National Insurance Contributions (Increase of Thresholds) Bill

Baroness Kramer Excerpts

2nd reading
Wednesday 30th March 2022 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I am obviously not opposed to the lifting of thresholds in today’s Bill, as it takes some of the lowest paid out of the burden of national insurance contributions. I fully recognise the point made by the noble Lord, Lord Davies, and again by the noble Lord, Lord Macpherson, which is that the lowest paid get no help from this at all because they fall below the existing lower threshold. I suspect that tomorrow, we will discuss extensively how the group on the lowest incomes have been helped least by anything that has come out of the Spring Statement, so I will leave some of that for then.

The Government should have not just raised the threshold but scrapped the whole increase. They had a £26 billion bonus of unexpected tax revenues available—we will probably talk tomorrow about how that happened through fiscal drag—and they could have easily imposed a windfall tax on the super-profits of the oil and gas companies. Again, I suspect we will talk about that more. Those kinds of actions would have genuinely helped people to face a cost of living crisis.

I am afraid that I see the whole package as reflecting the fact that the Government have very little empathy for the pressures and choices that people are facing. They will not just hear this from us. The Minister is being very self-congratulatory about all of the steps that have been taken, but she will hear from the public, because they feel the pain, face a squeeze on their budgets and incomes, and are forced to make choices and changes in their lifestyle. For some it is whether to heat or eat, and for many others there will still be extraordinary pressure, even if they are not trying to work out how they survive falling into destitution. The Minister will hear a great deal from them, so I warn against this constant self-congratulation of having done so much. The public will be able to tell people, in pounds, shillings and pence, how little has happened to get them through this particular crisis. I agree with the noble Baroness, Lady Bennett, on this issue.

When the Chancellor made the Spring Statement, it became clear why he had earlier decided to increase NICs by 1.25%. He did so—here I agree with the noble Lord, Lord Davies—knowing that it would fund a very large share of a cut in income tax in 2024, just ahead of a general election. In fact, with the raising of the threshold, the numbers look extraordinarily matched. It is an optical illusion—why increase a tax in order to cut a tax? I do not think that it fooled anyone; it was simply a cunning plan to make the Chancellor look like a tax-cutter. Frankly, it was completely rumbled by the Institute for Fiscal Studies, which pointed out that the tax giveaway in 2024 would simply be giving back one-sixth of the increase in taxes that the Chancellor has made. He remains a high-tax Chancellor and they remain a high-tax Government.

I agree with others, such as the noble Lord, Lord Macpherson, that NICs and the health and social care levy that will follow do not fall on exactly the same group of taxpayers as income tax. The NICs increase and the future levies fall on employers, employees, the self-employed and dividend recipients. Indeed, as the noble Lord, Lord Macpherson, said, employers have been given no relief at all; they do not experience any benefit from the rise in the threshold and will still pay as before. Income tax ranges far more broadly, falling on all those who receive income, including rental income and income from trading assets, and a wide range of pension holders.

I hope that the Minister will explain this arbitrage to us today. No one understands arbitrage better than the Chancellor, and we are owed some clarity on who the winners and losers are in this tax arbitrage arrangement. I suspect that a shift from income tax to NICs is a very poor outcome for those who work and a very good outcome for those who get income from sources that are not tied to work. But we need to see the numbers, and I hope that the Minister will explain that logic. I am very grateful to the noble Lord, Lord Macpherson, for putting this in the longer-term context of a continuing move to a shift from progressive income tax to a far more regressive NICs system.

The Minister will undoubtedly say that the increase in NICs and the future levy are hypothecated to the NHS and then social care. I personally agree with those who think that very little of this money will actually reach social care, but let us set that aside for today and instead look at hypothecation, which really is a figment of accounting. The National Insurance Fund was created to fund the state pension but it is increasingly just a piggy bank. In that context, will the Minister today make clear what the impact on the fund will be from the drop in expected income arising from the increase in the threshold? This is not to criticise the increase, but I would like to understand how this will impact the fund and even more understand the consequences for funding the NHS and social care. After all, if this were truly a hypothecated levy, there ought to be a drastic impact on the money flowing to the NHS and social care. Is that what is going to happen? I did not read it when I looked at the OBR numbers—perhaps it did not fully understand the input of the Government’s arguments that the NICs increase was wholly and solely related to funding the NHS and social care. That number would then have come down, if it was describing accurately.

