model the indirect costs, the effect on employer pension contributions, the likelihood that firms will scale back their own contributions to compensate for higher tax costs, or the impact on workforce retention where salary sacrifice has been used as a recruitment and benefits tool. The OBR itself has acknowledged significant uncertainty in its projections, noting that revenue yields are highly sensitive to behavioural change—a very important point—and yet the Government press ahead without the evidence base one would expect for a measure of this scale.

My concern—which is shared by a range of voices in the pensions industry and in business groups and among those who have looked carefully at the measure— is that, in restricting salary sacrifice without proper analysis, the Government risk undermining the very pension-saving behaviours they claim in other contexts to support. As the ABI has put it, savers and the pension system need stability. What we should not be doing is swapping pension stability for short-term revenue raisers.

The Minister has cited a number of statistics on the numbers whom HMT anticipates will be affected, but these fail to recognise that the Government have almost no idea of how employers and, therefore, employees would respond and be affected by those changes. As I have already mentioned, the OBR has said that there is a high level of uncertainty over the size of the behavioural response. If an employer stops offering a salary sacrifice because of the compliance costs and complexity, as many of them have warned they will, then every one of their employees will be affected. So how can the Minister say that 74% of basic rate taxpayers will be left unaffected when HMT has no idea how the organisations employing them will react to the Bill? Indeed, the detail is still unclear. The point many noble Lords have raised stands: the Bill brings a great deal of uncertainty, and the Treasury does not understand the wider effects of what it is proposing—thus my wish to delay commencement until we have a clearer view.

I welcome Amendment 32 in the name of the noble Baroness, Lady Kramer, which references the OBR’s supplementary forecasts. I do not want to steal her thunder, but the issues this forecast raises are numerous. Of particular concern are the behavioural changes that it anticipates. The OBR estimates that behaviour reduces the 2030-31 yield by around 48% compared with the static figure. Employers are assumed to redirect pay growth into employer contributions, employees are assumed to shift into relief at source or net pay arrangements, and there are additional pass-through effects into wages and profits. In other words, nearly half the static yield depends on assumptions about how employers and employees respond. The options open to employees and employers are numerous, and they have three years to think about it.

Another serious concern highlighted is that HMRC does not hold comprehensive data on salary sacrifice usage. As we understand it, the modelling used by the OBR relies heavily on ASHE survey data and historic APSS 107 returns to estimate bonus sacrifice behaviour. The OBR therefore assigns this measure a medium-high uncertainty rating with particular uncertainty around behavioural responses and the size of the bonus sacrifice base. This policy is uncertain. How will it affect savings, how will it affect behaviour and, significantly, how much will it raise and for how long?

I know others may have questions for the Minister, but the new arrangements come into operation in 2029-30 and, as we have all been saying, there is time for more questions to be asked and answered and for more work to be done. I hope the Minister will look at these various amendments positively. I thank the Deputy Chairman for his clarification on timing, and I beg to move.

Lord Livermore (Lab)

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My Lords, I will first address Amendment 31, tabled by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham. I agree on the importance of transparency on the impact of this policy, including on employers. However, an additional publication is not necessary to achieve that objective. A number of documents have already been published in line with the usual practice for national insurance contribution changes, which comprehensively set out the impacts of this measure, including on employers.

The tax information and impact note was published alongside the introduction of the Bill. This sets out the number of employers expected to be impacted by this measure, the one-off costs—including familiarisation with the change, the training of staff and updating of software—and the expected continuing costs, including performing more calculations, and recording and providing additional information to HMRC, where salary sacrifice schemes continue to be used. This equates to a one-off £75 and an ongoing £99 per business per year. The Government also published a policy costing note, which includes detail on the costing of the measures, including the tax base, static costing and a summary of the behavioural responses expected by individuals and employers.

The Office for Budget Responsibility published its economic and fiscal outlook, which provides the OBR’s independent scrutiny of the Government’s policy costing. The OBR also published a supplementary forecast note, which provided additional information that it received in last year’s Budget to further increase the transparency of this measure. Taken together, these publications already provide an appropriate and comprehensive assessment of employer impacts.

On Amendment 32, the OBR’s economic and fiscal outlook and its supplementary forecast—

Lord Livermore (Lab)

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My Lords, as I have already said, it has been published in various places, and I do not see the need to bring that into one place, as the noble Lord asked.

On Amendment 32, the OBR’s economic and fiscal outlook and its supplementary forecast publications set out how behavioural responses have been considered in certifying the costing. Some of these behavioural assumptions were also published in the policy costing note accompanying the Budget. The supplementary forecast information was drawn from analysis and data supplied to the OBR by the Government ahead of Budget 2025, in line with the standard process by which the OBR scrutinises and certifies costings. The Government’s published costings therefore already reflect these behavioural effects, and the OBR has certified these costings in the usual way. Given that the material reference is already publicly available and has been fully reflected in the certified policy costings, it is not necessary to review the OBR’s supplementary forecast.

If the noble Lord, Lord Londesborough, will forgive me, I will write to him with the answer to his specific question. In the meantime, given the points I have made, I respectfully ask noble Lords not to press their amendments.

Baroness Neville-Rolfe (Con)

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My Lords, I am grateful to all noble Lords who have spoken in this debate—a shorter debate than we probably needed—and I am particularly grateful to the noble Baroness, Lady Kramer, and the noble Lord, Lord de Clifford, for drawing out so clearly the scale of the uncertainty that we are facing here.

