National Insurance Contributions (Employer Pensions Contributions) Bill

Baroness Neville-Rolfe Excerpts

2nd reading
Wednesday 4th February 2026 Lords Chamber

[Baroness Neville-Rolfe (Con)]

My Lords, this Bill is deceptively small. It runs to just four pages of text and could be easily mistaken for something minor. But its consequences for working people and for long-term pension saving in particular are serious and far-reaching. We are talking about pensions, not other benefits, which the previous Government reformed.

There is a risk that the Bill’s impact will be misunderstood or dismissed as marginal, but it is neither. In simple terms, it introduces a £2,000 annual cap on the amount of pension saving that can be made through salary sacrifice without attracting national insurance. Above that cap, pension contributions are treated as earnings for national insurance purposes. Because of the way NICs work, employees earning below £50,270 will pay national insurance at 80% on the excess; those earning above that threshold will pay 2% on the excess. That is the policy, and the question for this House is who it really affects and what behaviour it is likely to change. I thank all noble Lords for staying late and look forward to their contributions.

The Government have repeatedly argued that this measure is targeted at those they describe as high earners. Page 2 of the Explanatory Notes makes it clear that this is the Government’s intention, and the fashionable Minister, Torsten Bell, has said that the Bill “protects ordinary workers”. He implicitly recognises that, for those on low incomes, salary sacrifice is the only way to build up a significant defined contribution pension fund.

But what is immediately obvious to the pension providers, employers and experts that we have spoken to is that this is not, in practice, a measure aimed at the highest earners. It hits people squarely in the middle of the income distribution, and in some cases below it. Those saving responsibly through salary sacrifice are most affected. They include younger professionals in high-cost cities and mid-career workers trying to make up pension shortfalls, typically earning between £30,000 and £60,000 a year. Given that the average UK salary is £37,430, it is difficult to see how people earning within this distribution can be credibly described as high earners. They are ordinary working people doing exactly what successive Governments have spent decades encouraging them to do: saving responsibly for retirement.

I will give the House a concrete example. Imagine a young professional who has just graduated and taken up a job in a city—London, Bristol or Manchester—earning £45,000 a year. They decide to do the responsible thing and save seriously for retirement, contributing £5,000 a year through salary sacrifice. Under the Bill, £3,000 of that saving is treated as earnings for national insurance purposes, and that individual will be paying more national insurance, not because their income has increased but because they are trying to secure a decent pension. This represents an additional hit of £240 a year for a young working person, coming on top of student loan repayments at a ridiculously high interest rate, tax, existing national insurance contributions and the high cost of living.

This raises a question for the Minister: quite how are the Government defining a high earner? A graduate in their 20s, living in London and living on £45,000 a year—£40,000 after sacrificing £5,000 for their pension—is not a high earner: not against average income, and certainly not in the context of where they are living. So where has the Treasury decided to draw that line? Unless the definition is clearly set out, it risks becoming a flexible and politically convenient threshold, capable of being shifted over time to suit the Treasury’s needs. Without a fixed and transparent definition, no group can be confident it will not be caught by provisions targeted at high earners.

The example I gave goes to the heart of one of our core concerns with the Bill, which is that the likely behavioural response it will generate risks undermining pensions adequacy. We already know that adequacy is a serious and unresolved problem. Auto-enrolment, introduced on a cross-party basis, has been a major success in bringing people into pension saving. But even so, the statutory minimum contribution of 8% is widely accepted as insufficient to deliver a decent retirement income for many people. The system relies on employers paying over the statutory minimum for their workers to be sufficiently funded in retirement. That is not a controversial point; it is the settled consensus of the pensions world.

The IFS report, Adequacy of Future Retirement Incomes: New Evidence for Private Sector Employees, clearly makes the point that despite the success of automatic enrolment, a large minority of private sector employees are not on track for an adequate retirement income and saving has become more challenging. It found that only 57% of private sector employees saving in defined contribution pensions are projected to hit the Pensions Commission’s target replacement rates, and around one-third of savers are not projected to achieve even the minimum retirement living standard defined by the Pensions and Lifetime Savings Association

Against that backdrop, discouraging additional pension saving is exactly the wrong policy response, yet that is precisely what the Bill does. Evidence published prior to the Budget suggested that nearly 40% of workers would reduce their pension saving if the benefits of salary sacrifice were capped, and the costs and complexities of the new system will almost certainly mean that employers reduce their salary sacrifice offerings altogether. That outcome is a foreseeable consequence of the policy design set out in the Bill.

The effects of the Bill will be felt not just immediately but deeply over time. Lower saving today means lower retirement income tomorrow and greater reliance on the state in future decades. At a time when we are rightly concerned about the long-term sustainability of the public finances, it is deeply troubling to introduce a measure that reduces pension saving, thus storing up higher costs for future Governments.

It would be a mistake to pretend that the Bill bears only on savers. Employers, especially small businesses, will be hit directly by higher costs, new administrative burdens and unpalatable choices about pay and pension provision. It comes at the worst possible time. Businesses are already struggling under the cumulative weight of this Government’s economic choices—minimum wage increases, punitive business rates, an expanding national insurance burden and an economy mired in prolonged stagnation.

