National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

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

My Lords, I am in no doubt that taxes have to rise. The spending decisions made by the last Government—or rather the lack of them—the cost of the pandemic, higher interest rates and increasing demographic pressures all point in the same direction. Therefore, with a heavy heart, I broadly support the Bill.

In a sensible world, the Government would not have made the manifesto commitments on personal taxes that they did. For my part, I would have preferred to see an increase in income tax, as Denis Healey implemented in his first Budget, or even an increase in VAT, as Sir Geoffrey Howe and George Osborne implemented in their first Budgets. But we are where we are, and I recognise that tearing up a manifesto commitment in a first Budget rarely ends well for a Chancellor. It is much better to raise a large tax a little than lots of small taxes a lot. Those who oppose the Bill really need to explain how they would fill the void which its defeat would leave.

My main worry about the recent Budget is that it did not go far enough in stabilising the public finances. Fiscal headroom is remarkably small, long-term interest rates remain stubbornly high, and spending pressures—in particular those relating to the so-called triple lock on pensions and to the National Health Service, social care and defence—are as likely to increase as to decline. Although I remain an optimist about Britain’s long-term growth prospects, given the global move to protectionism there is every chance that the economy will underperform over the next 18 months.

I understand the concerns about the impact of this tax increase. We should be in no doubt that national insurance is indeed a tax on jobs; generally, the more you tax employment, the less you will get of it. The change will undoubtedly add cost pressures, both for the public and the voluntary sectors, which the Government will need to address. But in assessing the impact of this measure, we need to recognise that the economy is close to full employment; indeed, that is one of the reasons why it has been so easy for inflation to take root in recent years.

It is important to look at national insurance in the round. The incidence of employers’ national insurance is almost identical to that of employee national insurance. The last Government cut the rate of employee national insurance from 12% to 8% earlier this year. They should not have done so, since that only added to the deficit, but they did, and I am happy to make a virtue of its economic impact in the labour market broadly off-setting the negative impact of the measure in the Bill. The cuts in employee national insurance make it cheaper to employ people; the rise in employers’ national insurance makes it more expensive. The net effect is broadly neutral, and many have argued that it would have been a lot easier to cancel the employee cut and leave employers’ national insurance unchanged, but here we come back to the manifesto commitment.

I will confine my remaining comments to how national insurance contributions might develop from here, given that whoever is in power in the decades ahead will be under pressure to raise more in tax. First, I worry that national insurance rates are too high and income tax rates too low. During my adult life, the combined rate of national insurance has risen from 14.5% to 23%, while the basic rate of income tax has fallen from 34% to 20%. The only reason I can see for this change is a belief that taxpayers are less averse to paying national insurance than income tax. However, the evidence for that is increasingly thin. More significantly, to use the language of the last century, the trend has benefited rentiers and capitalists at the expense of the workers.

Secondly, if Governments remain determined to keep income tax and national insurance separate, I would encourage the Treasury to consider the base for national insurance contributions. As I said, it is anomalous that national insurance is not chargeable on interest income, dividends or rents. It is also anomalous that employees cease to pay national insurance at pension age. I declare a personal interest, since I will reach pension age in six months’ time.

Thirdly, there is the issue of the self-employed. I completely understand why the Government have chosen not to increase self-employed national insurance in the Bill. The last Chancellor who sought to do so was, after all, the noble Lord, Lord Hammond of Runnymede, and that was what is known in the trade as a courageous decision—I was not entirely surprised when he was forced to back off very quickly. There may have been some logic for the self-employed paying lower national insurance when we still had income-related benefits to which they were not entitled, but those days are very long gone. As the OBR and others have pointed out, the Bill will encourage employers to find ways of recasting their employees as self-employed. I therefore ask the Financial Secretary what plans the Government have to make this more difficult.

Finally, I encourage the Government to consider how the costs of an ageing population will be financed. I have long argued the case for a health and social care levy paid by employees, employers and the self-employed. The last Government were sensible enough to introduce one—indeed, its abolition is one of the only surviving measures of the notorious Truss-Kwarteng mini-Budget—and sooner or later, and probably not in this Parliament, a Government will have to return to such a levy. As and when that happens, I would encourage the Treasury to consider as wide a base as possible, the better to keep the rate down. In the meanwhile, painful though it is, I see no alternative but to support the Bill.