The Minister has referred to various costings and has described them as conventional, but the truth is that the tax impact notes that have been published are inadequate, as indeed were parallel information notes published last year when we were discussing the national insurance changes of £25 billion. As a result, the consequences we are now seeing in the economy were not, to my mind, adequately flagged up.

However, where a policy is acknowledged by the OBR to carry medium to high uncertainty, and where almost half of the projected yield depends on a behavioural response that is not known in advance, I think the data that we have is incomplete. It is therefore reasonable to pause and require an independent assessment, and we have time for that. The alternative is that the Government legislate blind and then ignore the impact of the measures they take, as they did last year. In this case, of course, it will be a long time before we know the impact, because the measures will come into play in 2029-30.

In matters of pension saving and employment costs, stability and predictability are essential. If the Government are confident in their policy, they should have nothing to fear from the independent scrutiny that we have proposed. But time is late; we have reached the witching hour, and I beg leave to withdraw the amendment.

Baroness Neville-Rolfe (Con)

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My Lords, I am pleased to be opening our deliberations on Report by speaking to a powerful group of amendments tabled by not only the Opposition but noble Lords from across the Chamber. This group in many respects shows the scale and breadth of the concerns that are held by noble Lords with respect to this Bill.

My first amendments in this group seek to exempt basic rate taxpayers from this policy. I am grateful to noble Lords from across the House who supported Amendment 1 in Committee and who recognise the seriousness of the issue that it seeks to address. This Bill is a mistaken Bill. It will limit incentives to save into pensions and reduce pensions adequacy. In our lively Committee discussions, Peers with business and tax experience and knowledge of pensions and payroll exposed its failings. The responses from the noble Lord, Lord Livermore, did not allay our concerns. On the contrary, they reinforced them.

The Government have been clear in the Bill’s Explanatory Notes and in Statements made in this House and the other place that this policy is intended to target higher earners. That is the stated purpose and the political justification, but it is not the reality. The Society of Pension Professionals has told us that around one-quarter of those who use salary sacrifice and who will be caught by these changes are basic rate taxpayers. When this was put to the Minister, he did not dispute it. In fact, he went further. He told us that around 74% of basic rate taxpayers currently using salary sacrifice will be protected by the £2,000 cap. That is the current position and, as far as I know, does not allow for wage inflation in the period before the measure takes effect. That could increase the number of basic rate taxpayers who are affected.

The new arrangements take effect in 2029-30, conveniently helping the Government with £4.7 billion of revenue to satisfy their fiscal rules in that crucial year. However, the Minister’s exclamation means that 26% of basic rate taxpayers will not be protected. More than one in four basic rate taxpayers using salary sacrifice will be hit. The Minister also acknowledged that some people earning under £30,000 would be affected. Let us pause on that. This is a policy presented as targeting high earners, yet it will impact workers earning under £30,000. Surely that is, by the Treasury’s own admission, a fundamental contradiction between rhetoric and reality. For a basic rate taxpayer, the 8% national insurance charge represents two-fifths of the value of their income tax relief. In practical terms, the marginal cost of this policy is four times higher for a lower-paid worker than for someone on a higher income. That is a very different definition of a progressive tax. The lower your income, the greater the relative blow.

Our amendment offers the Government a straightforward way out. By exempting basic rate taxpayers from the cap, we would align the policy with its stated objective. If the aim is to target higher earners, let us do precisely that. Let us not drag lower and middle earners into a measure that they were repeatedly told would not affect them. Lower savings today mean lower retirement incomes tomorrow, and lower retirement incomes tomorrow mean greater reliance on the state. That is neither fiscally prudent nor socially responsible.

This is closely related to another of my amendments in the group, Amendment 7, which would require that regulations made under Clauses 1 and 2 should explain the basis on which the Treasury considers certain employed earners to be higher earners for the purposes of the national insurance charge and how the contribution limit reflects that assessment in Great Britain and Northern Ireland. This amendment, which we also tabled in Committee, received a wholly inadequate response. I asked the Minister who in the Government’s view were higher earners. I asked for a number. Was it people on £50,000 a year or £60,000 a year? The Minister refused to give one. Indeed, he did not engage with the point at all. Remember, some basic rate taxpayers will be affected by this policy. They are not higher earners. The Government should be honest about that.

Amendment 7 seeks to ensure that when regulations are forthcoming—and there are a lot of them provided for in the Bill as it stands—the Treasury will do the right thing and explain how the regulations meet the policy intent of affecting only higher earners. It would not impose costs on the Treasury or affect how the policy works but would ensure that we get an explanation of how lower and medium-income workers are to be protected. That is the Government’s stated aim. If the Minister is confident that regulations will meet the Government’s own test, he should accept this amendment.

The final one of my amendments to which I wish to speak, Amendment 29, concerns SMEs and charities. Throughout the passage of this Bill, and in debates far beyond it, many of us have warned about the cumulative burden this Government are placing on smaller employers. Think about the Employment Rights Act, the minimum wage hikes, the spiralling business rates, U-turns and uncertainty, compliance and regulatory costs and, indeed, the previous NICs hike. The list goes on. Each item is a policy that damages small and medium-sized enterprises in our country. They include family firms, start-ups, local manufacturers, high-street shops, care providers and charity and community employers. They often do not have in-house tax teams or compliance departments. They do not have margins that allow them quietly to absorb new fiscal shocks. Many do not offer salary sacrifice, but some do and more may do so now that it is more in the public consciousness thanks to this change.

