National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Blackwell Excerpts

Committee stage
Wednesday 29th January 2025 Grand Committee

[Lord Blackwell (Con)]

My Lords, I would like to put this discussion in the context of the profitability of the small businesses that we are talking about. The noble Lords who proposed these amendments have effectively made the point that many of these small businesses will be the engine of growth—the acorns that will develop and be the big businesses of the future. In successful small businesses, profitability varies tremendously, depending on the sector and capital intensity, but it would not be unusual for a business of this scale to have a net profit margin of around 10%. However, in some sectors, such as retail, hospitality and construction, that margin may be as low as 2% or 3%. When you are talking about adding 1% to the cost of employment, where the employment may be a significant part of the turnover, you can see that the impact on the net profit margin is potentially devastating, particularly since, in many cases, the percentage increase in their national insurance bill will be larger than 1%.

Clearly, we must be particularly concerned about start-ups because they are not yet successfully established trading businesses. They may have to undergo a number of years of losses before they get to that position. They accumulate those losses and they have to pay interest on those losses and, projecting forward, the additional costs may well tip the balance on whether those profitability equations earn an adequate return on capital to make the investment worth while.

Amendment 6 proposes to exempt businesses with a turnover of below £1 million. Obviously, that is a broad category to cover. We do not know exactly how many people are employed in such businesses but, as a rough proxy, the number of people employed in businesses with less than 50 employees is 47% of the entire UK workforce. We are talking about a significant part of the workforce being impacted by these changes, potentially in a significant way.

I heed the message from the noble Lord, Lord Eatwell, that we should not be complicating the tax system, but the only reason why we are discussing these amendments is the proposal to increase national insurance. If the Minister does not want to accept a broad exemption for small businesses, it would be helpful to the Committee if the Government could suggest amendments that would exclude those businesses that we are particularly concerned about—the start-ups and those on narrow profit margins—and see if there is a way in which to ensure that the engines of growth in this sector are not destroyed or damaged.

[Lord Forsyth of Drumlean (Con)]

My Lords, I just want to follow up on that excellent point made by my noble friend. It is a long time since I ran a small business, but I can still remember the feeling of fear as to whether, as one started up, one was going to have enough to meet the payroll at the end of the month. There is pressure on client and other businesses and there are risks, and events can drive you off course. When you have produced your budget for the year and are reliant on certain things happening, out of a blue sky—actually, the Labour Government did not come out of a blue sky; that was obviously going to happen—you suddenly have to find all this extra money. The impact is harder on the smallest businesses of that kind. It is hard to quantify and saps the enthusiasm and drive among entrepreneurs when they are faced by this.

I am very supportive of the Chancellor of the Exchequer’s determination to get growth in this country and the way she is going about it. However, as has been pointed out by several noble Lords—the noble Lord, Lord Blackwell, put it most crisply—small businesses are the ones that will become big businesses; they are the ones that will create the wealth, while the large businesses will shed labour. We keep being told how AI will mean that those businesses will be laying off labour. However, the small businesses are the ones that will be using artificial intelligence, if you believe it will be such a big change. They are the ones that will develop and use AI, but they are also being hammered and will find themselves facing great difficulty.

It is also the case that small businesses find it hardest to get support from the banks, because, increasingly, the large clearing banks are not interested. As we have heard in the Financial Services Regulation Committee, they are increasingly not interested in supporting SMEs. If the Chancellor’s determination is to get growth, hobbling small, embryo businesses is not a smart idea, if you are taking at least a longer-term view of three to five years.

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[Lord Sharkey (LD)]

My Lords, these amendments address very important issues. As noble Lords who attended the Committee last week will be aware, we on these Benches have taken an approach to the Bill aiming to exclude certain sectors from the Government’s rise to employers’ national insurance contributions—sectors that we feel will be particularly impacted by the change.