Under the current system, salary sacrifice arrangements are a widely used mechanism through which employers support pension saving. They reduce employer NI liabilities, simplify administration and enable employers to offer more generous pension provision without increasing headline wages. The Bill fundamentally damages that settlement.

From April 2029, employers will be liable for employer national insurance contributions at 15% on any salary-sacrificed pension contributions above £2,000. That represents a direct increase in payroll costs for any organisation with meaningful take-up of salary sacrifice arrangements.

Let us imagine an employee aged 50 with a £40,000 salary, trying to make up a potential pension income shortfall before they retire by sacrificing £5,000 per year. Their £5,000 sacrifice is due to trigger national insurance on £3,000 of that amount, costing the employer an additional £450 and the employee £240 per year.

The Office for Budget Responsibility assumes that around three-quarters of those additional costs will be passed on to employees, either through lower wages or reduced employer pension contributions. But even with these anticipated changes in behaviour, employers will still bear substantial transitional costs, ongoing compliance burdens and reputational risks associated with scaling back on pensions.

Employers will also face new administrative and reporting requirements. To administer the £2,000 cliff edge, they will be required to track and report total salary-sacrificed pension contributions through payroll systems, calculate national insurance liabilities on any excess above the cap and communicate clearly with employees about changes to their take-home pay. While the three-year window will allow many to update their payroll software, the complexity should not be underestimated, particularly for smaller employers without sophisticated payroll infrastructure or for employees with more than one job, which is common in the SME sector.

Faced with these costs and complexities, it is entirely rational for employers to withdraw salary sacrifice. The result is likely to be less flexibility, fewer incentives to save, and weaker pension provision across the workforce, making the private sector even less competitive as compared with the generous defined benefit pension provision in the public sector.

This is not mere speculation by the Opposition. The OBR’s own revenue projections already assume significant behavioural change, and evidence suggests that employers are actively reassessing their pension strategies in anticipation of the Bill, meaning that it is increasingly likely that the OBR has been overgenerous in its estimations. At a time when successive Governments have encouraged employers to play a greater role in supporting retirement adequacy, often paying above the statutory minimum, the Bill risks pushing employers in precisely the opposite direction. Higher costs, greater complexity and weaker incentives are not a recipe for stronger workplace pensions, and there could even be a backlash against the Government as individual employees find it difficult to know whether they have hit the cap.

The Government argue that this is a modest measure necessary to raise revenue of £4.8 billion—and, I note cynically, to do so by the end of the forecast period in 2029-30, which is the horizon against which the Chancellor’s fiscal rules are judged. The revenue assumptions depend heavily on people not changing their behaviour, but the evidence suggests that they will. When incentives change, behaviour changes, by both individuals and employers. When behaviour changes, revenues fall, but the damage to pensions adequacy remains. The Bill risks achieving the worst of all worlds: reducing trust in the pensions system, a cap that disincentivises pension saving by responsible individuals, an increase in future dependency on the state, and a failure to deliver the long-term fiscal benefits the Government want.

Tax is a behavioural lever—a powerful one—and should not be considered independently of other pension priorities. The Government are legislating for these changes in isolation today, at a time when the Pension Schemes Bill and the Pensions Commission are likely to transform the whole pension environment. Is this really wise? I believe this House must scrutinise this Bill, its costings and any regulations made under its powers with the greatest of care.

National Insurance Contributions (Employer Pensions Contributions) Bill

Baroness Neville-Rolfe Excerpts

Committee stage
Tuesday 24th February 2026 Grand Committee

Moved by

[Baroness Neville-Rolfe]

1: Clause 1, page 1, line 10, after “tax” insert “at the higher or additional rate”
Member’s explanatory statement
This amendment would exempt basic rate taxpayers in England, Wales and Scotland from the £2,000 cap.

[Baroness Neville-Rolfe (Con)]

My Lords, I am delighted to open proceedings with my noble friend Lord Altrincham on our first day in Committee and to be joined in this group by my noble friend Lord Leigh and the noble Baroness, Lady Altmann.

This is not a Bill we welcome. Contributors to research done by HMRC published last year were critical of all the hypothetical scenarios put forward by the Government, including the £2,000 cap, which I believe was seen as the most complicated option presented. This proposal will add to administrative burdens on business, as will become clear when we debate later amendments, especially where people have multiple jobs, start or change employment or vary what they do seasonally.

We are also greatly concerned that it will limit incentives to save, punish normal working people for making prudent and sensible decisions, and reduce pension adequacy. Pensions adequacy is one of the central long-term economic challenges facing this country and, under this Government, it is only set to get far worse. Today we are looking at another small nail in the coffin of such adequacy. Of course, the proposal was not in the Labour manifesto, which I think promised not to raise taxes on working people.

The research by HMRC has shown that employers were seriously concerned that

“changing the pension system could inevitably cause confusion and risk people becoming more disengaged with pensions”.