It seems to me that the Bill also brings into the spotlight the whole issue of thresholds. The Chancellor is freezing tax thresholds in order to raise additional tax through fiscal drag. The original estimate last October was that fiscal drag would increase tax revenues by £8 billion. With sharply rising prices, that estimate is now £21 billion—these are OBR numbers. It is a huge tax rise, obscured by optical illusion. I am deeply concerned that the public’s mistrust of politics will get yet deeper and more cynical with these constant attempts at a sleight of hand. I attempted to draft an amendment to the Bill to require that at least the NICs threshold would in future rise annually with CPI, but that was apparently out of scope. It is a very live issue, and the Minister needs to explain why these thresholds will not increase with CPI in the future.

Finally, I have a more specific question for the Minister—and this is an issue which was raised by the noble Baroness, Lady Bennett. Like most of this House, I am very concerned that the Spring Statement did so little for the least well-off, especially those who rely on universal credit. Can the Minister tell me how the increase in the NICs threshold will apply to those who are in work but also on universal credit? Will she confirm what emerged from debate in the other House that the threshold change, or at least about half of it, is clawed back through the universal credit taper? The IFS has come to that same conclusion. How many people are impacted by the clawback which is the effect of the taper? I ask particularly because the Minister’s colleagues in the Government were completely flummoxed by this and only eventually accepted its accuracy.

The Resolution Foundation has estimated that 1.3 million people, including half a million children, will fall into absolute poverty—I stress “absolute poverty”, which is below 60% of real median income in 2010—so it is quite a shocker that people on low incomes and benefits are facing. Those not in work, including people with disabilities, will see a fall in income this year of 8%. The Minister will surely tell us that the Government have done a great deal to help these folk but, frankly, the numbers do not lie. There are rumours in the press that the Government are becoming frightened and that they will provide more help in the future. However, we are here today and this is an opportunity for the Minister to tell us what future changes are going to be made to benefit those who have been essentially left out, or barely helped, by the changes that we heard from the Chancellor last week.

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[Baroness Penn (Con)]

My Lords, I start by thanking all noble Lords for their thoughtful contributions to this debate. I shall do my best to address as many of the points raised as I can. Before I do so, it is worth returning to the purpose of the Bill before us. It will make major changes to the NICs system that will put billions of pounds back into people’s pockets at a difficult time. In addition, the Bill underlines the Government’s ambition to promote tax cuts for working people and to simplify the tax system as a whole.

This ambition is delivered in the Bill by two main measures. The first is the increase to the NICs primary threshold and the NICs lower profits limit to £12,750 from 6 July—an increase that will equalise the NICs and income tax thresholds. On an individual level, this will mean that a typical employee will see their tax bill reduced by £330 in the year from July; for self-employed workers, that will be an equivalent saving of £250. It will also mean that around 70% of workers will have their NICs cut by more than the amount that they paid through the new health and social care levy. That is an important point to bear in mind when weighing the relative benefits of increasing the NICs thresholds versus not proceeding with the levy altogether. Those left with higher NICs bills will be, for the most part, higher and additional rate taxpayers. In addition, almost 2 million people will be taken out of paying class 1 and class 4 NICs and the health and social care levy entirely.

The Bill’s second measure seeks to alleviate some of the pressures caused by the rising cost of living on those who earn low amounts and who work for themselves, so that from April those with profits between £6,725 and £11,908 will not pay class 2 NICs. This will rise to £12,570 from April 2023. This measure will benefit 500,000 self-employed people, saving them up to £165 a year. These measures, taken together, will allow the Government to fulfil their commitment that the first £12,500 that an individual earns is free of tax. As I outlined earlier, importantly, removing class 2 NICs from the group of low-earning self-employed workers will not prevent them from building their eligibility to the state pension, and other contributory benefits.