My amendment simply says that, where the employers are a small or medium-sized enterprise, or a charity or a social enterprise, the provisions of this clause should not apply. If the Government’s intent is to truly address behaviours concentrated in large corporates then they should have no difficulty accepting that smaller employers ought to be shielded.

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

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My Lords, I am very grateful to all noble Lords who have contributed to this first group of amendments. I turn first to Amendments 1 and 17 in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, which seek to exempt basic rate taxpayers from the Bill. As the noble Baroness, Lady Neville-Rolfe, noted, the vast majority—74%—of basic rate taxpayers using salary sacrifice will be unaffected by the changes in this Bill. Specifically, three-quarters of those earning up to £50,270 and using salary sacrifice will be entirely protected, and that rises to 95% when looking at those earning £30,000 or less who use this mechanism to save into their pensions. The minority 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 they receive on their pension contributions. Half of those basic rate taxpayers contributing above £2,000 will face an additional national insurance contribution liability of less than £50 a year.

Exempting basic rate taxpayers would also be exceptionally difficult to operate in practice and would add considerable additional administrative burden on to employers. That is because, unlike income tax, national insurance does not operate on an annual aggregated basis, nor does it determine liability by reference to an individual’s final tax position. An individual cannot be confirmed as a basic rate taxpayer until their full income position is reconciled at the end of the tax year, taking account of potentially multiple employments and other sources of income. To apply a tax band-based exemption, employers would be required to undertake year-end reconciliations across employments and account for other sources of income as well that sit wholly outside the design of the national insurance contributions system. This would represent a fundamental departure from established payroll processes, imposing significant complexity, cost and risk on to employers and payroll providers.

Amendments 16 and 29, in the names of the noble Baronesses, Lady Neville-Rolfe, Lady Kramer and Lady Altmann, and the noble Lord, Lord Altrincham, seek exemptions for small and medium-sized enterprises, charities and social enterprises. Exempting small and medium-sized enterprises and charities in the way proposed by the amendment would add considerable complexity to the tax system and would not be proportionate to the limited impact this policy is expected to have on those businesses. The changes in this Bill primarily affect larger employers, which are significantly more likely to operate salary sacrifice arrangements and to have employees contributing above the £2,000 cap.

Small businesses are significantly less likely to offer salary sacrifice than larger businesses. Only 28% of employees in SMEs use salary sacrifice for pension contributions, compared to 39% in larger firms. When it comes to contributions above the £2,000 cap, the difference is even clearer. Only 10% of employees in SMEs make pension contributions through salary sacrifice that exceed the value of the cap, compared to 18% of employees of larger firms. This underlines that the largest benefits from uncapped salary sacrifice are concentrated in bigger firms, not smaller firms.

In practice, the changes in this Bill will level the playing field between small businesses and their larger competitors, ensuring that the national insurance contribution advantages of salary sacrifice are not disproportionately concentrated among employees in big firms. More widely, the Government recognise the importance of supporting small businesses and charities alike.

This leads me to Amendments 7 and 23 in the names of the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham. These amendments 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 and how the contributions limit reflects that assessment. The Explanatory Notes for this Bill set out clearly that the Government’s objective is to limit the national insurance contributions relief available to higher earners on employer pension contributions made through salary sacrifice, while protecting lower-earning pension savers. These changes are about fairness and consistency across the labour market.

Additionally, 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 completely excluded from using salary sacrifice altogether. The cap we are introducing through this Bill will protect the majority of basic rate taxpayers using salary sacrifice and ensure that the cost of national insurance relief on pension salary sacrifice is put on a fiscally sustainable footing.

I now turn to Amendments 5 and 21 tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baronesses, Lady Altmann and Lady Kramer, which seek to exempt salary sacrifice pension contributions over the £2,000 limit from being included in the definition of earnings used to calculate student loan repayments for employees. Student loan repayments are calculated using the same earnings base as class 1 national insurance contributions. As a result, salary sacrifice currently reduces both national insurance contributions and the earnings used to calculate student loan repayments. Any change in student loan repayments arising from this measure is a mechanical consequence of restoring those earnings to the national insurance contributions base. It is not a change to student loan policy itself; rather, it flows from levelling the playing field between those who are able to use salary sacrifice arrangements to reduce their earnings for national insurance contributions and those who are not. Of those employees making pension contributions through salary sacrifice, younger people are far more likely to be protected by the £2,000 cap than those above the age of 30. Some 76% of those in their 20s—

Lord Livermore (Lab)

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I am afraid I do not know what led the noble Baroness to believe that. That is not in any way my intention at this point.

As I was saying, 76% of those in their 20s who use salary sacrifice are protected by the cap, compared to half of those aged 30 and above. The Government do not believe that this Bill is the appropriate vehicle through which to amend the basis of student loan repayments—

Lord Livermore (Lab)

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I think it does make the system fairer. We discussed this extensively at Second Reading and in Committee. The Government intend to make the system both fiscally sustainable and fairer, and I think that is exactly what we are doing with this legislation.

