Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2022
Baroness Penn
That the Grand Committee do consider the Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2022.
Baroness Penn (Con)
My Lords, I turn first to the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2022. These regulations set the national insurance contributions limits and thresholds, as well as the rates of a number of national insurance contributions, for the 2022-23 tax year and make provision for a Treasury grant to be paid into the National Insurance Fund if required.
National insurance contributions, or NICs, are social security contributions, as I am sure all noble Lords will know. They allow people to make contributions when they are in work in order to receive additional contributory benefits when they are not working, for example when they have retired or if they become unemployed. NICs receipts go towards funding these contributory benefits, as well as the NHS. As announced in the Budget, the Government are using the September consumer prices index figure of 3.1% as the basis for setting all national insurance limits and thresholds, and the rates of class 2 and class 3 national insurance contributions, for 2022-23.
I will first outline the specific changes to the class 1 primary threshold and the class 4 lower profits limit. The primary threshold and the lower profits limit indicate the points at which employees and the self-employed start paying class 1 and class 4 NICs, respectively. These thresholds will rise from £9,568 to £9,880 per year. The rates of class 1 and class 4 NICs have already been increased to 13.25% and 10.25%, respectively, through the Health and Social Care Levy Act. Increases to the primary threshold and lower profits limit do not impact on state pension eligibility. This is determined by the lower earnings limit for employees—which will increase in line with the CPI from £6,240 in 2021-22 to £6,396 in 2022-23—and payment of class 2 NICs for the self-employed, which I will come to shortly.
The upper earnings limit, the point at which the main rate of employee NICs drops to 3.25%, is aligned with the higher rate threshold for income tax. It was announced in the Spring Budget 2021 that the income tax higher rate threshold and the UEL will remain frozen at £50,270 until 2025-26. Similarly, the upper profits limit is the point at which the main rate of class 4 NICs drops to 3.25%. This will also remain at £50,270 per year.
As well as class 4 NICs, the self-employed pay class 2 NICs. The rate of class 2 NICs will increase from £3.05 in 2021-22 to £3.15 in 2022-23. The small profits threshold is the point above which the self-employed must pay class 2 NICs. This will increase from £6,515 in 2021-22 to £6,725 in 2022-23. Class 3 NICs allow people to voluntarily top up their national insurance record. The rate for class 3 will increase in line with inflation from £15.40 in 2021-22 to £15.85 a week in 2022-23.
The secondary threshold is the point at which employers start paying employer NICs on their employees’ salaries. This threshold will increase from £8,840 in 2021-22 to £9,100 in 2022-23. The threshold at which employers of people under 21 and apprentices under 25 start to pay employer NICs on those employees’ salaries will remain frozen at £50,270 per year to maintain alignment with the upper earnings limit.
The regulations also make provision for a Treasury grant of up to 17% of forecasted annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2022-23. A similar provision will be made in respect of the Northern Ireland National Insurance Fund. The Government Actuary’s Department report laid alongside the re-rating regulations forecast that a Treasury grant will not be required in 2022-23. However, in view of the economic challenges created by the Covid-19 pandemic, the Government consider it prudent to maintain the maximum provision at this stage.
I turn to the Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2022. As noble Lords will know, the Government are committed to delivering a welfare system that is fair for claimants and taxpayers while providing a strong safety net for those who need it most. These regulations will ensure that tax credits, child benefit and the guardian’s allowance increase in line with the consumer prices index, which had inflation at 3.1% in the year to September 2021.
In summary, this proposed legislation makes changes to the rates, limits and thresholds for national insurance contributions and provision for a Treasury grant, and increases the rates of tax credits and guardian’s allowance in line with prices. I hope noble Lords will join me in supporting these regulations. I beg to move.
Lord Davies of Brixton (Lab)
My Lords, I thank the Minister for her clear introduction of the measures in these regulations. I intend to speak solely to the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2022. What really interests me about these regulations is that they come with the report from the Government Actuary which we should have had when we discussed the Government’s Bill to drop the triple lock. It would have been so much more informative to have those discussions with the figures before us, rather than discussing them in the abstract. This might be a minority taste, but I am particularly looking forward to later in the year when we will have the quinquennial review of the National Insurance Fund.