The noble Baroness, Lady Ritchie, and many others set the context for the debate as the cost of living crisis that people face in this country. The Government completely acknowledge that. We also acknowledge that we cannot completely protect people from some of the difficult times they will face, but we will stand by the British people, as we did throughout the pandemic. I take it back to this specific Bill: the IFS has said that raising the NIC threshold is the best way to help low and middle earners through the tax system at this time.

I know noble Lords will be aware of the measures the Government are taking to support people. I will have to disappoint the noble Baronesses, Lady Ritchie and Lady Kramer, that I cannot look forward to future Queen’s Speeches or Budgets, but it is worth emphasising some of the support that is out there for families, which is worth over £22 billion in 2022-23. It includes providing millions of households with up to £350 to help with rising energy bills and helping people to keep more of what they earn. We have cut the universal credit taper rate and frozen alcohol duty, as well as announcing a further rise in the national living wage to £9.50 an hour from April 2022. Other measures, such as the increase to the local housing allowance rates introduced during the pandemic, the cuts to fuel duty and the increase to the household support fund, will also provide important support to people.

The noble Baroness, Lady Ritchie, made some important points about providing more dedicated support to people to move into work, whether those facing health conditions, the disabled, or single parents. The Government are absolutely committed to that agenda. That is why we have so many more work coaches in place to help people make that move into work, because in the longer term that is the way to help people to deal with the growing cost of living, but also, importantly, when they are in work to move into better and higher-paid work. That is why action on the national living wage, which is rising by 6.6% this April, as I said, is important. That will be an increase of over £1,000 to the annual earnings of a full-time worker on the national living wage. That is also why we have the new in-work progression offer for people who are among the lowest-paid workers on universal credit to access personalised work-coach support to help them increase their earnings. Importantly, we have also matched that with significant investment in our skills system for this Parliament— £3.8 billion in skills in England by 2024-25. That funding is absolutely targeted at helping people improve their earnings prospects and support their success in the labour market.

The noble Baroness, Lady Bennett, made a number of points that we might return to in the debate tomorrow, but there are a couple I want to pick up on. She talked about a new excuse for austerity. I am afraid that just does not match the figures. Total departmental spending will grow in real terms at 3.7% a year on average this Parliament. Total managed expenditure as a share of the economy is expected to increase across the Parliament to 41.3% in 2024-25. That compares to 39.3% in 2007-08, for example, so public spending is increasing during the course of this Parliament.

The noble Baroness, and indeed the noble Baroness, Lady Kramer, also asked about the universal credit taper rate and the impact it has on the threshold rise. Noble Lords are absolutely right that the UC taper rate could impact on the benefit felt by those on universal credit by the increase in the threshold. It is important to note that these individuals will be better off overall thanks to the change in the threshold.

That is a really important point about the taper rates in universal credit. It reflects the importance of the Government’s decision to reduce that taper rate from 63% to 55%. In the design of universal credit overall, compared to tax credits and the other benefits that it replaced, we are bringing down the really high marginal effective tax rates that people who were on benefits or receiving tax credits could face when they sought to take on more hours and progress in work.

The noble Baroness, Lady Kramer, and the noble Lord, Lord Macpherson, asked about increasing the secondary threshold for employers. The threshold will increase in line with CPI, but will not match the increases to those for employees and the self-employed. The Government are committed to supporting businesses and incentivising investment to support growth. We are increasing the employment allowance to help small businesses fulfil their potential and boost employment. Over 1 million employers are benefiting from the employer allowance and reducing their annual employer NIC bills. From April 2022, 670,000 of these businesses will not pay NICs and the health and social care levy, due to the employment allowance. This includes 50,000 businesses which will be taken out of NICs and the levy by this increase. Due to the employment allowance, 41% of businesses will not be affected at all by the health and social care levy, while the next 40% will pay £500, 1% of their annual wage bill.

The noble Baroness, Lady Kramer, asked about the impact on the National Insurance Fund, the NIF. The Government Actuary’s Department is not required to produce a report alongside this Bill on the measures’ impact on the NIF. It will continue to provide a report alongside the annual uprating legislation, so the impact of these measures will be included in future uprating reports.