As I have said, the Government do not believe this Bill is the appropriate vehicle through which to amend the basis of student loan repayments. As the Prime Minister said last week, the Government inherited from the previous Government a broken student loan system, and we will look at ways to make that fairer.

I turn, finally, to Amendments 12, 13, 14, 15—

Lord Livermore (Lab)

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I was asked whether I was today saying we would do anything to this legislation; no, we will not. Will we look at how to make the system fairer? Yes, we will. I think those two things are perfectly consistent.

Lord Livermore (Lab)

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That was not a commitment I gave. What I said in Committee, and say again today, is this is not the right Bill to change the student loan repayment system. We will, however, look at ways to make the system we inherited from the previous Government fairer. That remains the position.

I turn, finally, to Amendments 12, 13, 14, 15, 26, 27, and 28, tabled by the noble Baronesses, Lady Neville-Rolfe, Lady Altmann, and Lady Kramer, and the noble Lords, Lord Altrincham, Lord Londesborough and Lord de Clifford. These amendments seek to increase the value of the cap or to uprate the cap by the percentage change in the consumer prices index or retail prices index. The purpose of the Bill is to cap an unchecked relief which predominantly benefits higher and additional rate taxpayers while protecting ordinary workers using salary sacrifice to make pension contributions. All employees using salary sacrifice will still benefit from national insurance contributions relief on £2,000 of contributions made via salary sacrifice. For a basic rate taxpayer, this is an additional £160 of relief relative to employees who do not use salary sacrifice.

The Government will keep the level of the cap under review, but we do not agree with the approach set out in these amendments, which seeks to uprate the cap in line with inflation. Automatic indexation of the cap would introduce a mechanism inconsistent with the treatment of other major pension tax reliefs, which are not routinely indexed. The Government’s view remains that the future level of the cap in the next decade and beyond is for Budgets in those decades. In light of the positions I have set out, I hope noble Lords may feel able not to press their amendments.

Lord Livermore (Lab)

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I am grateful to the noble Lord. I think the position remains the same, though.

Baroness Neville-Rolfe (Con)

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My Lords, I thank all noble Lords who contributed to this debate. I welcome the noble Lord, Lord Freyberg, to the fray and thank the Minister for his responses. He did not respond to the question raised by my noble friend Lord Ashcombe, the noble Lord, Lord de Clifford, the noble Baroness, Lady Altmann, and me about who high earners are and why those in the £40,000 to £50,000 band should pay 8% not 2%—four times higher. Indeed, why has the £2,000 limit been chosen in the first place?

On SMEs, on which I will also divide the House later, I think the lower incidence of the use of salary sacrifice actually makes the case for not imposing the complexities and administration of salary sacrifice on SMEs and charities. I will leave my noble friend Lord Leigh to wind up on student loans.

I am afraid that we on these Benches are unconvinced that the Government are meeting their policy objective of protecting workers on lower and medium incomes. As my noble friend Lord Leigh said, we are not sure that the Government are even going to raise the desired revenue. The Bill obviously hits those on lower and medium incomes and the protections are not in the Bill, which would ensure that the Government’s own policy objective is achieved. What is the hurry? I would like to test the opinion of the House on exempting basic rate taxpayers from the £2,000 cap.

Baroness Neville-Rolfe (Con)

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My Lords, I begin by thanking noble Lords with amendments in this group—my noble friends Lord Fuller, Lord Mackinlay and Lord Leigh and the noble Baroness, Lady Altmann—for their proposals, and for their forensic questions on the detail of the schemes and on any guidance that the Government might issue to minimise errors and problems.

There are numerous shortcomings in the Bill around operational detail and how everything will apply in practice. The reality is that we have very little clarity on how the Bill will work. It is designed to apply to a very narrow and limited set of employment and remunerative circumstances, and anyone who falls outside that definition has to wait for regulations, which will not be subject to the affirmative procedure.

We have no clarity on how the policy will apply to people working in numerous jobs. Is the cap per employment or per person? If it is per person, it will be very difficult to administer. We also need to know where responsibility for enforcement lies. There is no clarity about people with fluctuating remuneration: will they be penalised for saving during higher income periods because they hit the cap in some years and have no income to pay into pensions in others? What about anyone who has an unconventional pattern of remuneration for their job or jobs? How will it work for them? We have heard already that the arrangements for student loans are unclear, even after recent discussion, and we heard from my noble friend Lord Mackinlay about GDPR and from the noble Lord, Lord Freyberg, about the off-payroll rules. That is quite a lot of detail that has to be worked out.

My amendments in this group would help to deal with that by ensuring that all regulations would be subject to the affirmative resolution procedure, aside from those designed to increase the cap—that would be positive if it goes up, and you would not need to have an affirmative resolution because it would be beneficial. I am very grateful to the noble Baroness, Lady Kramer, and my noble friend Lord Ashcombe for their understanding and their vocal support for having this extra scrutiny.

