Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2022

Baroness Penn Excerpts

Wednesday 23rd February 2022 Grand Committee

Moved by

[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.

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I do not say these things to score political points; the subject matter is far too serious for that. I know that the Minister takes these matters very seriously and I hope the same is true for her colleagues in the department. As I said in relation to energy prices yesterday, we have a month until the Chancellor makes his Spring Statement. Given the difficulties that so many face, that occasion needs to offer real support to those who are most in need—not just vague promises of a brighter future. However, on the question before us today, we fully support the safe passage of these regulations.

[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.

Motion agreed.