The noble Baroness also asked about the impact on health spending. She will know that the health and social care budgets for the next three years were set at the spending review and, as is standard, we will not reopen a multi-year settlement on the basis of changing forecast receipts. Forecasts can go up as well as down and the stability and certainty of funding is important for departments and the devolved Administrations.

[Baroness Kramer (LD)]

Is the Minister confirming that, after the announced period, the effect will be that the anticipated additional funding for social care will be reduced by the impact of the rise in the threshold?

[Baroness Penn (Con)]

No, that is not what I am confirming. I am confirming that the budgets set out at the spending review still stand and that every penny from receipts of the health and social care levy will go to bodies responsible for health and social care. That is the way in which the levy is hypothecated. It does not determine the overall budgets for the health and social care systems. The noble Baroness will know that their budgets are far bigger than the receipts from the levy. The hypothecation is that all the receipts from that levy go towards spending on those areas.

[Baroness Kramer (LD)]

The Minister has left me thoroughly confused. Perhaps she could write to us to explain why, if this is hypothecated money and it is now less than was forecast, the amount of hypothecated money is apparently identical when it reaches the NHS or social care. It does not make any sense. It is either one or the other: if it is hypothecated, the amount would go down; if it is not a hypothecated amount, then we are dealing with a grander fiction, and it would be helpful to know that. Perhaps she could write to us on that.

[Baroness Penn (Con)]

I will give it one more try and will then write if I have not managed to make myself clear. The amounts raised through the levy will all go to health and social care spending. They are not the only things that determine the overall amount of health and social care spending and therefore responsible bodies’ budgets. It is also my understanding that, in the forecasts produced by the OBR alongside the Spring Statement, even with the increase to the thresholds, the amounts forecast to be raised through the levy are more than previously anticipated when the levy was announced. I will undertake to write to the noble Baroness because I do not think my second or third attempt has satisfied her.

National Insurance Contributions (Increase of Thresholds) Bill

Baroness Kramer Excerpts

3rd reading & Committee stage
Wednesday 30th March 2022 Lords Chamber

Moved by

[Baroness Kramer]

1: Clause 1, page 1, line 8, leave out “July” and insert “April”
Member’s explanatory statement
This amendment would bring forward the date of implementation of the increase in thresholds from 6th July 2022 to 6th April 2022.

[Baroness Kramer (LD)]

My Lords, all the amendments tabled today are in my name and in a single group, so I am not going to take up too much of this House’s time, and I should also make it clear that I do not intend to divide on any of these amendments. However, I thought there were a few issues which needed some additional focus and emphasis. These amendments were tabled by my colleagues in the other place, but I am not sure that we got terribly good answers to any of them. It is always worth having a second go, and many of these points are ones that I would like to leave with other Members of your Lordships’ House for future discussions around these various topics.

The first amendment, Amendment 1 in Clause 1, has the effect of bringing forward the date of implementation of the increase in thresholds from 6 July 2022 to 6 April 2022. There were two reasons why I thought it was important to table this amendment for a second time, and I am going to quote from the Resolution Foundation:

“If we consider just the changes to Income Tax and NI due in 2022-23 and reflect that the NI threshold will not fall until July, earners on less than £25,000 will gain, and those above will lose from all the measures being introduced in the next fiscal year (if the NI threshold had fallen in April, this cut-off point would have risen to £32,000).”


That is the difference between people who benefit from the threshold change being brought in in April and those who will benefit by it being brought in in July. I am going to estimate—maybe the Minister will have the number—that there an awful lot of people whose annual earnings fall between £25,000 and £32,000. In fact, I am going to go beyond that and suggest that is very often a family income. It is not a starting income, or the income of someone who has risen rapidly up the promotion ladder. It has got to be a very common income for a large part of our working population. I do not know what those numbers are, but I am sure that the Minister could tell us, so I am quite concerned about a policy that, at a time of huge pressure on the cost of living, is denying a benefit to people who fall between that £25,000 and £32,000 salary or earned income group.

