National Insurance Contributions (Increase of Thresholds) Bill
Wednesday 30th March 2022
(2 years, 9 months ago)
Lords ChamberNational Insurance Contributions (Increase of Thresholds) Act 2022 View all National Insurance Contributions (Increase of Thresholds) Act 2022 Debates Read Hansard Text Amendment Paper: HL Bill 140-I Marshalled list for Committee - (30 Mar 2022)
Baroness Penn (Con)
My Lords, I beg to move that the Bill be now read a second time. At a time when the UK faces the twin challenges of recovering from the Covid pandemic and responding to Putin’s appalling attack on Ukraine, my right honourable friend the Chancellor’s Spring Statement set out how we will build a resilient and growing economy that will allow us to respond to such crises at home and help our friends abroad in times of need. At the heart of that Statement was a three-part plan to support families with the cost of living, support growth in the economy and ensure that the proceeds of that growth are shared fairly.
While our tax plan will deliver significant benefits to both people and the economy, it is also underpinned by the principle of fiscal responsibility. We have ensured that we maintain space against our fiscal rules, we have continued to be disciplined and we have carefully considered the macroeconomic outlook. It is particularly important that the Government take this prudent approach because, in the next financial year, we are forecast to spend £83 billion on debt interest, the highest amount on record and almost four times the amount we spent last year.
These figures underline why the Government cannot shy away from some tough decisions. That is why the health and social care levy announced last year will remain in place. We need to safeguard a source of funding for our NHS and for those who need care throughout their lives. However, as the Chancellor pointed out, a long-term funding solution for the NHS and social care is not incompatible with reducing the tax burden on working families. This brings me on to the specifics of this national insurance contributions Bill, which is a key element of the Chancellor’s tax plan.
The Bill legislates for the two employee and self-employed NICs measures set out by the Chancellor in his Spring Statement. Noble Lords will be aware that it has long been the Government’s ambition to promote tax cuts for working people and to simplify the tax system. That is why since 2010 we have taken millions of people out of income tax by raising the personal allowance from £6,500 to its new level of £12,570. However, as my right honourable friend the Chancellor explained, the equivalent national insurance thresholds remain at around £3,000 lower. As a result, at the last general election the Prime Minister pledged to increase NIC thresholds, and in 2020 the Government took a significant step forward to this by increasing the threshold to £9,500.
The Bill’s first measure will increase the NIC primary threshold and the NIC lower profit limit to £12,570 from 6 July. These are the thresholds at which employed and self-employed respectively start to pay NICs. The increase in these thresholds of around £3,000 will equalise the NICs and income tax thresholds and in doing so create a fairer and simpler tax system. As the Chancellor has explained, this means that people will be able to earn £12,570 a year without paying a single penny of income tax or national insurance. This is the largest increase in a starting threshold ever and the largest single personal tax cut in a decade, reducing the tax burden by £6 billion for 30 million people across the United Kingdom.
On an individual level, a typical employee will see their tax bill reduce by £330 in the year from July, while the equivalent saving for a self-employed worker would be worth over £250. In addition, around 70% of all workers will have their NICs cut by more than the amount that they will pay through the new health and social care levy. Further, over 2 million people will be taken out of paying class 1 and class 4 NICs and the health and social care levy altogether, so many people will feel the benefits of this tax cut very soon.
However, the Government recognise that this is a big change for many employers and payroll software providers. We believe that the July implementation date strikes the right balance between ensuring that individuals benefit from the increase as soon as possible, while giving employers and payroll software providers time to update and test their systems. This avoids millions of taxpayers having to make manual claims for refunds at the end of the tax year and employers having to make payroll corrections.
The Government are also aware of the huge pressures faced by those working for themselves but earning low amounts due to the rising cost of living. To support this group, the Bill gives the Treasury the power to lay an affirmative statutory instrument. This will mean that, from April, those with profits between £6,725 and £11,908 will not pay class 2 NICs, and this will rise to £12,570 from April 2023. This measure will benefit half a million self-employed people, saving them up to £165 a year. This group will still be able to receive NIC credits just as they have done in the past. As a result, their ability to access the contributory benefits and build up state pension entitlement will be unaffected. Taken together with the increase to the primary threshold and the lower profits limit, the Government will meet in full their commitment to ensure that the first £12,500 that an individual earns is free of tax.
The Bill represents the largest cut to personal tax in a decade. It rewards workers while supporting those lowest earners and, ultimately, the Government believe that the Bill will make a real difference to people’s lives at this challenging time. I commend it to the House and beg to move.