What disappoints me is that, in accordance with the regulations, these reports are laid before the House, which provides only limited scrutiny. I could ask questions now, but, with all due respect to the Minister, it would be unfair to ask her to answer detailed questions. It would be useful in some way to provide a forum where we could have a more detailed discussion of what is in the Government Actuary’s report. I do not know whether this has been the practice of the House, but speaking for myself, I could enter into a very detailed discussion about the Government Actuary’s report and what it tells us about the financing of the national insurance scheme.
Chart 1.2 on page 8 of the Government Actuary’s report shows how the balance in the fund is going to increase. It is projected to increase year by year over the next six years by amounts varying between £2.1 billion and £10 billion. These are massive sums being paid into the National Insurance Fund. At least it raises the issue of the use of that fund in order to provide benefits to which people have contributed.
According to the draft timetable, we will get the social security uprating order before us on 9 March. Since we now have available the Government Actuary’s report, it would be helpful to have the opportunity to ask more detailed questions about the relationship between the increases in the order and the information presented to us by the Government Actuary.
I will highlight just one aspect, and this is truly a Treasury point rather than a Department of Work and Pensions point. It is a bit odd, because the regulations are really more of a social benefit issue than a Treasury issue. I am not complaining about that, but the oddity is that the Government Actuary’s report reveals to us that, because the upper earnings limit has been frozen to keep it in line with the upper-rate tax threshold, the take of national insurance contributions is actually going to decline at a greater rate because everyone’s earnings are increasing. This is actually a regressive move. The freezing of the upper-earnings threshold for income tax purposes is a progressive move. It makes higher earners pay that little bit more, but the freezing of it for national insurance purposes is actually a regressive move, because it puts proportionately more of the burden of paying those contributions on lower earners.
I am sure that is not a specific government objective, but it is an oddity of the way the system is being operated. It reflects the fact that higher earners do not pay national insurance contributions. Maybe they could pay a bit more in order to support the taxation system. The fact that they stop paying most national insurance contributions at the upper earnings threshold is perhaps something we should bear in mind in the thorough rejigging of the tax system that I would favour.
With those few remarks, I support these regulations.
Baroness Kramer (LD)
My Lords, I will start by addressing the social security regulations. Struggling through the alphabet soup that characterises these SIs brought home to me how hard hit so many low-wage people will be by the Government’s additional national insurance contributions levies. With inflation running at 7%—now some are expecting 8%—energy prices up by as much as £700 a year and most wages barely rising, this is not the time to hit low-income people with a 1.25% increase in NICs.
Using NICs rather than income tax to raise government revenue was always cruel because it drags in workers on wages below the income tax threshold and excludes a raft of high-income people. But the SIs reveal further subtle changes which I had not appreciated. The Government have been clear that income tax thresholds will be frozen to drag more low earners into income tax and more modest earners into higher-rate tax. But I—and, I suspect, others—did not anticipate a read-across into national insurance contributions. The upper earnings limit, the upper secondary threshold, the apprentice upper secondary threshold and the upper profits limit are all frozen, if I understand the SIs correctly, instead of increasing with CPI. They will pull more people into higher NICs payments, including many young people and apprentices. I would like to hear from the Minister how many people are impacted by the decision not to increase these thresholds by CPI and how much additional money is being raised by the Treasury as a consequence.
On the other side of the coin, CPI is being used to raise the lower earnings limit above which an earner gains access to certain state benefits; in other words, it will reduce the number of people eligible. What will the impact be on benefit recipients, how many will lose benefits, and how many will get reduced benefits and by how much? Why was there no consultation on issues that, frankly, are so significant? These are presented to us as though they are “routine changes” but they are not routine changes to people’s lives, as the Explanatory Memorandum tries to claim.
We then come to changes in the state pension. Pensioners are now being driven into poverty, certainly fuel poverty. How can the Government justify excluding the earnings component from the triple-lock calculation, and increasing pensions by only 3.1%, particularly with inflation galloping away? As I say, it is now expected to hit something between 7% and 8% over the year. I suppose that if next year inflation continues to be high, the Government will exclude CPI from their calculation, arguing that this year set a precedent for manipulating the formula while paying it lip service.
I notice that the notes suggest that raising the state pension by 8.3% this year, which would happen if it was based on average earnings, would increase the pension base and, over time, compromise the National Insurance Fund. If one is concerned about the health of the fund, why are the Government deliberately depleting it by offering employers NICs at zero rate in freeports? I think I have described this before as a fundamental problem. Freeports attract money laundering and other forms of crime because of their lack of transparency and now there is the possibility of an attractive tax package as a further incentive and, indeed, a depletion of the National Insurance Fund as a consequence, which presumably justifies many of the increases that we have seen in these SIs. Will the Minister finally tell us the cost of that giveaway of national insurance contributions at zero rate in freeports? I have been struggling to find the number; it may well be available, but I have struggled to find it.