Against this unsatisfactory background, Amendments 1 and 14 make a simple but very important clarification, which is to exempt basic rate taxpayers from the £2,000 cap. According to the Society of Pension Professionals, one-quarter of the people who enjoy salary sacrifice, and who will be hit by the changes that this Bill will bring in, are basic rate taxpayers. Around 850,000 basic rate taxpayers will be affected by the cap, with possibly greater numbers joining them, as the cap is not indexed. The Minister might dispute those specific numbers, but even he conceded at Second Reading that people earning under £30,000 would be affected by this change.

Not only does this contrast starkly with the Government’s stated ambition, as set out in the Explanatory Notes and by the Minister at Second Reading, to affect only higher earners; it also disproportionately affects lower-paid workers. Salary sacrifice, as we know, allows an employee to give up a portion of their pay so that it is paid directly into their pension. That does not just attract income tax relief, as all pension contributions do; it also enables national insurance contributions to be saved on the amount transferred. So it is the contribution that working people pay every month that lies at the heart of this issue. Higher rate taxpayers continue to benefit from relief related to their tax rate of 40%. Basic rate taxpayers benefit less, since their tax rate is only 20%. We are talking, on Treasury estimates, about 850,000 basic rate taxpayers.

For a basic rate taxpayer, the 8% national insurance loss amounts to two-fifths of the value of their income tax relief. In absolute terms, the marginal cost of this policy is four times higher for lower-paid workers than for those on higher incomes. The problem goes further: this is a harsher blow to certain groups of savers than many had anticipated, particularly those repaying student loans. That is why I very much support Amendment 3 in the name of my noble friend Lord Leigh, which would prevent those repaying student loans from being hit by a double whammy. I will leave it to him to explain the detail.

Graduates begin repaying their loans once earnings exceed £28,745, at a rate of 9% if they are on the plan 2 scheme. If the Bill is unamended, graduates using salary sacrifice will no longer see that 9% effectively redirected into their pension via salary sacrifice once they exceed the £2,000 cap. For those individuals, the effective loss is not just 8% in national insurance but 17% at the margin.

This comes at a time when the newspapers are full of furious comment about the high interest rates—inflation plus a huge 3%—payable on plan 2 loans. The announcement over the weekend by Kemi Badenoch to support a cut in the rate of interest charged on some student loans issued in the decade up to 2023 is therefore most welcome and is a clear step toward addressing this problem, which the Government, distressingly, seem content to live with.

The interaction between that major issue of public concern today and this Bill on salary sacrifice comes through clearly in a comment from the director of the Chartered Institute of Taxation. She said:

“The change will disproportionately affect basic rate taxpayers because they will pay at 8% NIC on contributions over the £2,000 cap, compared with a 2% charge on higher earners. It will also disproportionately impact those with student loans who earn above the repayment threshold, as they will have incurred an extra 9% student loan deduction from their pay”.


At a time when we are urging people to do the right thing—to save, to plan ahead and to take responsibility for their retirement—the Government are choosing to hit lower-paid workers harder. That is the unavoidable consequence of how this policy operates in practice.

Worse still, it falls most heavily on a younger generation who already face higher housing costs, who paid for their university education and who now find work taxed more heavily under this Government’s jobs tax—last year’s £25 billion NICs changes, which we discussed in this Room and which we rightly warned would devastate youth employment. Because that prediction has proved accurate, especially for young people, the Government would be wise to listen to the concerns aired today and outside and make changes to this Bill. It is ironic in a way that we are considering this at the same time as the Pension Schemes Bill, which is designed to improve pension saving and the incentive to save. We are doing the opposite here: making pension saving harder, less attractive and less fair.

Our amendments provide a simple solution for the Minister. By exempting basic rate taxpayers from coming under the cap, we would ensure that the Government’s stated aim is achieved and that we modify what is in effect a regressive tax. Our amendment offers a simple, targeted means of mitigating the harm that this policy will cause to some of the more financially vulnerable people in our society and I urge the Minister to accept it. If he cannot, he should explain to the Committee why his Government are choosing to disincentivise people from taking responsibility for their own future at precisely the moment when state pensions are under significant strain, which is set to intensify in the years ahead. Lower savings today means lower retirement income tomorrow and greater reliance on the state for future needs.

I turn to my Amendments 2 and 15, which ask the Minister a very simple question. What precisely does the Treasury mean by a “higher earner”? Throughout the passage of this Bill, the Government have repeatedly justified this policy on the basis that it is targeted at higher earners. At Second Reading, the noble Lord, Lord Livermore, described the reforms as “fair and balanced” and said that they,

“protect lower and middle earners”.—[Official Report, 4/2/26; col. 1684.]

Similarly, the Explanatory Notes state plainly that the Bill

“limits the NICs relief available to higher earners”.

Those are the Government’s words, but nowhere in the Bill, in the Explanatory Notes or in the Minister’s speech is the term “higher earner” actually defined.