Baroness Ritchie of Downpatrick (Lab)
My Lords, I thank the noble Baroness, Lady Penn, for presenting this technical Bill to the House today as a consequence of the Chancellor’s Spring Statement in the other place on Wednesday last week. I recognise that there are benefits to raising the threshold at which people pay national insurance—there are also requirements on employers—but we must remember that this Bill has more to do with the Chancellor’s increasingly desperate desire to paint himself as a tax-cutter than with a well thought-out package of measures to help people as they continue to face the cost of living increases. The Chancellor’s Spring Statement did not fundamentally deal with the rising cost of living or provide adequate mitigation measures.
Obviously, there are benefits to raising the threshold at which people pay national insurance but, set against that, we have the problem that people are facing astronomical increases in energy, inflation and food prices, and more people will be forced into food and fuel poverty and reliance on food banks.
I shall consider this from the point of view of the cost of living impact in Northern Ireland and the measures that the Government can provide to mitigate such impacts running alongside the NIC Bill. Although the purpose of the Bill is welcome, I would like more to be done by the Government to mitigate the rising cost of food, energy and other commodities as a result of Brexit, the war in Ukraine and the Covid-19 recovery.
In Northern Ireland, income levels remain lower than those in the UK as a whole: £506 per week compared to £547 per week in other regions of the UK. The after-housing cost figures are £473 for Northern Ireland and £476 for other regions of the UK. I am grateful for a recent report on poverty in Northern Ireland from the Joseph Rowntree Foundation, published just this month, which states:
“As Northern Ireland entered the pandemic, nearly one-in-five people in Northern Ireland lived in poverty, including over 100,000 children. With 1 in 14 households in food insecurity, the recent spike in energy prices, and wider inflation, as well as certain areas of Northern Ireland and groups such as people in workless families, disabled people, carers and people in ethnic minority households having much higher poverty rates, people across Northern Ireland need”
the Treasury, the Government here in Whitehall, working with a new Northern Ireland Executive, to go further—and we must be mindful of the fact that there might not be a Northern Ireland Executive in the post-election scenario. That must be taken on board.
We need a focus on the adequacy of the social security system: the need to reverse or partly mitigate the impact of the £20 per week cut to basic rates of universal credit and to match benefit uprating to the cost of living. Failing to do so will push 10,000 more families in Northern Ireland into poverty. In the longer term, we need to reform the welfare social security system to focus on people’s needs. A targeted payment could reduce child poverty. The role that the old DLA/PIP can have in helping disabled people into the labour market should be considered, including considering how the administration of the payments could be redesigned with dignity and poverty reduction at their heart.
We also need investment in the housing market, building more energy-efficient social housing to shorten waiting lists and provide good-quality affordable homes. We need to take action to provide targeted employability support to people struggling most to secure well-paid jobs, not least disabled people and single parents. We need to work with employers and the education and skills system to ensure that people are able to secure the skills that they need for the jobs of the future, not least the significant potential for jobs in transition to a low-carbon economy.
The Northern Ireland Executive fell some weeks ago, and it is important that the Government work with a potential new Northern Ireland Executive to build on the provisions in the Bill to mitigate the worst impacts of the cost of living increase in Northern Ireland. We must remember that due to there being no Executive, £300 million could not be released to the various government departments, which would have assisted those in poverty and most in need.
A colleague of mine in the Northern Ireland Assembly got cross-party support for a Private Member’s Bill to release this money, but the Bill was refused debate by the Speaker of the Assembly, which is totally unacceptable. In these circumstances, can the Minister tell us what additional legislative and other measures, running alongside this Bill, which I do not have a particular problem with, the Government will bring forward in forthcoming Budgets and in the Queen’s Speech to mitigate the impact of the rising cost of living, whether by inflation, price increases—in terms of food and other commodities—and energy prices? Energy prices are spiralling out of control and impacting the lives of people throughout Northern Ireland and probably the rest of the UK, and bringing new people into the poverty sector who, while hitherto poor, have not experienced such levels of deprivation.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a great pleasure to follow the noble Baroness, Lady Ritchie of Downpatrick, and to echo her concerns about poverty—in Northern Ireland, which is hit particularly hard, and all around these islands.
It is tempting to use this speech to tackle the utter inadequacy of the Spring Statement in dealing with that sheer level of poverty and suffering in our society, with so many people struggling to put food on the table and keep a roof over their heads. I will try to focus on the Bill and the details of it, but we must look at the context. The common phrase and hashtag on Twitter is “cost of living crisis”, and “crisis” tends to imply that this is something that has happened as a result of Covid and the dreadful Russian aggression in Ukraine that the Minister referred to in her introduction, but this is a result of very long-term trends in which we have seen food banks become a fast-growing part of our society, as so many people simply do not earn enough money to meet the basics of feeding themselves and their households. This is not a one-off crisis. It is part of a long-term trend which has seen multinational companies not paying their taxes, rich people becoming richer and richer, and general society having a smaller and smaller share of the pie and, for many people, fewer and fewer of the crumbs.