My second reason for tabling this amendment was the words of the Financial Secretary to the Treasury in the other place when dealing with issue. She said:

“Of course the Government want to help people with the cost of living as quickly as possible, which is why the Chancellor introduced a number of measures immediately … However, it was not possible to deliver the increase to the primary threshold from 6 April, which is in less than two weeks’ time. The Government are implementing the change as early as possible, from 6 July. It is not possible for the majority of software and payroll providers to deliver the measure for April.”—[Official Report, Commons, 24/3/22; col. 522.]


I just thought, “This one is a classic”: the assumption that the only way to deliver the benefit is through making a change to the software associated with the universal credit scheme.

When the Government of the United States sought to give people a helping hand with Covid, they simply cut a cheque and sent it to everybody who was a registered taxpayer. It seems to me that getting an appropriate list of the people who would qualify—with a starting date of 6 April to fill in and plug the two months—would not be much of a challenge for this Government. They do not have to go and change the whole universal credit system or require every employer to make a change; they could simply access the data and then find a way to make a rebate.

We often have this kind of siloed thinking. Here is a Minister who is in a sense saying, “I only wish I could find a way to do it”. So I wonder whether the Minister can go back and say to her department, “Of course we can find a way to do it; we just need to start thinking outside the box and not simply assume that what we have to do is some complicated and extensive programming problem. We simply need to find a way to send a rebate”. I suspect that most people would not mind a cheque—frankly, I suspect that most people would not mind if they had to wait a little time for it to come, provided it came. This ought to make the Financial Secretary to the Treasury exceedingly happy. These two issues highlight the impact of the delay and the fact that there are many ways in which that problem could be remedied. It just takes some lateral thinking.

The amendments in my second set are much more similar and come after Clause 3. Essentially, they concern reporting requirements. The concerns around transparency were well described at Second Reading. The noble Lord, Lord Macpherson, used the phrase “sleight of hand” in his speech; I used it slightly differently in mine. There is a great deal that is opaque, particularly in the way we relate income tax and national insurance contributions. As the noble Lord stressed, for many years, Governments have chosen to reduce income tax and shift the burden on to national insurance contributions because they are less visible and because, frankly, the public are under the impression that they are saving for their own pensions. Now, they are going to be under the impression that they are making an extra effort to help the NHS and social care; they will therefore accept an increase, whereas they would not have done had it been made to income tax. It has become very clear, however, that the whole thing is completely fungible; this notion that national insurance contributions are an entirely separate, protected, segregated, hypothecated pot is merely an accounting fallacy. It is all just smoke and mirrors.

The first of my two amendments would require the Secretary of State, within six months, to lay before Parliament a report on the impact of the Act’s provisions on disposable incomes. That is to try to tease out some of the arguments that the Minister made—which did not seem to have many numbers attached to them—that, overall, this would be extremely beneficial to a huge range of people. We would also like to see that same calculation done if combined with a reduction in the national insurance rate of 1.25%. It seems to me that this would provide a level of transparency that the public could understand and we in this House could argue about, having full possession of the facts and without the confusion of various different pots interacting with each other. It is probably because I come from a business background that I think that what you always need to look at is what happens at the bottom line. You must not get completely lost in the hedgerows, the highways and the woods—and I am afraid that that is where a lot of the discussion about what is happening in terms of support for the economy has found itself.

The second of my amendments would again require the Secretary of State, within six months of the Act being passed, to lay before Parliament a report considering the impact of the Act’s provisions on the levels of taxation on earned and unearned income. Again, that goes directly to the heart of the issue that the noble Lord, Lord Macpherson, raised: the switch, virtually unrecognised by the general public, from income tax, which covers all income, to a system of taxation that in effect falls primarily on workers. This is an important philosophical issue that needs to be highly transparent, and I do not believe that at the moment it is.

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With those comments, I hope I have addressed the points raised by this small group of amendments. I hope that the noble Baroness, although I know I will have disappointed her with some of my answers, has heard sufficient to withdraw her amendments.

[Baroness Kramer (LD)]

I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

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[Lord Tunnicliffe (Lab)]

I thank the Minister for her courtesy and for making herself available to discuss the Bill.

[Baroness Kramer (LD)]

I join in those words from the noble Lord, Lord Tunnicliffe. We did not need to meet the Minister because, at this point, everything was looking very straightforward, but she made a very kind offer and it was appreciated.