That is a serious matter, because the practical effect of this policy suggests that it reaches well beyond any intuitive understanding of what a “higher earner” might be. The Minister has already acknowledged that individuals earning £30,000 and below will be affected. Industry experts have warned that those earning between £30,000 and £60,000 are likely to feel the impact most acutely. Median earnings in the UK are around £37,000 and, in London, they are £10,000 greater. Given this, who are these “higher earners” to whom the Treasury refers?

Since the election, we have heard a succession of phrases from the Treasury: working people, ordinary earners, higher earners. The language shifts, but what has remained constant is the refusal to define these terms. When this House considered the national insurance Bill last year, we warned that the burden would ultimately fall on working people. That proved correct; and the same risk arises here that rhetoric about protecting lower and middle earners does not align with the actual distributional impact of the policy, and the Government are allowed to get away with it because they never set the goalposts in the first place. If the Government’s objective is generally to protect those on lower and middle incomes, that objective must be capable of scrutiny. Scrutiny requires definition. Without definition, we cannot assess whether the Government are meeting their own stated aims. That seems a basic requirement of transparency in fiscal policy-making. I look forward to the debate, and I beg to move.

[Lord Leigh of Hurley (Con)]

My Lords, I shall congratulate my noble friends Lady Neville-Rolfe and Lord Altrincham and the noble Baroness, Lady Altmann, on Amendments 1 and 2, then I will speak to my Amendments 3 and 16.

This Bill has a number of disadvantages to the economy and society, as it penalises pension saving and retirement security while, of course, leading to higher costs and a higher administrative burden for employers. It may also lead to some employers reducing pension generosity or even scrapping salary sacrifice schemes altogether, so it may well discourage and disincentivise good behaviour. One has to question whether the limited expected tax yield justifies the cost, particularly as we know that behavioural response will reduce the amount of tax generated, and it simply is not fair for many people, disproportionately affecting certain groups such as savers and lower-income earners.

However, the Government cannot argue that it was in their manifesto, because it was not. In fact, it was the reverse—the manifesto pledged no increases in tax, including national insurance. We can argue that it is important that we have a very good look at certain aspects of this Bill and try to point out its shortcomings, together with making some constructive and, I hope, helpful amendments. After all, it looks like some 44% of employees using salary sacrifice for pensions will be impacted by this measure. It is important that we look at the Bill in detail, as the Society of Pension Professionals—SPP—has warned the Government that planned restrictions to salary sacrifice could reduce retirement saving and increase costs for hundreds of thousands of employers and millions of workers. The SPP has warned that the changes are likely to reduce pension savings at a time when government figures already show that 15 million people are not saving enough for adequate retirement; that rises to 25 million if the state pension triple lock is removed.

The Reward and Employee Benefits Association has warned that this Bill will put strain on businesses and push millions of people into poorer retirement. In a survey it undertook, an overwhelming 99% of businesses said the organisation would be affected by the cap and 70% said this Bill would increase the administrative burden. Furthermore, a third of businesses expect the change will make it difficult for them to attract and retain talent. It has been described as a change from sleepwalking into a retirement crisis into speedwalking into one.

I appreciate that all I have said is somewhat of a preamble, but it needs to be said, and it will be said by me only once, although it applies to all the amendments we will discuss today and possibly on Thursday—although I gather the plan now is to curtail debate today if at all practical. Is the noble Lord waving at me? Does he not know either? Fair enough. I always pay attention to Government Whips waving at me.

I turn to Amendments 3 and 16—parallel amendments because of Northern Ireland—in my name and that of the noble Baroness, Lady Altmann. They deal with the complications this Bill brings in respect of student loans. I appreciate this is a little technical and complicated and may not be best resolved by debate in this Committee so much as by discussion between all relevant parties before Report. I thank my noble friend Lady Neville-Rolfe for setting me up to explain it all. I will do my best but, as I say, this may be a difficult format in which so to do.

--- Later in debate ---

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, it is a great pleasure to respond to the debate on this first group of amendments. I thank all noble Lords who have contributed.

This first set of amendments, in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, seeks to exempt basic rate taxpayers from the Bill. I have listened closely to the points raised and the concerns expressed during this debate. The Government have ensured that the measures in the Bill do not affect the majority of basic rate taxpayers. Around 74% of basic rate taxpayers currently using salary sacrifice will be protected by the £2,000 cap, and almost all—95%—of those earning £30,000 or less will be protected. The small number of basic rate taxpayers with contributions above £2,000 will continue to benefit from employee national insurance relief, worth £160 a year, in addition to the full income tax relief that they receive on their pension contributions. Of the small number basic rate taxpayers who are impacted, half will face an annual additional national insurance contributions liability of less than £50.

While we recognise the intention behind the amendments laid by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, exempting basic rate taxpayers would, in practice, be operationally challenging and add significant further complexity to the tax system. That is because the tax system can confirm which band an individual is in only at the end of a tax year, when reconciliation of their income tax liabilities has taken place. Adding complexity to the system would also likely lead to an increase in costs for employers, as they would be required to bear the burden of identifying the full extent of their employees’ potentially multiple sources of income.