The amendments in this group follow the same structure as our earlier amendments, exempting employers of young people in various age groups from the proposed rise in employers’ national insurance contributions. We touched at least tangentially on that and on some of the concerns raised about youth employment when we debated amendments last week, tabled by my noble friend Lady Kramer, relating to part-time workers and to the hospitality and tourism sectors. For many young people, part-time work is the entry point into the world of work. A career in hospitality is often the first step on the career ladder for many young people entering the job market.

According to data commissioned by that well-known authority, the British Beer & Pub Association, pubs currently provide jobs for more under-25s than they ever did, with 350,000 people in employment in that sector. The association estimates that, to keep employing that same number of under-25 year-olds, the NICs liability for employers will increase from £82 million to £153 million.

I shall not repeat the points made in our debate last week, but I urge the Minister to address further some of the possible unintended consequences that the measures in this Bill might result in, as employers in these sectors look at ways in which to offset the additional costs that they will have to endure—perhaps instituting hiring freezes or freezing pay rates—and especially and specifically the impact that will have on young people seeking to enter employment for the first time. An impact assessment would have been very helpful, as would the application of the mechanism contained in Amendment 33 from the noble Baroness, Lady Noakes, which we discussed earlier this evening.

In the regrettable absence of an impact assessment, it would be entirely proper to postpone the NIC provisions until the Government make more age threshold granular data available to help to assess the effect of the measure on young people. I heard the Minister’s unequivocal refusal to provide any more impact assessments, and I expect that we will hear it again in Committee and on Report.

[Lord Blackwell (Con)]

My Lords, I want to add to the comments made by my noble friend Lord Altrincham in introducing these amendments. He spoke of a large number of young people who are not in economic activity, full-time education or training. Labour market statistics are notoriously difficult to interpret, as we know, but, if you take the unemployment rate he quoted—around 14%—we know that, in addition, a worryingly large number of people in this age group are also on long-term sickness benefits. All of them could be in productive work, with the right support and encouragement.

A number of Members of this Committee are also members of the House of Lords Economic Affairs Committee, which recently did a review of this area. Some of the evidence that we took made the point that, once a young person moves on to long-term benefits without ever having had meaningful employment experience, it becomes increasingly difficult for them to get work. They become stranded in a benefit life, which is not only wasteful for them but a huge cost to the taxpayer.

In stressing the importance of making it economically attractive for employers to take on young workers such as these, I wonder whether the Government should consider going further than these amendments: not just retain the existing levels of national insurance contributions for employers for this age group but reduce the national insurance contributions of young workers to give an additional incentive to help them, at this early stage in their lives, into a meaningful working career.

[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords who have taken part in this debate. I will address the amendments tabled by the noble Lord, Lord Altrincham, and the noble Baroness, Lady Neville-Rolfe, which seek to exempt the salaries of young people from the increase in employer national insurance.

An employer national insurance relief is already available for the earnings of those aged under 21 and for apprentices aged under 25, meaning that employers are not required to pay national insurance contributions up to £50,270 for these groups. Despite the challenging fiscal inheritance that this Government faced, we are maintaining these important reliefs for under-21s and apprentices under 25; they are not changing as a result of this Bill. Creating other thresholds and rates based on the age of staff would add additional complexity to the tax system. These amendments would introduce new pressures that would have to be met by more borrowing, lower spending or alternative revenue-raising measures.

The noble Lord, Lord Altrincham, mentioned NEETs. I completely agree with him, but the situation that this Government inherited is completely unacceptable. That is why, at the Budget, the Government announced £240 million to fund 16 pilot projects across England and Wales in order to improve the support available to the economically inactive, the unemployed and people who want to develop their careers. This will include eight youth guarantee pilots to test new ways of supporting young people into employment or training.

It is also why, in the spring, the Government will bring forward a welfare reform Green Paper. I have read with interest the proposals mentioned by the noble Lord, Lord Blackwell, from the Economic Affairs Committee of your Lordships’ House; I hope that many of them will feature in that Green Paper. For now, given the points that I have set out, I respectfully ask the noble Lord to withdraw his amendment.