I want to pick up on one of the points that the Minister made in her introduction, referring to £83 billion of debt interest payments. It is worth highlighting, since I do not think it is well understood, that the majority of extra spending during the Covid crisis has been paid for by us borrowing from ourselves, borrowing from the Bank of England. Two-fifths of total government debt that we owe to ourselves is government borrowing from government, and four-fifths of government debt is owed to people and institutions within the UK. Therefore, when we pay interest, we are putting money into the economy. That is important because we heard, in the words of the Minister, and we are hearing very broadly from most sections of the Government, though perhaps not all, that this is the excuse for a new kind of austerity and cutbacks in government spending, when we already have government that has been sliced to the bone, unable to meet the basic needs of delivery, as we see all too often in your Lordships’ House, as promised reports, promised progress, promised Bills and promised regulations are later and later. The Government are hopelessly overstretched, when we must now be investing in the transition which we must make to the low-carbon economy, the kind of just transition in our economy that requires significant amounts of government investment. Let us think about investment rather than labelling it all as spending.
However, if we are going to talk about debt, it is worth noting that the level of private sector debt in the UK is two to three times that of government debt. Our finance sector remains the most exposed to crisis of that of any G7 nation. So why do we—indeed, why do the Government—not talk more about the size of our financial sector and the risk it presents to the security of us all, rather than focusing on their own borrowing as the debt issue?
In introducing the debate, the Minister talked about a fairer, simpler tax system. Of course, rather like our constitution, what we have is an incredibly complicated tax code. You had better be feeling strong if you want to pick it up. As in our constitution, with the accretion of many centuries of historical accident—an expedient fix here, a gesture to a vested interest there—we have accumulated this complication in our tax code. The change we are bringing in is a small one in this incredibly complex system.
An alternative to what we are doing today would be to take away one of the complications instead of lifting the tax threshold. We could set a single rate of national insurance. Rather than earnings above £50,000 being charged at only 2%, their rate of national insurance could be raised to 12%. On its own, that would raise £11 billion. This would simplify everything and mean that we do not have the regressive system of national insurance that we do now.
However, the Green Party has a proposal for a much greater simplification; I do not expect an answer from the Minister on it today but I think I should draw it to the Government’s attention. Why not have a single, unified income tax? Leaving things at the same level they are at now, this could raise £24 billion; this could be used as a huge, immediate injection into social care, for example. It would mean that, whatever the source, everyone’s income would be paid at the same rate of tax. It would neither penalise workers nor favour the generally well-off in society, whose wealth and income come from property and other investments. Why not take the money fairly from across society and across all incomes? That is my modest proposal for the Minister.
I finish with a direct question that was asked in the Commons but not answered; I hope that the Minister may be able to answer it now. Calculations suggest that people who are in receipt of universal credit will not benefit from this change as much as those who are not on universal credit will because of the 55% taper rate. I hope that the Minister can answer that today.
Lord Davies of Brixton (Lab)
My Lords, this Government are collectively incapable of shame. I hope that, even if she cannot admit it, the Minister understands the shame that is inherent in the overall package coming from the Spring Statement. We will discuss the package in general tomorrow; I hope to intervene in that debate.
Coupled with the changes in personal taxation in the Spring Statement, this Bill is a deceit on the National Insurance Fund. I am a strong supporter of a fair and effective national insurance scheme with adequate benefits in retirement as well as in sickness and unemployment, funded by national insurance contributions paid while at work, coupled with a necessary Treasury supplement. This concept still has widespread support, even if we have strayed some way from its achievement in practice. The fact that we still use the term “national insurance” after more than 70 years is testimony to the strength of the idea. The Government’s proposals here and in the Statement ride roughshod over this concept and treat the idea of national insurance with contempt, making changes to national insurance contributions as a short-term political fix.
The impact of the Bill’s proposals on personal taxation must be judged in the context of the overall package. As such, they constitute a total travesty by being a paradigm of incoherent and unfair taxation policy. In effect, we have a promise of a cut in the standard rate of income tax some time in the future that is effectively being funded by an increase in national insurance contributions. In other words, a cut in progressive taxation is being funded by an increase in a more regressive form of tax.
National insurance contributions are regressive because of the upper threshold, above which the contribution rate is much lower. Such a ceiling originally made some sense in the context of flat-rate benefits and flat-rate contributions, but we have moved on from that era and there is no justification for relieving higher earners of their share of the contribution towards paying for our national insurance benefits.