This leads me to the amendments in the names of the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, which seek clarity on the basis on which the Government consider certain employed earners to be “higher earners” for the purposes of the national insurance charge, as well as how the contributions limit reflects that assessment. The Explanatory Notes set out that the policy rationale is to limit

“the NICs relief available to higher earners on employer pension contributions made through salary sacrifice arrangements whilst protecting lower earning pension savers by introducing a £2,000 threshold. Most employees and their employers who make typical pensions contributions via salary sacrifice will be unaffected”.

This is indeed the effect of the Bill. Some 87% of pension contributions made via salary sacrifice above £2,000 are forecast to come from higher and additional rate taxpayers. Some 74% of basic rate taxpayers using salary sacrifice will be protected by the £2,000 cap, and almost all—95%—of those earning £30,000 or less will be protected.

Let me turn lastly to the amendments in this grouping tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann. They seek to exempt salary sacrificed pension contributions over the limit from being included in student loan repayments definitions to employees making student loan repayments. The salary sacrifice changes made through the Bill equalise the national insurance contributions treatment of salary sacrifice above the cap with other types of employee pension contribution, which are counted as earnings when calculating student loan repayments.

There may or may not be good arguments for or against that, but we do not consider this Bill an appropriate vehicle through which to amend the basis of student loan repayments. The basis of calculating income from student loan repayments is set out in separate regulations, and we do not believe that this Bill should seek to vary that. It is also the case that, of employees making contributions via salary sacrifice, younger people are much more likely to be fully protected by the £2,000 cap than those over the age of 30. Some 76% of those in their 20s who use salary sacrifice are protected by the cap, compared to half of those aged 30 and above.

In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.

[Baroness Neville-Rolfe (Con)]

My Lords, I am pleased that we have begun Committee by addressing this issue and grateful to all noble Lords who have spoken. I am grateful to my noble friend Lord Leigh of Hurley, who seemed to be saying—I think with support from outside bodies—that the Treasury’s financial estimates were over-optimistic. That may, of course, be true of the figures that the noble Lord, Lord Livermore, has kindly given us, which we will obviously need to have a look at, on the effect of the change.

The difficulty as I see it is that the policy remains vague. Its impacts are largely unknown and the income group it is intended to capture is undefined. The Treasury’s assessment of how it will operate in practice has been inadequate. It is a complex mechanism by which to raise a relatively modest amount of revenue and does not take effect until 2029. It is a tool, if not a very sensible one, designed to make the Chancellor’s sums add up, rather than a longer-term policy. Even if the Government succeed in raising anything like the figure set out in the Treasury note, the projected yield declines sharply within just a few years of implementation.

There is also an issue of definition. I think the potential cost is greater. As the noble Baroness, Lady Kramer, said, there is a risk that middle and lower-income workers, and those paying basic rates of tax, will be drawn into scope. After all, this is a dynamic situation—we will come on to discuss whether there are ways of tackling that—but it could have serious consequences, and we would need to come back to the point about pension saving, long-term adequacy and, ultimately, future liabilities for the state. There is also an issue about irregular payments—“bonuses” was the word used by the noble Lord, Lord Londesborough. The majority of bonuses, in my experience, are small, as I know from my time at Tesco, but they can be used usefully to invest in pensions.

The absence of any safeguard in the Bill to prevent basic rate taxpayers being captured is a significant omission. If the Government are confident that such individuals will be protected, they should be willing to put that protection in the Bill. The noble Lord, Lord Ashcombe, rightly supported the need for transparency, and of course Amendment 2, which requires Ministers to define “higher earners”, would achieve just that. Even the noble Lord, Lord Davies of Brixton, agreed that there was a “kink in the line”.

Her Majesty’s Opposition are very concerned about the unfair impact on those struggling to pay their student loans at a rate of interest which is impossible to justify. The Government must look seriously at how to mitigate this, as my noble friend Lord Leigh of Hurley explained with his customary vim, and to do this in the Bill—not promise to do something elsewhere. This is a big issue that has been raised and it has to be solved. We are very sympathetic to those with big debts, which they will have to pay off under the loans scheme, so a way needs to be found to help them.

There is an ambiguity, as my noble friend Lord Mackinlay of Richborough said from his position as a tax expert, and we need to listen to him. He also warned of its damaging implications, on top of those already introduced for IHT on pensions. This is part of a wider attack on pensions which it is important to do something about if we are to tackle the problems of long-term pension sustainability.

I beg leave to withdraw my amendment, but I may need to come back to this on Report, as it is at the heart of the acceptability of this Bill.

Amendment 1 withdrawn.

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, I shall speak first to the amendments in this group that stand in my name and then to those tabled by my noble friends. The noble Baroness, Lady Altmann, helpfully outlined a list of banana skins or uncertainties from her experience, such as the cost of changes in employment contracts and payroll software and of dealing with employees concerned about the change. She was right to ask whether we need to legislate so rapidly given the complexities that seem to be thrown up by today’s useful debate.