When the regulations are developed, they will apply the cap to thousands of people and businesses who will be drawn into complications for the first time. My proposals would not impose a cost on the Exchequer or undermine what the Government are trying to do; they would simply ensure that, when the Treasury comes up with an answer to the questions that have been raised today, we will get a meaningful chance to debate and scrutinise the answers, as we are doing with the Bill at the moment. The Government really should have put the detail in the Bill but, in the absence of that, my amendments would ensure that we retain as much oversight as possible as the detail comes through. I can think of no reason why the Minister would not adopt the affirmative resolution if he cares about oversight, due process and the scrutiny of a policy which will affects millions of people. There are 7.7 million people using salary sacrifice and Amendment 9 should be an obvious amendment to support.

Lord Livermore (Lab)

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My Lords, I am grateful to all noble Lords who have spoken in this debate. I will begin by addressing Amendments 6, 22, 36 and 39, tabled by the noble Lords, Lord Mackinlay of Richborough, Lord Fuller, Lord Leigh of Hurley and Lord de Clifford, and the noble Baronesses, Lady Altmann and Lady Kramer, which seek clarity on the operation of the cap. I listened carefully to the requests made in Committee and again today to provide further reassurance to employers, payroll providers and individuals. Having put noble Lords’ concerns to officials in HMRC and the Treasury, I am pleased to confirm to your Lordships’ House that the cap will operate in line with other limits and thresholds within the national insurance regime. That is, the £2,000 cap will apply to each employment an individual undertakes.

To be clear, each employment will be treated separately for the purposes of the contributions limit for national insurance contributions. Any individual who has more than one employment and who sacrifices salary in more than one of those jobs will be able to do so independently in each case. Only 2% of those using salary sacrifice for their pensions have more than one job, and not everyone in this small group can or will use salary sacrifice in both their jobs. None the less, the approach I am confirming today provides clarity, aligns with the existing principles of the national insurance regime, and avoids the operational and administrative risks and burdens that could arise from attempting to operate a single cap across multiple employments. I confirm that this will be set out in legislation in subsequent regulations. The Government will also continue to engage with employers, payroll providers and other stakeholders to work through the detail of the policy ahead of its implementation.

I turn to Amendments 2 and 3 and the corresponding Northern Ireland Amendments 18 and 19 from the noble Lord, Lord Fuller, which each seek to introduce a carryover mechanism for any unused amounts of the cap allowance, including for those with fluctuating earnings.

Lord Livermore (Lab)

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Yes, I believe it will, because it is per job.

I will make three main points in response to the amendments from the noble Lord, Lord Fuller. First, the changes proposed would impact only a minority of those in receipt of salary sacrifice. The vast majority of people using salary sacrifice undertake traditional employment on stable contracts: 85% have been in their job for over a year, 88% work full-time and 97% have a permanent contract.

Secondly, although the cap we are introducing will be based on each employment, the Government are committed to continuing to engage with stakeholders as we design the detailed operation of the cap and provide for it in secondary legislation. That engagement will enable us to test how different approaches affect those with uneven salary patterns and ensure that the policy is introduced in the least burdensome way.

Thirdly, on the point made in Amendments 2 and 18 on the pensions annual allowance, that allowance limits the amount of pension savings that can benefit from tax relief in any given year. It is set at £60,000 for the vast majority of individuals. The purpose of the allowance is to deal with exceptional or uneven patterns of pension saving, including one-off spikes or fluctuations in defined benefit accrual. It is specifically not designed to deal with day-to-day saving. The allowance also relies on individuals holding accurate records across multiple years in order to track eligibility and usage. That may be manageable in a pensions tax context, but it would be wholly unsuitable for a national insurance cap that must operate through real-time payroll systems. This also applies to other mechanisms proposed by these amendments that look to roll an allowance over multiple tax years.

For these reasons, the Government believe that introducing a carryover in this Bill would create significant complexity, and consequently administrative burdens, for individuals, employers and payroll providers.

I turn now to Amendments 4 and 20, tabled by the noble Lord, Lord Leigh of Hurley, and noble Baroness, Lady Altmann. I begin by setting out clearly that these provisions operate squarely within the existing framework of the optional remuneration arrangements, or OpRA rules, introduced in 2017. The Bill relies on that existing statutory concept rather than creating a new or expanded test. As a result, its reach is already constrained by well-understood boundaries that are routinely applied in both tax and national insurance contexts. Under that framework, the legislation is engaged only where remuneration is structured in a way that offers the employee a genuine alternative, typically between receiving cash earnings and receiving a pension contribution. It is that element of choice which brings an arrangement within scope. Where no such alternative is presented, for example, where pension contributions are made as a fixed and non-negotiable part of the remuneration package, those arrangements simply do not meet the statutory definition.

Lord Livermore (Lab)

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It sounds to me, although I realise it is an odd phrase to use because you are negotiating with yourself, that that is established as a negotiated contract and, therefore, that is not an option that arises for you after that contract is negotiated. I think that in the example the noble Lord gives it would not be, but obviously that will be set out very clearly in guidance going forward.

The Government’s view is that the Bill already draws the appropriate and proportionate boundary. It addresses arrangements involving a choice between cash and pension provision, while leaving ordinary, non-optional employer pension contributions wholly outside scope.

Lord Livermore (Lab)

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If it is a new employment contract, it is a new employment. It is a new job. I think that should be fairly clear. On his point about collective bargaining, it is my understanding that it would be outside of scope. Again, that will be set out clearly in guidance.

Finally, I turn to Amendments 9, 10, 24, 25, 30 and 41 from the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham and Lord Fuller, which relate to parliamentary scrutiny and propose an impact report on the contributions limit.