National insurance is also regressive in the sense that it applies only to earned income, whereas in the past it applied to what was then referred to as unearned income, leaving massive opportunities for taxation arbitrage. This is something indulged in by people with higher incomes: they pretend that their earned income is what used to be termed unearned income, as I said. You can go to fancy accountants and they will sort it for you so that you end up receiving income that it is not subject to national insurance. Regrettably, it is a regressive tax. Those issues need to be addressed, but the Government have used regressive taxation to fund a cut in progressive taxation. This is nonsense and they should be ashamed of it.
It would appear that the Bill is necessary only because the Government suddenly realised that the increase in the levy would impact on people with lower incomes, so by increasing the lower threshold they relieved the pressure on a band of lower-income recipients, but it does absolutely nothing for those below the lower earnings limit. There is no benefit for them at all, and they are the people in the greatest need. It is all very well for the Minister to claim that this is helping people on lower pay, but it is not helping those on the lowest levels of pay. That is, if not a crime, a deceit on the public.
Let us discuss the Spring Statement in full tomorrow, but we have to see the Bill for what it is. It is a deceit on the National Insurance Fund, using the resources available to national insurance to achieve a short-term political fix because the Government stumbled into a situation where they were worried about the impact on the lower paid.
Lord Macpherson of Earl’s Court (CB)
My Lords, back in 1986, in my second job in Her Majesty’s Treasury, I was in charge of advising on national insurance and the National Insurance Fund. Here I am, 36 years later, speaking in this debate.
I will confine my observations to two points. First, my working life has seen this extraordinary transfer of revenue raising from income tax to national insurance. As other speakers have observed, national insurance is chargeable only on earnings, not on rental income or dividends. The relevant facts are that, when I became an adult, the national insurance rate was 5.75%; it is now 13.25%, so it has more than doubled. Over the same period, the basic rate of income tax has been cut from 34% to 20%, and it is now planned to reduce it to 19%. This is an extraordinary shift and one that both Conservative and Labour Governments have been prepared to implement, presumably because they regard taxpayers as more willing to pay national insurance than income tax and, sadly, opinion surveys bear that out. The fact is that both are taxes, and this is classic sleight of hand and smoke and mirrors which, as a former Treasury official, I should admire but I find it difficult so to do.
I will make my second observation briefly. I am actually in favour of the proposals in this Bill. I am in favour of lifting people out of national insurance. Of course, it is a new policy to seek to align the starting rate for national insurance with that of income tax. I remember Gordon Brown—in fact, I was advising him on that Budget—announcing it in 1999 and implementing it in 2001. Year after year throughout the 2000s, their starting points were aligned.
That was brought to a sorry end by Brown’s decision—again rightly, in my view, but unfortunately it had difficult consequences—to abolish the 10p rate of tax. As that resulted in losers, Mr Darling had to raise the personal allowance in mid-year and it was too expensive to raise the national insurance allowance. The two have ceased to be aligned ever since.
There is a more serious point to make. This Government have chosen, sensibly, to align the starting points of employee and self-employed national insurance with the personal allowance. When Gordon Brown was Chancellor he went one step further, which had a certain logic, which was to raise the employer allowance, which I believe is called the secondary threshold. In economic terms, whether you charge national insurance on employees or employers, the net effect is the same, because wages adjust. I am just slightly disappointed that the Government have, in a sense, sold the pass on employers, because this is also a burden on employment. When the Minister responds, I would be interested if she could explain why they have chosen to load the tax cut on employees. I recognise that employees vote and employers hardly do, or at least in fewer numbers, but it is a disappointing turn of events.
Baroness Kramer (LD)
My Lords, I am obviously not opposed to the lifting of thresholds in today’s Bill, as it takes some of the lowest paid out of the burden of national insurance contributions. I fully recognise the point made by the noble Lord, Lord Davies, and again by the noble Lord, Lord Macpherson, which is that the lowest paid get no help from this at all because they fall below the existing lower threshold. I suspect that tomorrow, we will discuss extensively how the group on the lowest incomes have been helped least by anything that has come out of the Spring Statement, so I will leave some of that for then.
The Government should have not just raised the threshold but scrapped the whole increase. They had a £26 billion bonus of unexpected tax revenues available—we will probably talk tomorrow about how that happened through fiscal drag—and they could have easily imposed a windfall tax on the super-profits of the oil and gas companies. Again, I suspect we will talk about that more. Those kinds of actions would have genuinely helped people to face a cost of living crisis.