My last comment is on the other statutory instrument, the tax credits SI, which raises by CPI the annual rates of working tax credit and child tax credit, and weekly rates of child benefit and guardian’s allowance. Although this meets the formula, today’s experience for people on low incomes is one of very high inflation, especially on the basics of life, including heat and food. Many would say that we are facing a crisis now, but that the economic pressures on families will get far more acute as the year moves on.
I have here a very brief note from the Child Poverty Action Group. It points out that
“benefits are due to increase by 3.1%, just as inflation is predicted to peak at 7.25%.”
I think that may be understated; people are now talking about a higher rate of inflation. The note continues:
“Energy bills are due to increase by 54% in April, and these families are set to spend three times the share of their income on energy, compared to better-off families … The council tax rebate scheme will mitigate around 40% of that cost through spring and summer, leaving families in poverty to cover around £35 in additional energy bill each month.”
I come from a part of London where house prices are extremely high, and many fundamental homes are above band D, but the people living in them are on very low incomes. They, of course, will get none of that council tax rebate benefit. The note goes on to say that
“180,000 families subject to the benefit cap will see no increase in their benefits come April. The cap hasn’t increased since 2016, while the cost of living has increased by around 16% in that time.”
Are the Government prepared to rethink? This is an exceptional year of inflation, so choosing the figure of 3.1% has a great artificiality to it; it would not in most years, but it does in this one. Will they simply restore the weekly £20 uplift in universal credit, which would make a substantial difference to the families who will be hit? Will they reconsider the national insurance contribution increases and shift instead to a money-raising mechanism that looks at income tax and higher earners? Will they unfreeze the tax thresholds, which is a way of increasing income tax without obviously saying that one is going to do it? Frankly, one way to pay for all of this would be a windfall tax on the fossil fuel companies whose profits have soared because of world conditions, not because of their own efforts.
I am not going to oppose this SI, but I hope that the Government will not be complacent and think that the changes have gone through with their consequences unrecognised.
Lord Tunnicliffe (Lab)
My Lords, I am grateful to the Minister for introducing these two measures. As she outlined, the first instrument increases the primary threshold above which people start to pay national insurance. It also freezes the upper earnings limit to ensure consistency with the equivalent limit for income tax. The lower threshold is being lifted by the level of CPI inflation in September last year; that is, 3.1%. We welcome any help for low-paid workers, given the enormous pressures on household budgets at the current time. The second instrument provides for a 3.1% uplift in the annual rates of working tax credit, child tax credit, child benefit and guardian’s allowance. We support these increases.
Of course, when it comes to inflation, the picture has changed quite significantly since September 2021. CPI is currently running at 5.1% and economists fear it could exceed 7%. We must also consider these changes against the backdrop of the withdrawal of the £20 universal credit uplift. Yes, the Government have amended the taper rate for some claimants, but many others gain very little or nothing at all. Finally, the 1.25% increase in national insurance contributions for 2022-23 and the longer-term introduction of the health and social care levy will be an additional hit to household finances.
Baroness Penn (Con)
My Lords, I thank all noble Lords for their contributions to this debate, which was short but thoughtful. The noble Lord, Lord Tunnicliffe, is correct that the matters we are debating today are of real relevance to people’s lives and will be in the coming months as we see inflation far above the target set, which will have an impact on households’ budgets. That is why the Government are putting in place significant support to help them with that—I will turn to that briefly later.
To start with the point from the noble Lord, Lord Davies of Brixton, about the Government Actuary’s Department report and its interesting contents, I may not have all the answers to his detailed questions to hand for this debate, but I will happily write to him if I cannot provide them in this debate. Obviously, we have many different forums in this House where we can discuss those reports and he is welcome to submit Written or Oral Questions or apply for debates so that we can explore those in more detail.
The noble Lord, Lord Davies of Brixton, and the noble Baroness, Lady Kramer, raised the freezing of the upper earnings limit and other limits; we keep those limits aligned. We have touched on the complexity of our system at various points in these debates, but it is important to consider the overall picture of these tax changes. If we consider the impact of NICs and income tax together, the upper earnings limit is aligned to the point at which income tax increases from 20% to 40%. When this is combined with the NICs rates, individuals pay a rate of 32% on earnings below the upper earnings limit and 42% above the upper earnings limit. That is a progressive system to ensure that higher earners pay more.