The core policy is set out in primary legislation to provide certainty for employers, with detailed operational matters deliberately dealt with through regulations to allow time to engage with employers. The approach we have taken follows long-standing precedent in national insurance legislation and ensures that the design is workable, fair and consistent with the wider national insurance contributions framework.

Early and sustained engagement with industry is central to the Government’s approach. The regulations will set out the detailed operational framework, including matters such as administration, process and interaction with payroll systems. These are best informed by technical expertise from employers, payroll providers and software developers themselves. Building on that engagement, the Government will consult on the regulations ahead of implementation. This will allow stakeholders to scrutinise the detailed design, raise practical concerns and begin preparing well in advance. It is through this process of consultation, guidance and industry engagement that employers will gain the clarity they need on how the system will operate in practice.

I also remind the House that a tax information and impact note has already been published, setting out the expected impacts of the policy on individuals, employers and the Exchequer. As with other tax measures, the Government will continue to monitor the operation of the policy as it is implemented and informed by ongoing engagement with Parliament and external stakeholders. Additionally, I assure the House that the Government intend to lay the regulations in good time before they commence. This will both support employer readiness and ensure that Parliament has a proper opportunity to scrutinise the regulations before they take effect.

The Bill draws a clear and appropriate distinction in relation to what matters should be dealt with by way of affirmative and negative procedure. Where regulations reduce the generosity of the £2,000 cap and increase Class 1 national insurance liability, they are subject to the affirmative procedure, ensuring full parliamentary scrutiny where contributor liability is increased. By contrast, regulations that implement the policy framework, set out administrative and operational detail or increase the cap so that less national insurance is payable are subject to the negative procedure. This reflects long-standing practice in national insurance legislation, where secondary legislation under the negative procedure is used for the operation of reliefs and matters of administration.

I also remind noble Lords that the Delegated Powers and Regulatory Reform Committee has scrutinised the Bill and raised no concerns about the proposed level of parliamentary scrutiny. Taken together, this approach provides robust parliamentary oversight where liabilities increase, while reflecting the well-established precedent for legislating for administration and reliefs through secondary legislation subject to negative resolution.

For these reasons, the Government do not believe that additional statutory requirements are necessary. In light of the positions I have set out, I hope that noble Lords will feel able not to press their amendments.

Lord Livermore (Lab)

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My Lords, Amendments 8 and 11, tabled by the noble Baronesses, Lady Kramer and Lady Altmann, seek to make commencement of the Act conditional on publication of estimates relating to the distributional impacts of the policy.

The Government agree on the importance of transparency. However, we do not believe that additional publications are necessary to achieve that objective. A number of documents have already been published which set out the distributional impacts of this measure. The Government’s budget document sets out that 74% of basic rate taxpayers currently using salary sacrifice will be unaffected by this change. This means that 26% of basic rate taxpayers would pay more. Of those, half will face a modest annual additional NICs liability of less than £50. I have confirmed previously that 87% of pension contributions made via salary sacrifice above £2,000 are forecast to come from higher and additional rate taxpayers.

The tax information and impact note was published alongside the introduction of the Bill. This sets out that an estimated 7.7 million employees currently use salary sacrifice to make pension contributions. Of these, 3.3 million sacrifice more than £2,000 of salary or bonuses. This means that 44% of employees using salary sacrifice for pensions would be impacted by this measure, while 56%—around 4.3 million people—are protected by the £2,000 threshold.

The tax information impact note sets out the expected equality impact of the measure. It notes that employees with salary sacrifice contributions are estimated to be of typical working age. The 52% who are aged 31 to 50 are estimated to be overrepresented compared with the prevalence in the employee population in general, of 44%. It notes that men are estimated to be overrepresented in the population making salary sacrifice pension contributions compared with the prevalence in the UK adult population.

The tax information impact note sets out the number of employers expected to be impacted by this measure—290,000; the one-off costs, including familiarisation with the change, the training of staff and the updating of software; and expected continuing costs, including performing more calculations, and recording and providing additional information to HMRC where salary sacrifice schemes continue to be used. This equates to a one-off £75 and an ongoing £99 per business per year.

Baroness Neville-Rolfe

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My Lords, I beg leave to test the opinion of the House.

Baroness Neville-Rolfe (Con)

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My Lords, I wish to test the opinion of the House on this amendment relating to SMEs and charities.

Baroness Neville-Rolfe (Con)

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My Lords, Amendment 31 is in my name and that of my noble friend Lord Altrincham. I thank the noble Baroness, Lady Altmann, and the noble Lord, Lord Londesborough, for putting their names to it. I will also speak to Amendment 33 in the name of the noble Baroness, Lady Sater, a charity professional in the best meaning of the word. She is very sorry not to be here today. Her amendment is in the same spirit as ours, and she is right that the impact on charities is very important and should be kept under review.

His Majesty’s Official Opposition will continue to be a voice for small and medium-sized enterprises. We have heard, time and time again, from small businesses about the weight of burden that this Government continue to pile upon them—tax after tax, regulation after regulation. The Minister did not even answer my question at Question Time this morning about whether he would consider options for exempting SMEs from the burden of regulation. This amendment presents such an opportunity for the Government and would demonstrate that they listen; to show that they take seriously the mountains of complexity heaped upon small businesses and small social enterprises; and to provide some measure of relief and some acknowledgement publicly that these cumulative pressures cannot be ignored indefinitely.