I am afraid that I see the whole package as reflecting the fact that the Government have very little empathy for the pressures and choices that people are facing. They will not just hear this from us. The Minister is being very self-congratulatory about all of the steps that have been taken, but she will hear from the public, because they feel the pain, face a squeeze on their budgets and incomes, and are forced to make choices and changes in their lifestyle. For some it is whether to heat or eat, and for many others there will still be extraordinary pressure, even if they are not trying to work out how they survive falling into destitution. The Minister will hear a great deal from them, so I warn against this constant self-congratulation of having done so much. The public will be able to tell people, in pounds, shillings and pence, how little has happened to get them through this particular crisis. I agree with the noble Baroness, Lady Bennett, on this issue.
When the Chancellor made the Spring Statement, it became clear why he had earlier decided to increase NICs by 1.25%. He did so—here I agree with the noble Lord, Lord Davies—knowing that it would fund a very large share of a cut in income tax in 2024, just ahead of a general election. In fact, with the raising of the threshold, the numbers look extraordinarily matched. It is an optical illusion—why increase a tax in order to cut a tax? I do not think that it fooled anyone; it was simply a cunning plan to make the Chancellor look like a tax-cutter. Frankly, it was completely rumbled by the Institute for Fiscal Studies, which pointed out that the tax giveaway in 2024 would simply be giving back one-sixth of the increase in taxes that the Chancellor has made. He remains a high-tax Chancellor and they remain a high-tax Government.
I agree with others, such as the noble Lord, Lord Macpherson, that NICs and the health and social care levy that will follow do not fall on exactly the same group of taxpayers as income tax. The NICs increase and the future levies fall on employers, employees, the self-employed and dividend recipients. Indeed, as the noble Lord, Lord Macpherson, said, employers have been given no relief at all; they do not experience any benefit from the rise in the threshold and will still pay as before. Income tax ranges far more broadly, falling on all those who receive income, including rental income and income from trading assets, and a wide range of pension holders.
I hope that the Minister will explain this arbitrage to us today. No one understands arbitrage better than the Chancellor, and we are owed some clarity on who the winners and losers are in this tax arbitrage arrangement. I suspect that a shift from income tax to NICs is a very poor outcome for those who work and a very good outcome for those who get income from sources that are not tied to work. But we need to see the numbers, and I hope that the Minister will explain that logic. I am very grateful to the noble Lord, Lord Macpherson, for putting this in the longer-term context of a continuing move to a shift from progressive income tax to a far more regressive NICs system.
The Minister will undoubtedly say that the increase in NICs and the future levy are hypothecated to the NHS and then social care. I personally agree with those who think that very little of this money will actually reach social care, but let us set that aside for today and instead look at hypothecation, which really is a figment of accounting. The National Insurance Fund was created to fund the state pension but it is increasingly just a piggy bank. In that context, will the Minister today make clear what the impact on the fund will be from the drop in expected income arising from the increase in the threshold? This is not to criticise the increase, but I would like to understand how this will impact the fund and even more understand the consequences for funding the NHS and social care. After all, if this were truly a hypothecated levy, there ought to be a drastic impact on the money flowing to the NHS and social care. Is that what is going to happen? I did not read it when I looked at the OBR numbers—perhaps it did not fully understand the input of the Government’s arguments that the NICs increase was wholly and solely related to funding the NHS and social care. That number would then have come down, if it was describing accurately.
It seems to me that the Bill also brings into the spotlight the whole issue of thresholds. The Chancellor is freezing tax thresholds in order to raise additional tax through fiscal drag. The original estimate last October was that fiscal drag would increase tax revenues by £8 billion. With sharply rising prices, that estimate is now £21 billion—these are OBR numbers. It is a huge tax rise, obscured by optical illusion. I am deeply concerned that the public’s mistrust of politics will get yet deeper and more cynical with these constant attempts at a sleight of hand. I attempted to draft an amendment to the Bill to require that at least the NICs threshold would in future rise annually with CPI, but that was apparently out of scope. It is a very live issue, and the Minister needs to explain why these thresholds will not increase with CPI in the future.
Finally, I have a more specific question for the Minister—and this is an issue which was raised by the noble Baroness, Lady Bennett. Like most of this House, I am very concerned that the Spring Statement did so little for the least well-off, especially those who rely on universal credit. Can the Minister tell me how the increase in the NICs threshold will apply to those who are in work but also on universal credit? Will she confirm what emerged from debate in the other House that the threshold change, or at least about half of it, is clawed back through the universal credit taper? The IFS has come to that same conclusion. How many people are impacted by the clawback which is the effect of the taper? I ask particularly because the Minister’s colleagues in the Government were completely flummoxed by this and only eventually accepted its accuracy.