My amendments, Amendments 5 and 18, helpfully supported by the noble Baroness, Lady Altmann, chiefly concern the principle of parliamentary oversight. Nothing is more central to our work. Under Clauses 1 and 2, the Bill quite properly provides that regulations reducing the £2,000 contributions limit must be subject to the affirmative resolution procedure. That is right. If the Treasury lowers the cap, Parliament must be given the final say. What the Bill does not provide is affirmative scrutiny where the Treasury alters the methodology by which the cap is calculated or applied. That omission is significant because new subsections (6C) and (6D) do not deal with minor technical points but determine how the policy will operate in practice for thousands of earners whose pay patterns do not fit a neat monthly model.

Let us look at new subsection (6C). It permits regulations to prescribe an equivalent contributions limit for those paid weekly or at other intervals. That phrase “other intervals” is remarkably broad. It covers shift workers, contractors, seasonal workers, gig economy participants, those on irregular pay cycles and those with multiple employments. People in these forms of employment make up a large and growing segment of the modern labour market, yet the detail of how the limit will be translated for those individuals is not in the Bill. It is left entirely to regulations and consultation, as the noble Baroness, Lady Kramer, said. The annual cap is scrutinised in primary legislation, but, inconsistently, the translation of that cap into weekly, irregular or non-standard pay structures, the arrangements when an employee moves and other detail of importance to both workers and those operating payrolls, are to be set out later in regulations without the same degree of parliamentary approval. These points can be material in terms of compliance costs and fairness. In other words, those whose circumstances fit most neatly within the annual framework benefit from full parliamentary scrutiny, while those whose pay patterns are more complex do not. We submit that if the methodology by which the cap is applied to those workers is altered in a way that materially changes who pays and how much, that is a policy decision and one which requires greater scrutiny from your Lordships’ House and the other place.

The same concerns arise under new subsection (6D). There, the Treasury is given powers to determine by regulation when amounts treated as remuneration are deemed to be paid, in prescribed cases to treat a figure other than the amount foregone as remuneration and to calculate that alternative figure in such manner and on such basis as may be prescribed. These are extremely broad powers. They allow the Treasury not merely to administer the cap but to redefine how remuneration is attributed and calculated for NICs purposes. If such methodological changes can be made without returning to Parliament for affirmative approval, the House will have ceded oversight of important mechanisms that determine the real-world effect of this new policy.

My amendments simply make the point that where the method by which the contributions limit is calculated or applied is altered, Parliament should have the opportunity to approve the change. The Committee is currently scrutinising the Bill line by line. We are examining the consequences. It would be inconsistent if, once enacted, substantial changes could be introduced through regulations subject only to the negative procedure. If the Government are confident that any such changes would be technical and uncontroversial, they should have no objection to subjecting them to affirmative scrutiny.

These provisions will affect real employers and real employees. They will determine compliance burdens, payroll calculations and the effective tax treatment of pension saving. They are not trivial matters. In short, where the substance of the policy shifts, Parliament should be asked to approve that shift. I hope the Minister will recognise that this is a sound and serious constitutional point and give it proper consideration.

Amendments 4 and 17, tabled by my noble friend Lord Leigh of Hurley, make an interesting case. The Government’s policy intent, as set out in the Explanatory Notes, is to apply a national insurance change where pension contributions are made pursuant to optional remuneration arrangements—in other words, where an employee has chosen to forgo cash pay in return for an employer pension contribution. However, there are some workplace pension arrangements where no such option exists: the employee is not offered a cash alternative, there is no choice between salary and pension, and the employer contribution is simply part of the structured remuneration package.

In these circumstances, it is difficult to see how the arrangements can properly be described as optional. There is no alternative compensation available and there is no optionality. The amendment therefore makes clear that where no cash alternative is offered, the arrangement should not be treated as an optional remuneration arrangement for the purposes of the new NICs charges. I would therefore be grateful if the Minister could clarify whether arrangements with no genuine cash alternative are intended to fall within the scope of the Bill. If not, I hope he might look favourably on this clarification.

My noble friend Lord Leigh’s Amendment 33 makes a further important point that the Bill should not come into force until the Treasury has published clear guidance setting out how the contributions limit will apply in cases of multiple concurrent employments. This is a matter of basic administrative clarity and fairness. The question about two caps for two jobs came from my noble friend himself, and it would be interesting to know the answer.

My noble friend Lord Mackinlay doubts whether guidance is the right route, and wants to know what the arrangements will be today, with amendments to the Bill if we believe—in the light of the answers—that that is needed. We certainly need clarity, a change to the scrutiny of regulations to the affirmative, and perhaps guidance when we have the answers.

Finally, I turn to Amendment 4A in the name of my noble friend Lord Fuller. As drafted, the Bill introduces a flat £2,000 annual limit, above which salary sacrifice to employer pensions will attract national insurance. It is a hard cap. But real earnings do not operate in neat annual instalments; for many people, remuneration fluctuates significantly from year to year. Without any carry-forward mechanism of the kind well articulated by my noble friend Lord Mackinlay, which is apparently not very costly, the Bill creates a cliff edge. An individual who sacrifices modestly for several years but has a single high-earning year will be treated as if that year existed in isolation. That is not how pension saving works elsewhere in the tax system.

