Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022

Lord Davies of Brixton Excerpts

Tuesday 6th December 2022 Grand Committee

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, in the Autumn Statement, the Government set out their prioritisation for taxation to be fair by following two broad principles: first, that we ask those with more to contribute more; and, secondly, that we avoid the tax rises that most damage business.

Noble Lords will remember that the National Insurance Contributions (Increase of Thresholds) Act 2022 increased the point at which class 1 and class 4 NICs are paid to align with the personal allowance for income tax. As a result of that legislation, almost 30 million working people are better off. We are here today to discuss the final element of the Government’s ambition to align national insurance contribution thresholds with the personal allowance for income tax.

I note that, in its 19th report, the Secondary Legislation Scrutiny Committee raised these regulations as an instrument of interest. The regulations introduce a new threshold within class 2 NICs from which self-employed individuals start to pay class 2 NICs. This will be known as the lower profits threshold. Class 2 NICs will now be due only if profits exceed the new lower profits threshold, set at £11,908 for the 2022-23 tax year.

The new lower profits threshold will be aligned with the personal allowance. However, the threshold is being set at £11,908 for 2022-23 to reflect the fact that personal NIC thresholds were increased from July this year, meaning that individuals will benefit from an increased threshold for nine months of the tax year. For 2023-24, the self-employed thresholds will be set at £12,570. This means that no one will pay a penny of income tax or national insurance contributions on their first £12,570 of income from 2023-24 onwards, allowing people to keep more of what they earn.

However, this measure goes further. Class 2 NICs are the mechanism by which the self-employed become entitled to certain contributory benefits, such as the state pension and statutory maternity pay. To ensure that individuals do not lose access to their benefit entitlement, the existing small profits threshold will be maintained as the point at which the self-employed gain access to certain contributory benefits. This means that individuals will benefit from the increased threshold for paying class 2 NICs without losing their entitlement to contributory benefits.

This measure will apply retrospectively from the start of the 2022-23 tax year, in line with the provisions made in the parent Act. This means there will be no delay in this measure benefiting around 500,000 self-employed individuals, saving them £163.80 a year. Changes will be delivered via the annual self-assessment process for the vast majority of customers, following the end of the tax year.

These regulations fulfil the Government’s obligation to increase the point at which the self-employed pay class 2 NICs. Importantly, they ensure that thresholds are aligned and our tax code is simplified. I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, as a supporter and fan of national insurance, I did not want these regulations to pass unnoted. I am a believer in the national insurance system—I guess there are not many of us left—where people pay contributions and that provides entitlement to national insurance benefits.

It has been understood, from the beginning, that there are people in employment and people who are self-employed. For practical reasons, different sets of rules have to apply to each group of workers. Nevertheless, the objective should always be neutrality in the financial impact, otherwise it is bound to give rise to issues of financial arbitrage regarding being employed or self-employed. That is all well understood. I will avoid going off down the IR35 track; there will be plenty of other opportunities to pursue that.

On the face of it—I would be interested in the Minister’s views—this change might be seen as a move towards reducing inequality between the employed and self-employed. However, in practice, it increases the difference. The tell is the fact that there is a cost, in a normal year, of £100 million. In the context of the figures we have seen in recent Budgets, that is not an enormous sum, but it suggests that this is a move away from neutrality and that it further increases the advantages that people perceive in being self-employed as opposed to being employed, with all the problems that flow from that. The background to this is clearly the extent of the acknowledged problem of fake self-employment for financial reasons. Perhaps the Minister would indicate, in broad terms, quite how this change fits in with what I hope is an understanding that there should not be excessive financial advantages in being self-employed.

I heard what the Minister said about the changes to entitlement to benefits. I emphasise that, in achieving neutrality between employed and self-employed contributions, there should equally be neutrality between the benefits paid to people who have paid the different types of contribution.