The Resolution Foundation has estimated that 1.3 million people, including half a million children, will fall into absolute poverty—I stress “absolute poverty”, which is below 60% of real median income in 2010—so it is quite a shocker that people on low incomes and benefits are facing. Those not in work, including people with disabilities, will see a fall in income this year of 8%. The Minister will surely tell us that the Government have done a great deal to help these folk but, frankly, the numbers do not lie. There are rumours in the press that the Government are becoming frightened and that they will provide more help in the future. However, we are here today and this is an opportunity for the Minister to tell us what future changes are going to be made to benefit those who have been essentially left out, or barely helped, by the changes that we heard from the Chancellor last week.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for presenting this Bill. I also particularly thank noble Lords who have spoken; they all seem to have set up considerable hors d’oeuvres for tomorrow’s debate, which I expect to be rather wide-ranging.
This is the second fast-tracked Bill this Session which makes significant changes to the national insurance system. The first implemented a 1.25% increase to national insurance for 2022-23. In essence, it created the very problem that the Chancellor is attempting to solve with this legislation. When the Health and Social Care Levy Bill was considered by the Commons in a single day, on 14 September, MPs in all political camps expressed concern about the lack of time given for debate and scrutiny. The Prime Minister’s surprise announcement felt more like a distraction or political relaunch than a genuine attempt at tackling the problems faced by the NHS and social care.
The money raised by the levy is unlikely to deliver the results promised by the Government. There is no coherent plan for clearing the NHS backlog or making the care system function more effectively. Both sectors are desperately short of staff and the workforce is exhausted. Capacity, not cost, is the limiting factor. There is no good time to break a manifesto commitment not to raise national insurance. However well-intentioned the decision may have been, September 2021 was a particularly bad time to make it. Inflation was beginning to rise and expectations for the economy were being downgraded. It was already becoming clear that a long, hard winter lay ahead for many.
Your Lordships’ House also considered the Bill in a single day, in October of last year. With costs continuing to rise, concerns were again voiced that the new levy was a tax on jobs, as well as the wrong tonic for the NHS’s problems. In the intervening months, Back-Bench Conservative MPs have grown somewhat restless. With their postbags bulging, they have come to realise that the Labour Party and others had a point: this is the wrong tax increase at the wrong time.
Since the Health and Social Care Levy Bill passed, inflation has climbed rapidly to its highest level for 30 years—or, to put it another way, since the last Tory inflation crisis. According to the OBR’s updated economic forecast, the 2% inflation target will not be met until late 2023 or early 2024. Due to this, it is warning of the biggest drop in living standards since records began in the 1950s. Energy prices are at a record high, the medium to long-term outlook remains uncertain and the price cap will shortly increase by hundreds of pounds, further increasing the pressure on household budgets. Despite the Government’s attempts to paint the cost of living crisis as a consequence of the war in Ukraine, the writing has been on the wall for months. The energy price cap announcement, for example, was trailed for some time. The decision was taken and made public before Vladimir Putin launched his illegal invasion.
In light of events, the Chancellor has been pushed hard to abandon his planned tax increase on workers. Conservative MPs express disquiet both privately and publicly. There have been media reports of heated disagreements among Cabinet colleagues. Even the “Money Saving Expert” begged Mr Sunak for an intervention, warning that the scale of the problem is so great that his tips can no longer make any meaningful difference to people’s day-to-day finances.
Fiscal events rarely capture the public imagination but, with so many feeling the effects of current circumstances, all eyes were on last Wednesday’s Spring Budget—sorry, Spring Statement, but really it was a Budget. The omens were good. As is becoming the norm, newspapers had been briefed in some detail about a substantial package to ease the burden on family finances. More than two years after his appointment, the Chancellor even confirmed on Twitter that his work to provide
“economic security for our people”
would finally begin. Unfortunately, the package announced did not live up to expectations. Despite the Prime Minister doing his best to leave the option open during weeks of media interviews, the Chancellor decided not to perform the much-desired U-turn. Instead, he opted to offset some of the 1.25% national insurance increase by equalising NICs and income tax thresholds.
We therefore come to the second piece of fast-tracked NICs legislation this Session, with, once again, a day’s debate in another place followed by Second Reading in your Lordships’ House. We support any measure to help households through this unprecedented cost of living crisis. We will therefore support the passage of this Bill today. However, while we are passing it in March, as others have observed, its effects will be felt only from July. We understand the reasons why, but that delay could have been avoided had the Chancellor been more proactive in his response to the mounting crisis.
Let us not kid ourselves: despite this Bill, taxes are still going up for most households in one week’s time. Mr Sunak wants to be seen as a tax-cutting Chancellor, but the facts speak for themselves. The overall tax burden will still be higher, irrespective of changes to the NICs thresholds. Once we are past the worst, the freezing of tax thresholds will reverse the Government’s previous good work in removing people from tax. Many low earners will find themselves paying income tax and national insurance once more. Under current plans, the benefit derived from the promised pre-election income tax cut in 2024 will have been offset by other increases across the tax system.