The pensions annual allowance regime already provides a three-year forward framework. Amendments 4B and 17B would align the national insurance treatment with that established precedent. The alternative amendments, Amendments 4A and 17A, simply provide the Treasury with a permissive power to introduce such a mechanism. They offer flexibility should Ministers be concerned about immediate fiscal implications.

Amendment 29A would require an independent review within 18 months of implementation. The Bill introduces a new compliance framework affecting payroll systems, remuneration design and pension planning. Therefore, it is entirely reasonable that Parliament should require evidence of its real-world impact, particularly on fluctuating earners and on employer administrative burdens. I do not agree with the noble Lord, Lord Davies of Brixton, that the extra burden of complexity on employers can be dismissed, particularly now we have heard that currently there is so little interaction between second and third employers. We want fewer burdens, not more. Enough is enough, and I look forward to a proper and detailed response on these very important technical points.

[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords who have spoken in this debate. I begin by addressing Amendments 4 and 17, tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann. These amendments relate to the technical and operational detail of the legislation, including the definition of “optional remuneration arrangements” and procedure. I fully understand the concern underlying them, which is to ensure that the Bill operates in a targeted, proportionate way and does not inadvertently affect ordinary employer pension contributions. The Government share this objective and I am grateful for this opportunity to clarify our intent.

The Bill before the Committee already relies on the established definition of “optional remuneration arrangements” set out in the Income Tax (Earnings and Pensions) Act 2003; this is the same framework that has applied since the optional remuneration arrangement rules were introduced in 2017. Under that definition, the rules apply only where an employee is given a choice—for example, a choice between receiving earnings or receiving employer pension contributions instead. This includes salary sacrifice arrangements, where an employee agrees to a lower cash salary in exchange for a pension contribution, or situations where an employee chooses pension contributions in place of a cash allowance.

Importantly, the Bill does not affect employer pension contributions where no such choice exists. Where an employer makes pension contributions as a standard part of the remuneration package and there is no alternative of cash or earnings available to the employee, those arrangements do not fall within the definition of “optional remuneration arrangements” and are, therefore, outside the scope of the Bill. In those cases, standard employer pension contributions will continue to be fully exempt from national insurance contributions, exactly as they are now. Nothing in this legislation changes that position.

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[Lord Livermore (Lab)]

It is a perfectly good outcome if the employer increases their contribution into an employee’s pension. That is something we want to achieve. On specifically how HMRC would view that, I am very happy to take that away, but I do not believe in any way, in what I am saying, that that is the intention of what we are doing.

I will finish what I was saying. In those cases, standard employer pension contributions will continue to be fully exempt from national insurance contributions, exactly as they are now. Nothing in this legislation changes that position. For these reasons, the Bill already draws the correct boundary by relying on a well-established and familiar legal definition. It targets only those arrangements where an employee is given a choice between cash and pension provision, and it does not interfere with ordinary, non-optional employer pension contributions.

I turn to Amendments 5 and 18 in the name of the noble Baroness, Lady Neville-Rolfe, and supported by the noble Baroness, Lady Altmann, and the noble Lord, Lord Altrincham. These amendments relate to parliamentary scrutiny and procedure. I agree with noble Lords about the importance of maintaining strong parliamentary scrutiny, particularly where changes could affect individuals’ national insurance liabilities. That is an important principle and one that the Government share. That is why the Bill contains a series of safeguards to protect scrutiny and transparency.

The Bill explicitly provides that, where regulations are used to reduce the generosity of the £2,000 limit—that is, where changes would lower the contribution limit and thereby increase the amount of earnings subject to class 1 national insurance contributions—those regulations would be subject to the affirmative procedure. This ensures that any change which tightens the policy or increases liability is brought before Parliament for full scrutiny and approval.

By contrast, where regulations are made simply to implement the policy, to set out administrative arrangements or to increase the £2,000 limit, thereby resulting in less national insurance being payable, it is standard practice for those regulations to be subject to the negative procedure. That approach reflects the well-established distinction between substantive policy changes and regulations which deal with administration or confer additional relief.

This is not a new or novel approach. It follows the established precedent for regulations made under the existing powers in Section 4(6) and Section 4A of the Social Security Contributions and Benefits Act 1992 and the corresponding Northern Ireland legislation. In those cases, regulations of an administrative or beneficial nature have routinely been subject to the negative procedure.

I also note that the Delegated Powers and Regulatory Reform Committee has carefully scrutinised the powers in the Bill, including the proposed level of parliamentary scrutiny. The Committee has confirmed that there is nothing in the Bill that it wished to draw to the special attention of the House.

Taken together, these provisions ensure an appropriate and proportionate balance: robust parliamentary oversight where the policy is made less generous, and a well-established, efficient procedure for setting out administrative detail and making changes that operate in favour of contributors.

