National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading (Hansard): House of Lords
Wednesday 26th June 2019 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I will speak briefly in support of the Bill. It would be poor form not to, since the Bill has its origins in George Osborne’s last Budget, when I was his Permanent Secretary.

In many ways, it is a textbook piece of tax legislation. It originated from a proposal from the Office of Tax Simplification and reflects extensive consultation. I recognise that increasing tax on redundancy payments will not satisfy all, but if they are subject to income tax, it follows logically that they should be subject to national insurance. Who knows? A higher tax charge might deter unnecessary redundancies.

Nearly every Government I worked for at the Treasury looked at bringing income tax and national insurance closer together. I remember a review in the mid-1990s, encouraged by the noble Lord, Lord Heseltine, which I suspect was led by the noble Lord, Lord Young, as Financial Secretary to the Treasury. However radical their initial intentions though, Governments tend to shy away from wholesale reform, understandably scared off by the number of winners and, more importantly, losers. The difference in assessment periods and tax base of national insurance and income tax is problematic. National insurance is assessed weekly; income tax is assessed annually. National insurance is payable only on earnings; income tax is payable on savings and rental income too. Income tax includes a number of reliefs, not least on pension contributions; national insurance does not. National insurance provides pension entitlement; income tax does not. National insurance is not payable by employees over the pension age; sadly, income tax is payable until you die. The income tax system is progressive, marginal rates increasing with income; national insurance is not. Indeed, once earnings go above the upper earnings limit, the employee’s marginal rate falls from 12% to 2%.

Therefore, although there would be substantial administrative gains if income tax and national insurance were brought together, and the tax system would become altogether simpler and more intelligible for citizens, Governments generally conclude that full alignment is altogether too difficult. Indeed, I wonder how much Governments really want it. National insurance rates have almost doubled during my working life, while successive Governments have taken credit for reducing the basic rate of income tax from 33% to 20%.

All that said, it is still possible to create greater alignment. The Bill represents a small step in that direction. I would be grateful if the Minister would confirm that the Government remain committed to finding further ways of bringing income tax and national insurance closer together. It is right in principle that sporting testimonials and large redundancy payments are subject to income tax. If that is the case, they should also be subject to national insurance.

It is a pity that only employers’ national insurance contributions—class 1A—are being applied. There is a strong case for applying employee national insurance contributions as well. No doubt the Government will argue that there are precedents for exempting certain types of employment income from class 1. For example, benefits in kind, such as a company cars, are subject to class 1A but not class 1. I encourage the Government to look at this again at some point in the future. The national insurance system should not discriminate between different forms of remuneration. Potentially, it would bring in some useful additional revenue, which, to judge by the spending commitments of the candidates to be the next leader of the Conservative Party, will be needed.

In seeking greater alignment between national insurance and income tax, I encourage the Government to keep two areas in their sights. The first is self-employed earnings, where the Office of Tax Simplification recommended abolishing class 2 and raising class 4. Sensibly, the Chancellor came forward with a proposal on this in 2017, but he was forced by a strange coalition of Brexiteers and the official opposition to withdraw it. At some point, maybe many years hence, a Government will be elected with a rather more compliant majority than exists today. At that point, I hope Treasury Ministers will have another go at simplifying the system and creating greater alignment between employee and self-employed national insurance.

Secondly, by bringing the starting point for income tax and national insurance closer together, Gordon Brown achieved broad alignment in the early 2000s. For the rest of that decade, the annualised lower earnings threshold was maintained in line with the income tax personal allowance. The coalition Government chose to prioritise increases in the income tax allowance. The national insurance threshold has been left behind. At some point, I hope the Government will seek to close the gap. I am encouraged that both candidates in the Conservative Party leadership election have advocated a rise, although they have not yet said how they propose to fund it. I know closing the gap fully would be very expensive, but if in future the Government have the resources to cut taxes, I hope they will make this a priority. Meanwhile, I strongly support the Bill and wish it safe passage.