[Lord Tunnicliffe (Lab)]

My Lords, I welcome the Minister’s introduction of these technical amendments by His Majesty’s Revenue & Customs. As she outlined, the practical impact is to implement the self-employment element of the Government’s commitment to align the trigger points for national insurance contributions with the income tax personal allowance. The SI will also ensure that individuals with profits at or above the existing small profits threshold but below the lower profits threshold are treated as if they have paid class 2 NICs. This will ensure that those individuals continue to be eligible for the contributory benefits, which is hugely important. We will not oppose the regulations, as they provide some much-needed help for self-employed people in the face of the current inflation crisis and probable recession.

Autumn Statement 2022

Lord Davies of Brixton Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, in her absence, I congratulate the noble Baroness, Lady Lea of Lymm, on her maiden speech.

In the Chancellor’s Autumn Statement, I was struck by the emphasis placed on public services. It merited several references, and it was one of the three “priorities” that were identified, that is, stability, growth and public services. There were mentions of teachers and nurses, and the declaration that what we needed were “high-quality public services”. Even the Prime Minister got a mention shoved into the middle of the Statement, that he is also in favour of high-quality public services. My question is: how can we expect to achieve high-quality public services when we are going to cut pay to the people who provide them? Public services are, by and large, about people; people carry out the work that we require to deliver good-quality public services. What does this plan deliver? It delivers cuts to their pay. How can you align those two factors?

In addition to that, cutting the take-home income in real terms of large parts of the workforce in itself creates the austerity that the Government claim they wish to avoid. So I am puzzled—well, I am not puzzled, because it is part and parcel of the Conservative philosophy, but inflicting the pain of the cost of living crisis on public service workers who are receiving pay increases materially less than the pay increases of the equivalent employees in the private sector is totally against what the Government claim they are trying to do.

As well as pay, there are pensions, and I shall say two things. First, I challenge the use, which Ministers have frequently adopted, of the phrase “generous public service pensions”. Public service pensions are not generous; they might be good—I would describe them as “adequate”—but to me they are the pensions that everyone should be receiving. They should not be dragged down to achieve the poor-quality pensions all too prevalent in large parts of the private sector; they are the objective at which all employment should be aimed. Using the term “generous” for such pensions is clearly wrong; it ascribes a motive of generosity. Well, I can assure noble Lords that terms and conditions of employment are never a matter of generosity—they are a matter of the rate for the job, and if the rate for the job includes an adequate pension, that is nothing to do with generosity, it is paying the rate for the job.

Secondly, I come back to the annual allowance for taxation purposes. It is an issue that is not going to go away. Implicit in the Government’s plans is that it is going to be frozen at a time when inflation is out of control; there is galloping inflation of 20% or 30% over a relatively short period, which means a significant effective increase in the impact of the annual allowance on people’s pay and their employment. It is worth reminding ourselves that the last Prime Minister promised to stem the exodus of doctors from the NHS caused by the annual allowance. The Prime Minister before that promised to fix the pension tax relief rules, and the new Chancellor, no less, has called the situation a national scandal in the report that he chaired for the Commons Health Committee.

Unlike the noble Baroness, Lady Penn, I am in favour of high taxation. I make no secret of the fact that I think that the well-off and the wealthy should be paying high rates of income tax—tax on their earnings. What puzzles me, and what I do not understand, is why they think it is worth taxing income from a pension at a marginal rate of 55%. That is what the system does. We are told that 45% is at the margins of what is considered to be acceptable, yet pensions, where people have sought to provide themselves with a decent income, are being taxed at 55%. Where is the sense in that?

Clearly, pensions taxation is a mess and needs a thorough review, but we still need some short-term measures to address the problems caused by the annual allowance. It is not just a question of doctors, although they have quite rightly fought that campaign. I recall comments made three years ago by the noble and gallant Lord, Lord Craig of Radley, who spoke about the annual effect of the annual allowance on forces personnel. He referred to the

“complex and indefensible treatment of Armed Forces pensions”

and pointed out that the annual allowance

“incurs a significant … tax charge”

that

“must be paid forthwith”

unless you use the

“irrevocable scheme pays”—[Official Report, 15/10/19; col. 72.]

approach.

