National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Storey Excerpts

Committee stage
Tuesday 21st January 2025 Grand Committee

Moved by

[Lord Storey]

4: Clause 1, page 1, line 1, at end insert—
“(A1) In section 9(1A) of the Social Security Contributions and Benefits Act 1992, after paragraph (aa) insert—“(ab) if the employer is a specified employer under subsection (1B), the specified employer secondary percentage;”(A2) After section 9(1A) of that Act insert—“(1B) A “specified employer” means—(a) a provider of education or childcare to children under five years of age—(i) registered in England in the early years register maintained by the Office for Standards in Education, Children’s Services and Skills,(ii) registered in Wales with Care Inspectorate Wales, or(iii) registered in Scotland with the Scottish Care Inspectorate; or(b) a university.(1C) For the purposes of this Act, the specified employer secondary percentage is 13.8%.””Member’s explanatory statement
This amendment provides that early years settings and universities would continue to pay contributions at current rates.

[Lord Storey (LD)]

My Lords, I attended Second Reading but, as some noble Lords may have noticed, I was 90 seconds late and the Government Chief Whip said that I could not speak in the debate. I was quite disappointed by that, but never mind, here I am.

Nurseries have been struggling financially for more than 20 years, and the outcome of this struggle usually falls on parents in the form of increased fees. As Jess Phillips said, this NI increase will “undoubtedly” make this worse. This is supported by nursery spokespeople, who stress that the most likely outcome of this increase in NI is an increase in nursery fees. This is because the consequence of government-funded nursery places makes most nurseries ineligible for the employment allowance scheme, meaning that nurseries, which are already struggling to break even, cannot apply for discounted NI bills.

According to the qualifying criteria for the employment allowance scheme, if 50% of a non-charitable organisation’s work is determined as public work, and 50% of the organisation’s income comes from public funding, the organisation is designated a public body and therefore cannot claim employment allowance. Because of government-funded places in nurseries, many have become a public body under this policy, meaning that they are excluded from applying for the employment allowance.

The number of nurseries impacted by this is likely to increase as a result of increased government funding for nursery places. The Government are proposing to increase places by September 2025 so that any child of working parents earning less than £100,000 can receive 30 hours per week across 38 weeks between the ages of nine months and five years old. This will mean that around 70% to 80% of nursery places across the UK will be government-funded. As the number of funded nursery places increases, the larger a nursery’s public-funded income will be, removing them from employment allowance eligibility.

The chief executive officer of the Early Years Alliance, Nick Leitch, summarised this problem:

“Early years providers are stuck between a rock and a hard place”.


If nurseries do not accept government funding for free nursery places, they lose a huge proportion of their income. If nurseries do accept this funding, they lose a huge proportion of their income on NI bills.

The Government have yet to estimate how many early years providers will be eligible for the employment allowance when NI charges come in in April 2025, and there has been no explicit response from the Government about how they will support nurseries through this increase in NI costs.

In a speech on 17 December about the proposed changes in the Bill, James Murray, the Exchequer Secretary, commented only on the Government’s pledges to increase government-funded childcare places. He reassured that there will be a rise in funding for these places to “over £8 billion” but did not address the implications that the NI increase will have on these nurseries. Repeated throughout his speech was the lifeline that the employment allowance scheme will provide for many organisations, but overlooked was the exclusion of most nurseries from this scheme because of government-funded places. Currently, the likely solution for nurseries is to either increase fees or decrease the number of government-funded places they accept.

Neither is a good outcome for increasing access to early care for parents or for children. Nurseries do not have to accept government funding, and if they did not, they could apply for a decrease in NI bills from the employment allowance scheme. Many nurseries do not want to do this because of the income that government-funded places provide. It is also worth noting that currently, even with government-funded places, most nurseries barely break even. The most likely solution is therefore increased fees, so hard-pressed parents will have to shoulder the burden. I beg to move.

[Lord Sharkey (LD)]

My Lords, I have added my name to Amendment 4 in the name of my noble friend Lord Storey, which proposes to exempt universities from the NIC increase, among other things. I will speak to that exemption for universities. I am grateful for the extensive briefing provided by UUK, and I declare an interest as a member of council at UCL.

Even before the NIC increases proposed by the Bill, our university sector was in deep financial trouble. Funding per student has fallen to its lowest real level for 25 years and, because of an ongoing inability to recover the full economic cost of research—partly the fault of government—universities lost £5.3 billion on their research activities last year. A decline in overseas student numbers has made the financial problems worse. In the year ending last September, the number of visas issued to foreign students fell by 19% on the previous year, while the decline at master’s level was 25%.

All this has produced a situation where many universities face urgent and very serious financial problems. The OfS’s latest modelling suggests that 72% of our universities could be in deficit by 2025-26. It is not as though there are widespread reserves available to smooth the problem. In fact, 40% of our universities are predicted to have fewer than a month’s cash by the end of the next academic year. The proposed employers’ NIC rise will make an already fragile system more fragile and more precarious. The universities will have to find £372 million to fund this increase. There is a risk of real and hard-to-reverse damage to our higher education sector.

There has already been extensive media speculation about breaches of covenant, reluctance of lenders to lend, and even insolvencies. This sector is of critical importance to our future and to our prospects for growth. AI is an example. We are well placed to be world leaders because of our research and our research standing. But if we want to fulfil the Prime Minister’s aspirations, we need a healthy and sustainably funded university sector with strong connections to business. The higher education sector is critical in its liaisons with business and in its generation of spin-offs, start-ups and social enterprises, as well as in the generation of IP and in providing key public service workers. Every year, our universities train over 100,000 public service workers: around 42,000 nurses, 21,000 medics and 38,000 teachers. The total economic impact of the sector has been estimated at over £265 billion. This impact is widely spread around the country, not just confined to our largest cities and oldest universities.