The Spring Statement and, by extension, this Bill, do not represent a particular, fair approach to the challenges faced by so many across the country. When appearing before the Commons Treasury Select Committee on Monday, the Chancellor failed in his attempt to label this plan as progressive. No plan that knowingly and willingly pushes over 1 million people into absolute poverty can be described in that manner. However, we will have other occasions, including the Spring Statement debate tomorrow, to cover some of those broader issues. For now, it is for us to get this fast-tracked legislation through, to ensure that these changes can take effect in July. It may be a sub-optimal solution but, regrettably, it is the only one this Government are willing to offer at the current time.
Baroness Penn (Con)
My Lords, I start by thanking all noble Lords for their thoughtful contributions to this debate. I shall do my best to address as many of the points raised as I can. Before I do so, it is worth returning to the purpose of the Bill before us. It will make major changes to the NICs system that will put billions of pounds back into people’s pockets at a difficult time. In addition, the Bill underlines the Government’s ambition to promote tax cuts for working people and to simplify the tax system as a whole.
This ambition is delivered in the Bill by two main measures. The first is the increase to the NICs primary threshold and the NICs lower profits limit to £12,750 from 6 July—an increase that will equalise the NICs and income tax thresholds. On an individual level, this will mean that a typical employee will see their tax bill reduced by £330 in the year from July; for self-employed workers, that will be an equivalent saving of £250. It will also mean that around 70% of workers will have their NICs cut by more than the amount that they paid through the new health and social care levy. That is an important point to bear in mind when weighing the relative benefits of increasing the NICs thresholds versus not proceeding with the levy altogether. Those left with higher NICs bills will be, for the most part, higher and additional rate taxpayers. In addition, almost 2 million people will be taken out of paying class 1 and class 4 NICs and the health and social care levy entirely.
The Bill’s second measure seeks to alleviate some of the pressures caused by the rising cost of living on those who earn low amounts and who work for themselves, so that from April those with profits between £6,725 and £11,908 will not pay class 2 NICs. This will rise to £12,570 from April 2023. This measure will benefit 500,000 self-employed people, saving them up to £165 a year. These measures, taken together, will allow the Government to fulfil their commitment that the first £12,500 that an individual earns is free of tax. As I outlined earlier, importantly, removing class 2 NICs from the group of low-earning self-employed workers will not prevent them from building their eligibility to the state pension, and other contributory benefits.
The noble Baroness, Lady Ritchie, and many others set the context for the debate as the cost of living crisis that people face in this country. The Government completely acknowledge that. We also acknowledge that we cannot completely protect people from some of the difficult times they will face, but we will stand by the British people, as we did throughout the pandemic. I take it back to this specific Bill: the IFS has said that raising the NIC threshold is the best way to help low and middle earners through the tax system at this time.
I know noble Lords will be aware of the measures the Government are taking to support people. I will have to disappoint the noble Baronesses, Lady Ritchie and Lady Kramer, that I cannot look forward to future Queen’s Speeches or Budgets, but it is worth emphasising some of the support that is out there for families, which is worth over £22 billion in 2022-23. It includes providing millions of households with up to £350 to help with rising energy bills and helping people to keep more of what they earn. We have cut the universal credit taper rate and frozen alcohol duty, as well as announcing a further rise in the national living wage to £9.50 an hour from April 2022. Other measures, such as the increase to the local housing allowance rates introduced during the pandemic, the cuts to fuel duty and the increase to the household support fund, will also provide important support to people.
The noble Baroness, Lady Ritchie, made some important points about providing more dedicated support to people to move into work, whether those facing health conditions, the disabled, or single parents. The Government are absolutely committed to that agenda. That is why we have so many more work coaches in place to help people make that move into work, because in the longer term that is the way to help people to deal with the growing cost of living, but also, importantly, when they are in work to move into better and higher-paid work. That is why action on the national living wage, which is rising by 6.6% this April, as I said, is important. That will be an increase of over £1,000 to the annual earnings of a full-time worker on the national living wage. That is also why we have the new in-work progression offer for people who are among the lowest-paid workers on universal credit to access personalised work-coach support to help them increase their earnings. Importantly, we have also matched that with significant investment in our skills system for this Parliament— £3.8 billion in skills in England by 2024-25. That funding is absolutely targeted at helping people improve their earnings prospects and support their success in the labour market.