The Minister suggested in Committee that only some 10% of employees in small and medium-sized enterprises have pension contributions through salary sacrifice that exceed the proposed cap. That may well be the case today, but with public awareness, more SMEs may introduce it. We on these Benches would like to see that figure grow, as saving for a pension is one of the most desirable and cost-effective methods of saving, as I am always explaining to the next generation. Salary sacrifice is also one of the few tools available to a small employer competing against a large corporation for talent and productive workers.

An independent review over a year would allow us all to consider the impact of the changes on SMEs and charities. I beg to move.

Lord Livermore (Lab)

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My Lords, Amendments 31, 32 and 33, tabled by the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, would require a review of the legislation’s impact on small and medium-sized enterprises, charities and social enterprises. As set out earlier, the Government agree on the importance of transparency, and a number of documents have already been published which set out the impact of this measure. As I said on Amendments 16 and 29, the Government fully recognise the importance of supporting small businesses and charities alike. In practice, the changes in the Bill primarily affect larger employers, who are significantly more likely to operate salary sacrifice arrangements and to have employees contributing above the £2,000 cap.

Charities and their donors benefit from a wide range of reliefs and exemptions across multiple taxes, including VAT, inheritance tax, stamp duties and gift aid. Ahead of the cap taking effect, the Government will continue to work closely with employers, payroll providers and other stakeholders, including representatives of the charity sector, to ensure that changes are implemented in a clear and proportionate way for organisations of all sizes that operate salary sacrifice arrangements. In light of the position I have set out, I hope that the noble Baronesses will feel able not to press their amendments.

Baroness Neville-Rolfe (Con)

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My Lords, I thank noble Lords for their contributions to this debate, which is an important one, and I am grateful to those who spoke in support. We heard from the noble Lord, Lord Freyberg, about the positive implications for the creative sector, and of course my noble friend Lord Leigh, who is very much in touch with trade representative bodies and charities, supported the amendment. The noble Lord, Lord Londesborough, raised again the question of data, which we were talking about at Question Time, and his concerns about the demise of SMEs under the burden of red tape.

Finally, I strongly support the noble Baroness, Lady Kramer, and the Federation of Small Businesses, which is such a useful source of information, on the need to be able to keep employees happy and to retain them. The same is true in charities and social enterprises, as I am sure my noble friend Lady Sater would say if she had been able to be with us today.

The case for a comprehensive and independent impact assessment of this legislation on small and medium-sized enterprises and social enterprises could not be clearer, nor, I am afraid to say, could the Government’s failure to undertake one. We have heard today of the depth and breadth of concern, and that is why we have voted and agreed on an exemption for SMEs and charities. But there is a risk that this will be rejected in the other place, in which case this review will be even more important.

Although some documents have been published, as the Minister said, the Office for Budget Responsibility’s own analysis points to significant uncertainty surrounding the effect of these measures. That uncertainty is not a reason for the Government to look away; it is precisely the reason that they must look more closely. When the OBR itself signals uncertainty, the duty falls on the Government to acknowledge what they do not yet know and to commit to finding it.

That brings me to an important matter which the Minister may want to comment on or follow up, perhaps in the next group. The Government announced last year a commitment to reduce the administrative burden on business by 25%. I remember welcoming that announcement. It was not a quiet aspiration buried in a footnote; it was a public commitment made with fanfare. Yet if the Government’s answer whenever we ask about the administrative impact of a specific policy is simply that such an impact cannot be measured, one must ask how precisely the Government intend to meet that target.

I fear there are only two conclusions. Either the Government have a means of measuring administrative impact, which they have chosen, curiously, not to deploy on this occasion, in which case they should do so, or the commitment to reduce the burden on business by a quarter was an empty promise from the outset.

But we have had a good debate today, and time is getting on. In the circumstances, I beg leave to withdraw my amendment.

Lord Livermore (Lab)

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My Lords, I am grateful to noble Lords for their contributions to this debate.

Amendments 35, 37 and 40, tabled by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, cover the impact of the future Act on pensions adequacy and on pension-saving behaviour and participation. As I have already set out, the Government agree on the importance of transparency, and a number of documents have already been published that set out the impacts of this measure.

I turn to the principled point raised about the impact of this policy on pensions adequacy and savings behaviour more specifically. As we discussed in Committee, salary sacrifice existed in the 2000s and early 2010s, yet there were falls in private sector pension saving during that period. The key factor that has led to an increase in saving in recent years is automatic enrolment. As a result of that, over 22 million workers across the UK are now saving each month.

Although we all share a commitment to improving pensions adequacy, many groups at highest risk of undersaving, including the self-employed, lower earners and women, are not the most likely to benefit from salary sacrifice. Only one in five self-employed people saves into a pension but they are entirely excluded from salary sacrifice. Low earners are most likely not to be saving, but higher earners are more likely to be using salary sacrifice. Many women are undersaving for retirement, but many more men use pensions salary sacrifice. The pensions tax relief system remains hugely generous and there remain significant incentives to save into a pension. The £70 billion of income tax and national insurance contribution relief that the Government currently provide on pensions each year will be entirely unaffected by these changes.