In very many of our towns and cities, our universities are engines of growth and critically important supporters of the local economy. It is true in general that our universities are of exceptionally high quality and standing. According to the last QS survey, here in the UK we have four out of the world’s top 10 universities and 16 out of the top 100. These are astonishing figures and an astonishing advantage to be leveraged to help produce the growth we need. The figures demonstrate our international standing and our success in education and research, and this standing boosts our soft power. The HEPI 2024 soft-power index found that 58 serving world leaders received their higher education here in the United Kingdom.

Perhaps it is in research that our universities most obviously display their world-class quality and reach, but this kind of quality and reach is under severe financial pressures and increasing global competition. Our current financial arrangements rely on a high—disproportionately high—cross-subsidy from overseas students, which is an obviously unstable element in today’s geopolitical world.

If we want our international standing to remain at the highest levels, and our universities to continue to be engines of growth, then we need very urgently to do something about our funding system. What we do not need is to impose additional costs on an already overstressed system. We also should not discourage overseas students from coming to the UK, as the previous Government did. These students contribute at least £37 billion to the UK economy. That is important, but it is obviously not a substitute for sustainable funding. Increasing employers’ NIC will not help with any of that and may, in some cases, push some universities to the financial brink.

The Minister will be aware of the financial dangers faced by our higher education sector. He will be aware of the conversations in Whitehall and elsewhere about how to reform our funding system and of the urgency of producing a stable and sustainable funding system. He will also know that the employers’ NIC increase will damage universities’ finances, at least until we have a better funding system. The additional funds raised will be relatively small from a Treasury perspective, but relatively and dangerously large from the sector’s perspective.

Applying the NIC increases to our world-leading higher education system will inevitably damage its contributions to our leadership in research and in the production of IP. It will damage our prospects for growth. Can the Minister give us his assessment of the likely impact of this NIC rise on our university sector and its ability to operate? We need a proper impact assessment on this and many of the other things that we are discussing.

--- Later in debate ---

[Lord Livermore (Lab)]

I totally understand the points that the noble Lord is making but, as I said at the outset, there are specific reasons for the Bill. Those decisions are difficult decisions, but they are necessary decisions.

On universities, I recognise the great value of UK higher education in creating opportunity, being an engine for growth in our economy and supporting local communities. The Budget provided £6.1 billion of support for core research and confirmed the Government’s commitment to the lifelong learning entitlement, a major reform to student finance that will expand access to high-quality, flexible education and training for adults throughout their working lives.

The Secretary of State for Education has since confirmed that maximum fees will rise in the academic year 2025-26 for the first time since 2017, from £9,250 to £9,535 for a standard full-time undergraduate course. This was a difficult decision which demonstrates that the Government are serious about the need to put our world-leading higher education sector on a secure footing.

I have previously set out the Government’s position on additional impact assessments.

I turn to charities and housing associations. The Government recognise the need to protect the smallest businesses and charities, which is why we have more than doubled the employment allowance to £10,500, meaning that more than half of all businesses, including charities, with national insurance liabilities will either gain or see no change next year.

The Government also provide wider support for charities via the tax regime. The UK’s tax regime is among the most generous in the world, with tax reliefs for charities and their donors worth just over £6 billion for the tax year to April 2024.

More broadly, the Government deliver a number of grant and support programmes, including the community organisations cost of living fund last year and the ongoing social enterprise boost fund. Across 2023-24, the National Lottery community fund made grant awards totalling more than £900 million, 84% of which were under £10,000, with the majority supporting grass-roots organisations.

Regarding housing associations, the Government have announced major steps towards delivering a once-in-a-generation increase in social housing, including supporting the housing associations that deliver this. We are consulting on long-term social rent settlements to provide housing associations with the long-term stability they need to deliver crucial services. I am afraid that I cannot comment on the specific case that the noble Baroness, Lady Grender, set out, as I do not have all the information about it, but I am of course more than happy to discuss with her at any time. On the wider points, any exemptions, carve-outs or delays would of course undermine the fundamental purpose of the Bill, which I have set out before.

Finally, Amendment 8, tabled by the noble Baroness, Lady Kramer, and the noble Lord, Lord Storey, seeks to exclude town and parish councils from the employer national insurance rate change. The Government have no direct role in funding parish and town councils and therefore do not intend to provide further support for the employer national insurance changes. This is in line with the approach taken for previous national insurance policy changes, including the previous Government’s health and social care levy.

All these proposed amendments would of course come at a cost. They would necessitate either higher borrowing, lower public spending or new revenue-raising measures. That is not what this Government intend to do. For the reasons I have set out, I respectfully ask noble Lords not to press their amendments.

[Lord Storey (LD)]

I am grateful to all noble Lords who have spoken in this group. I want to make one observation. My noble friend Lady Grender and the noble Lord, Lord Randall, talked about charities. Many charities provide services which nobody else pays for and they do not get government funding. For example, this will affect tremendously the hospice movement, which looks after terminally ill people. In my home city of Liverpool, there is a charity called Zoe’s Place that looks after terminally ill babies. It has had major building problems and was looking at having to close down. What happened? The local community and the business community all piled in and saved that building. These increased costs will affect that charity, as they will affect other charities too.

With thanks, I beg leave to withdraw my amendment.

Amendment 4 withdrawn.