The noble Baroness, Lady Bennett, made a number of points that we might return to in the debate tomorrow, but there are a couple I want to pick up on. She talked about a new excuse for austerity. I am afraid that just does not match the figures. Total departmental spending will grow in real terms at 3.7% a year on average this Parliament. Total managed expenditure as a share of the economy is expected to increase across the Parliament to 41.3% in 2024-25. That compares to 39.3% in 2007-08, for example, so public spending is increasing during the course of this Parliament.
The noble Baroness, and indeed the noble Baroness, Lady Kramer, also asked about the universal credit taper rate and the impact it has on the threshold rise. Noble Lords are absolutely right that the UC taper rate could impact on the benefit felt by those on universal credit by the increase in the threshold. It is important to note that these individuals will be better off overall thanks to the change in the threshold.
That is a really important point about the taper rates in universal credit. It reflects the importance of the Government’s decision to reduce that taper rate from 63% to 55%. In the design of universal credit overall, compared to tax credits and the other benefits that it replaced, we are bringing down the really high marginal effective tax rates that people who were on benefits or receiving tax credits could face when they sought to take on more hours and progress in work.
The noble Baroness, Lady Kramer, and the noble Lord, Lord Macpherson, asked about increasing the secondary threshold for employers. The threshold will increase in line with CPI, but will not match the increases to those for employees and the self-employed. The Government are committed to supporting businesses and incentivising investment to support growth. We are increasing the employment allowance to help small businesses fulfil their potential and boost employment. Over 1 million employers are benefiting from the employer allowance and reducing their annual employer NIC bills. From April 2022, 670,000 of these businesses will not pay NICs and the health and social care levy, due to the employment allowance. This includes 50,000 businesses which will be taken out of NICs and the levy by this increase. Due to the employment allowance, 41% of businesses will not be affected at all by the health and social care levy, while the next 40% will pay £500, 1% of their annual wage bill.
The noble Baroness, Lady Kramer, asked about the impact on the National Insurance Fund, the NIF. The Government Actuary’s Department is not required to produce a report alongside this Bill on the measures’ impact on the NIF. It will continue to provide a report alongside the annual uprating legislation, so the impact of these measures will be included in future uprating reports.
The noble Baroness also asked about the impact on health spending. She will know that the health and social care budgets for the next three years were set at the spending review and, as is standard, we will not reopen a multi-year settlement on the basis of changing forecast receipts. Forecasts can go up as well as down and the stability and certainty of funding is important for departments and the devolved Administrations.
Baroness Kramer (LD)
Is the Minister confirming that, after the announced period, the effect will be that the anticipated additional funding for social care will be reduced by the impact of the rise in the threshold?
Baroness Penn (Con)
No, that is not what I am confirming. I am confirming that the budgets set out at the spending review still stand and that every penny from receipts of the health and social care levy will go to bodies responsible for health and social care. That is the way in which the levy is hypothecated. It does not determine the overall budgets for the health and social care systems. The noble Baroness will know that their budgets are far bigger than the receipts from the levy. The hypothecation is that all the receipts from that levy go towards spending on those areas.
Baroness Kramer (LD)
The Minister has left me thoroughly confused. Perhaps she could write to us to explain why, if this is hypothecated money and it is now less than was forecast, the amount of hypothecated money is apparently identical when it reaches the NHS or social care. It does not make any sense. It is either one or the other: if it is hypothecated, the amount would go down; if it is not a hypothecated amount, then we are dealing with a grander fiction, and it would be helpful to know that. Perhaps she could write to us on that.
Baroness Penn (Con)
I will give it one more try and will then write if I have not managed to make myself clear. The amounts raised through the levy will all go to health and social care spending. They are not the only things that determine the overall amount of health and social care spending and therefore responsible bodies’ budgets. It is also my understanding that, in the forecasts produced by the OBR alongside the Spring Statement, even with the increase to the thresholds, the amounts forecast to be raised through the levy are more than previously anticipated when the levy was announced. I will undertake to write to the noble Baroness because I do not think my second or third attempt has satisfied her.
Lord Tunnicliffe (Lab)
I confess to being as confused as the noble Baroness, Lady Kramer. Please could the Minister write to all noble Lords who have participated in the debate.
Baroness Penn (Con)
I will do so and place a copy in the Library so that all noble Lords can access it. I believe I have addressed most of the points raised in this debate, but if I have not, perhaps I could address any outstanding points in my letter.
I reiterate my thanks to noble Lords for their contributions to this debate and for considering this Bill so quickly. In short, the Bill is a fundamental part of the Government’s plans to use the tax system to support households with the cost of living, boost the economy through support to businesses and help workers enjoy more of the proceeds of growth. I commend it to the House, and I beg to move.