The noble and gallant Lord identified that at that time there were 4,000 members of the Armed Forces who in a single year had breached their annual allowance and had to produce that financial contribution, not out of their current income but out of the income that they did not prospectively expect to receive for many years in future. So I hope that the Minister will be able to assure us that action will be taken on the annual allowance to relieve the impact that it has had on NHS staff as well as on the military, in schools, and throughout the public service.

Financial Markets: Stability

Lord Davies of Brixton Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I first offer my thanks to the noble Lord, Lord Sharkey, for initiating this debate, and to the previous speakers. I have to declare an interest as a fellow of the Institute and Faculty of Actuaries. I have to say, based on over 40 years in the world of pensions, I find it quite difficult to cram what I want to say into five minutes—less than five minutes now.

I will, however, make three points. First, thanks to the noble Baroness, Lady Bowles of Berkhamsted, we have heard a clear exposition of the technical difficulties that arose in the episode in September. We need to understand, however, that this is a systemic problem with our pension system and the way that it is funded. It is not just a question of overleverage or pooled funds being difficult to manage. It is about the whole approach to how we fund defined-benefit pensions. There is a mistaken belief that if you look to reduce short-term volatility, that in some sense helps in the long term. The contrary is true: the real risk to pension funds is that they do not deliver their benefits, or the obverse, which is that the cost of providing those benefits is set too high, dissuading us from making adequate provision. It is a complicated subject, but this is encapsulated by this short-termism and focus on mark-to-market valuation at the behest of company accounts. That is the fundamental problem and it needs to be broken.

To address that issue, we must have a proper review of this incident and what it means for funding in general. Currently, we have an alphabet soup of regulators involved: there is the Joint Forum on Actuarial Regulation; within that we have the Institute and Faculty of Actuaries, the Financial Conduct Authority and the Pensions Regulator—it goes on. They are undertaking a review next month of what happened but we need an important and clear independent element in that review. I pressed the issue in Questions earlier in the week: I hope that the Treasury will take a more long-term view of what is happening here. We are told that three Select Committees are looking at this issue. Perhaps we will have to wait until their conclusions, but the Treasury has to take hold of this issue and look at what needs to be done, rather than relying on this alphabet soup of regulators.

Thirdly, what impact does this have on pension benefits? A lot of commentators in the industry have said that funding ratios have gone up, so it is all right. As has been explained, ratios have gone up not because there is more money—there is less money—but because of the adjustment in the value attributed to future liabilities. That is fine, but the problem is that the better funding ratio is not looking at what that means for benefits. The funding ratio might have improved, but the higher rate of inflation that comes with that reduction in interest rates will have a devastating effect on members’ future benefits. It is no good having a higher funding ratio if the benefits have, effectively, been reduced because of the impact of inflation.

Defined Benefit Pension Funds

Lord Davies of Brixton Excerpts

Tuesday 1st November 2022 Lords Chamber

[Baroness Penn (Con)]

My Lords, the Government do not agree with the noble Baroness’s assessment of the situation. Along with the Bank of England and the Financial Policy Committee, we keep a close eye on identifying and addressing systemic risks to improve UK financial stability. In 2018, the committee specifically looked at UK pension schemes’ resilience to an instantaneous 100 basis point rise in yields across maturities. The movements that we saw a few weeks ago were greater than that. As the FPC has also noted, it may not be reasonable to expect market participants to insure against all extreme market outcomes, because there can be negative effects to that as well.

[Lord Davies of Brixton (Lab)]

My Lords, I declare an interest as a fellow of the Institute of Actuaries. I am afraid that there will be an alliance of regulators and providers who will say, “Nothing to see here, we can move on”. There are questions to be answered about what damage has been done and about what we can do to ensure that it does not happen again. There is so much hidden in the investment policies of pension funds. Can the Government give an assurance that there will be a proper investigation of what happened, with an independent element?

[Baroness Penn (Con)]

My Lords, the Pensions Regulator and other regulators have said that they will want to look at what has happened and learn lessons. I also understand that the Work and Pensions Committee in the Commons is looking at this issue, including any changes to the Pensions Regulator, for example, that may need to be made. The Government look forward to reading the results of its findings.