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[Lord Blackwell (Con)]

My Lords, I will not repeat the powerful arguments that have been made for this set of amendments, but I would like to put the argument in stark terms. What is exceptional about most charities is that they do not have the ability to raise revenue by selling more and putting up prices. Some do, but many are not commercial enterprises. In effect, since those charities can raise this money only through additional fundraising, the Government are saying to charities, “We want you to go out and solicit more contributions from philanthropists to pay for government services”. If the Government went out to the public and said, “This is what we’re going to do”, I wonder how many people would think that a sensible policy.

[Baroness Kramer (LD)]

My Lords, I will be very brief, because these Benches spoke extensively on charities in an earlier grouping, where the amendment would have overturned the change that the Government are introducing. I particularly want to pick up the amendment from the noble Baroness, Lady Bennett, because, like others, I am very conscious that, of the charities that I have talked to, a fundamental part of their problem is that they cannot turn around and respond quickly enough to a measure that is being introduced so quickly. I am not up on all the rules of the Charity Commission, but I suspect that it would frown greatly on a charity spending when there is no clear funding mechanism coming in to replenish its resources. I think that there is a requirement to have several months’ contingency on the books, so there is a real problem here for many charities in having to turn around very quickly.

One of the amendments deals with increases in the employment allowance. That runs into a problem that the Government could help us with. It is my understanding that an entity that sells 50% of its services to the public sector does not qualify for employment allowance, so there will be many charities that are excluded from any benefit that is offered under that amendment. I wonder if the Minister could help us to get a better grip on that, because I think we have all struggled with understanding the application of those rules.

My last point did not occur to me until I started reading the input from various charities. A number of charities that have been able to survive and are fairly confident about their funding will now find themselves in a position where they need to battle and compete for grants. Some of the very smallest charities are concerned that they may get excluded from the grant offering because charities with a bigger reach are now turning to those particular pots. I am not sure whether the Government considered that as they put together this picture.

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[Lord Londesborough (CB)]

My Lords, I will speak briefly as I put my name down in support of Amendment 62 in the name of the noble Baroness, Lady Neville-Rolfe. I could have—indeed, I should have—done so for Amendments 61, 63 and 64 as well.

I continue to use the word “baffled” about the Government’s apparent resistance to impact assessments, which are so crucial if you are to have joined-up thinking on the Government’s economic growth strategy. As we know, rather worryingly, we lost 47,000 people off the payroll last month. I just raise this point in relation to the Government’s White Paper, Get Britain Working, which has some ambitious and laudable aims. Specifically, the headline bullet is that the aim is to take 2 million people out of welfare and into work. Put another way, the aim is to reduce the economic inactivity rate of our working-age population from the current 25% to 20%. Of course, the question is: where will those 2 million jobs come from? Who will create them? The answer is the private sector; that is the assumption.

When you come back to impact assessments, you have to ask how private sector employment will be impacted by not just the rise in national insurance contributions but the increase in the national minimum wage and the upcoming anticipated restrictions being brought in by the new Employment Rights Bill. All these factors boil down to the importance of assessment. If we have a lack of assessment, we greatly reduce the chances of the Government achieving their aims. So, again, I ask the Government to embrace accountability through Amendments 61, 62, 63 and 64.

[Lord Blackwell (Con)]

My Lords, I will make a brief comment on these amendments. In the Committee’s discussions so far, the noble Lord, Lord Eatwell, has made great play of the fact that the OBR suggested that the overall Budget measures would increase employment. The noble Lord is not in his place but, if he were, I am sure that, as an economist, he would agree that it is important to have the right counterfactual. Of course, what the OBR was not looking at in the Budget was the exact impact of taking the £20-odd billion from the national insurance rise and spending that money. It was looking at spending a lot more money; the Government are raising expenditure by £142 billion over the next five years, in excess of what they are raising in additional taxation.