On the noble Baroness’s point about the health and social care levy, I remember the time when the Lib Dem policy was a penny on national insurance to pay for the NHS. Well, this is 1.25p on national insurance to pay for the NHS. This is the right decision to make. We have supported the NHS through the pandemic, but we have come out of it facing a huge amount of work that needs to be caught up on in terms of elective procedures. We have also made a significant commitment to addressing social care needs in this country. These are significant increases in permanent spending on the NHS and social care, and they need to be funded; a national insurance increase that will turn into the health and social care levy is a progressive way in which to do this.
The noble Baroness may have preferred us to do that through income tax, but also calls for us not to freeze the income tax threshold over the coming years. Again, I contend that that is not something we are doing via a stealth tax. We have been perfectly up-front about some of the really difficult decisions we have had to make on tax to pay for the support we have provided to people during the pandemic. We expect everyone to contribute in a progressive way, which is why we have frozen the thresholds for income tax and other taxes. It is also why we have increased corporation tax so that businesses, which have also received a huge amount of support during the pandemic, make their contribution to repairing our public finances.
As I say, these are difficult decisions that affect households and families. We have tried to take them in a progressive way, and they are being done to pay for the significant support that the Government have been able to provide.
Baroness Kramer (LD)
Can the Minister provide me with a number for how much in additional national insurance contributions the Government expect to receive from freezing the threshold that has an impact on apprentices? Below the threshold, their NICs are rated as zero; above the threshold, they pay NICs. Many of them will now be brought into paying NICs because the threshold is frozen. It is particularly interesting to me that the Government have chosen to target that group. The same goes for young people; I would love to have those numbers. I honestly do not think that most apprentices, students or even the businesses that apprentices work with have caught on to what is happening.
Baroness Penn (Con)
I note the noble Baroness’s specific questions. I am afraid that I do not have those figures to hand, but I will happily write to her with them. I take her point about those limits. As I say, it would probably be better to write but I imagine that, if there is an element of keeping parts of the tax system aligned, it is therefore a follow-on from the decisions we made on income tax thresholds passing through. I think it is probably better for me to write with the specific figures and the rationale for those decisions.
The noble Baroness also asked about the increase in the lower earnings limit, meaning that some people may lose eligibility for contributory benefits. Of course, since the introduction of the lower earnings limit, there have been a number of ways in which individuals can receive credits to protect their eligibility for contributory benefits. Those who are in receipt of universal credit or child benefit automatically receive class 3 NICs credits, which count towards their entitlement to the state pension. Only individuals receiving maternity allowance, carers allowance and contribution-based JSA and ESA are entitled to class 1 credits, which make them eligible for contributory benefits including the state pension. As I am sure the noble Baroness knows, individuals who are not in receipt of NICs credits can pay voluntary class 3 NICs to build their entitlement to the state pension; this could be individuals who earn below the lower earnings limits or individuals who have a gap in their NICs record from being unemployed or living abroad.
The noble Baroness also made a point about the changes to the triple lock this year not taking earnings into account. Those were very specific circumstances that we faced with the impact of the pandemic on those earnings figures. We are quite clear that that is an exception to our approach rather than the norm.
Finally, the noble Lord, Lord Tunnicliffe, talked about Jack Monroe’s campaign on the differential impact on inflation, looking at low-income households in particular. She has done excellent work and I am glad the ONS has taken up her suggestions. We will be interested to see the results of that work.
The Government recognise the impact of current energy costs and broader inflation on households. That is why we have taken a significant number of steps to support low-income households, including providing £670 million in 2021-22 for local authorities to support households struggling with their council tax bills; £140 million in 2021-22 for discretionary housing payments; and over £200 million a year, through the spending review 2021, to continue the holiday activities and food programme. We also raised the national living wage in April to ensure the lowest paid continue to receive pay rises, and we continue our ambition to abolish low pay altogether through use of increases to the national living wage. In recent weeks, the Chancellor set out a £9 billion package of support for low-income and middle-income households, with support for everyone to smooth the costs of the particularly high energy bills they are currently facing.
I hope I have addressed all noble Lords points. If there are further points that I have not managed to address specifically, I will write.