Amendment 38, tabled by the noble Baroness, Lady Kramer, would require the Government to lay before Parliament a formal review of the Office for Budget Responsibility’s supplementary forecast information release of 5 February 2026, and specifically its analysis of behavioural responses by organisations to the provisions in the Bill. The OBR’s economic and fiscal outlook and its supplementary forecast publication set out how behavioural responses have been considered in certifying the costings. A summary of these behavioural assumptions was also published in the policy costing note accompanying the Budget. The supplementary forecast information was drawn from analysis and data—

Lord Livermore (Lab)

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All those points will be set out in regulations, and I am more than happy to confirm that to the noble Baroness in writing.

The OBR’s economic and fiscal outlook and its supplementary forecast publications set out how behavioural responses have been considered in certifying the costings, as some of these behavioural assumptions were also published in the policy costing that accompanied the Budget. The supplementary forecast information was drawn from analysis and data supplied to the OBR by the Government ahead of Budget 2025, in line with a standard process by which the OBR scrutinises and certifies costings. The Government’s published costings therefore already reflect these behavioural effects. The OBR has certified these costings in the usual way. Given that the material referenced is already publicly available and has been fully reflected in the certified policy costings, the Government do not believe that it is necessary to review the OBR’s supplementary forecast.

Lord Livermore

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That the Bill do now pass.

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

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My Lords, the cost of pension salary sacrifice was set to treble to £8 billion a year by the end of this decade. That increase has been driven mostly by high 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. The status quo is 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 introduces a cap of £2,000 under which no employer or employee national insurance contributions will be charged on any pension contributions. It protects ordinary workers by 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.

Saving into a pension, including via salary sacrifice, will also 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. These are fair and balanced reforms. They protect lower and middle earners. They give employers many years to prepare. They preserve the incentives that underpin workplace pension saving and they ensure that the tax system is kept on a sustainable footing. I beg to move.

Baroness Neville-Rolfe (Con)

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My Lords, as we said at Second Reading, in Committee and again on Report, this is a poorly conceived Bill, because it prioritises the hope of short-term tax gain over the far more important task of sustaining a system that encourages and rewards responsible pension saving. Throughout the Bill’s passage, we have sought to examine it line by line to see what the Government’s policy will actually mean in practice, and what has become clear is deeply troubling.

This measure risks deterring pension savings. It will hit those on lower and middle incomes, including some earning under £30,000 a year. It will impose yet more compliance, payroll and administrative burdens on business, particularly on small businesses and charities that are already under considerable strain. It will particularly penalise those who are repaying student loans.

Against that background, I am proud of the scrutiny that the House has brought to the Bill. Your Lordships have approached it with care, expertise and determination to improve it where we can. As a result, with unusual speed, good order and good humour, the House agreed five amendments last week which seek to limit some of the Bill’s most damaging consequences.

First, our Conservative amendments ensure that basic rate taxpayers, those on the lowest incomes, are protected from the NICs charge. If the Government insist that this policy is directed at higher earners, not those on modest incomes trying to save for their retirement, this should be explicit in the Bill.

Secondly, we proposed an exemption for small and medium-sized enterprises and small charities. These organisations are the backbone of our economy and our communities, and they should not be burdened with yet more payroll, compliance and administrative costs as a result of this policy. We have all seen the impact on them of last year’s £25 billion hit.

Thirdly, we proposed that most of the regulations under the Bill should be subject to the affirmative procedure. Given the uncertainty that surrounds how these provisions will apply, it is only right that Parliament has the opportunity to scrutinise those regulations properly.

Fourthly, my noble friend Lord Leigh of Hurley successfully secured an amendment to limit the impact of the Bill on those repaying student loans, who would be hardest hit by the measure.

Finally, the amendment by the noble Baroness, Lady Kramer, raised the cap to £5,000, helping to mitigate some of the worst impacts of the Bill on those least able to bear them.

In recognition of the seriousness of the issues raised by the Bill and the progress made here, I shall take a moment to thank a number of noble Lords for the diligence with which they have scrutinised it. I am particularly grateful to my noble friends Lord Leigh of Hurley, Lord Fuller, Lord Ashcombe and Lord Mackinlay of Richborough, and the noble Baroness, Lady Altmann. They have worked tirelessly, both with me and my noble friend Lord Altrincham, and their amendments have prompted important debates. I am also grateful to our Whips’ Office team, especially my adviser Oliver Bramley, for their unstinting and effective support, and I thank the noble Baroness, Lady Kramer, for the constructive way in which she has engaged with us during the course of the Bill. Hers has been a powerful voice in holding the Government to account.

More broadly, I thank other noble Lords across the House, including the noble Lords, Lord de Clifford, Lord Londesborough and Lord Freyberg, for their thoughtful contributions in scrutinising the legislation. Finally, it would be remiss of me not to thank the Minister for the way in which he has engaged with the House during the passage of the Bill. I am particularly grateful to him and his officials for their response to the letter I sent following Committee. It addressed a number of the questions raised during our debates and was both timely and informative.

I hope that, as the Bill proceeds, the Government will reflect carefully on the points raised and show a willingness to move on the issues that have united so many across this House.

Lord Livermore (Lab)

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My Lords, I am very grateful to the noble Baronesses, Lady Neville-Rolfe and Lady Kramer. I beg to move.