[Baroness Neville-Rolfe (Con)]

Before the Minister moves on, would he consider making an affirmative regulation on the very first occasion? The discussions that we have had this evening show that there is quite a bit of complexity here, and that has compliance costs for employers and employees. It seems odd to take the precedent of the social security Act on something new and difficult. I wonder whether that would be worth considering. Perhaps the Delegated Powers and Regulatory Reform Committee did not have the benefit of the experts here who have explained some of the problems. I am sure the Minister cannot say anything today, but could he at least have a look at whether the first such regulations could be by affirmative resolution, which is a practice that I have encountered with lots of other Bills that we probably worked on together?

[Lord Fuller (Con)]

If I may interject, especially with such a load of—

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Moved by

[Baroness Neville-Rolfe]

12: Clause 1, page 2, line 27, at end insert—
“(5) The amendments made by this section do not apply where the employer—(a) is a small or medium-sized enterprise, or(b) is a charity or social enterprise which meets the conditions in subsection (6).(6) The conditions are that—(a) the employer meets the definition of a small or medium-sized enterprise in section 465 of the Companies Act 2006, and(b) the employment is carried out wholly or mainly for the purposes of that charity or social enterprise.(7) In this section—“charity” has the meaning given by section 1 of the Charities Act 2011;“social enterprise” means an undertaking which—(a) has as its primary purpose the achievement of social or environmental objectives, and(b) principally reinvests its profits for those purposes;“small or medium-sized enterprise” has the meaning given by section 465 of the Companies Act 2006.”Member’s explanatory statement
This amendment exempts small and medium-sized enterprises, and small and medium-sized charities and social enterprises, from the provisions of the Bill in Great Britain.

[Baroness Neville-Rolfe (Con)]

My Lords, I will speak first to Amendments 12 and 24, which would exempt small and medium-sized enterprises, charities and social enterprises from the salary sacrifice pension contribution cap introduced by the Bill. I also welcome Amendment 27, tabled by the noble Baroness, Lady Kramer, requiring a review of the ability of SMEs to recruit and retain staff.

Small and medium enterprises have been hammered under this Government. They have introduced policies that will cost businesses £25 billion annually in tax compliance alone, according to the firm Together Accounting. Their previous NICs hike added a further £25 billion burden and there are business rate hikes, minimum wage increases and the Employment Rights Act. Is it any wonder that 52 businesses per 10,000 are entering insolvency, nearly double the rate from just five years ago? The Federation of Small Businesses reports that 63% of businesses now cite tax as their primary concern. Business confidence has plummeted. This is something that I have spoken about many times, and the Conservative Party stands with small businesses. They are the lifeblood of our communities, our jobs market and our economy.

Our amendment tries to shield SMEs and charities from what is effectively yet another damaging tax by exempting them from this policy. Given the onslaught SMEs have suffered under the Government, the rationale for this needs little explanation. SMEs operate on thin margins, often without sophisticated accounting mechanisms or payroll and accounting teams. They will be disproportionately affected by this policy and should be exempt.

Turning to charities, before the Budget was even confirmed, the Charity Finance Group ran a survey of the sector specifically on the question of salary sacrifice. It found, and I urge the Committee to note these figures carefully, that 81% of charities reported that the salary sacrifice change would have a negative impact on their ability to offer competitive benefits to staff. Nearly seven in 10 had already started to reduce headcount or expected to do so in the near future, and that was before this further measure. It is not surprising that they are worried, as in my experience charities often have more complex employment arrangements: seasonal working, moving jobs, and weekly rather than monthly pay. They also often have much less sophisticated payroll systems.

CFG warned explicitly that, for charities operating on tight margins, salary sacrifice has been a critical tool and a way both to support staff and to achieve meaningful savings on employer national insurance at the same time, stretching limited resources further while enabling employees to build better pension provision. To cap that mechanism is to remove one of the few cost-efficient tools available to organisations that cannot increase prices, raise equity finance or easily diversify their income when grant funding or public contracts do not keep pace with costs.

The wider context of what has happened to charities under the Bill matters here, too. Last year, on Report, the House of Lords carried amendments to the then national insurance contributions Bill that would have protected small charities with revenues under £1 million from the main NICs rise. However, the Government rejected them, and we have seen what happened there. The Government have said that they want to build a stronger economy and a thriving civil society. That ambition is not well served by a policy that removes from smaller employers and civil society organisations one of the most effective tools that they have to compete for talent and support their people in saving for retirement.

Amendment 26 asks that, within 12 months of this Act coming into force, the Government commission and lay before Parliament an independent review of its impact on small and medium-sized enterprises, including administrative costs, compliance burdens, employment costs and the ability of SMEs to attract and retain staff—and, crucially, that this be assessed in the context of the cumulative changes to employer national insurance since July 2024.

Time and again, the Government’s approach has displayed a worrying lack of understanding of how small firms actually operate, how thin their margins are, how sensitive they are to cumulative costs and how easily confidence can be shaken. We saw it with the previous national insurance hike and in the rushed recalibration over pubs, and we see it all over again in this Bill and the rush to pass it when the vital detail is still to be settled. We know that the revenue collected will almost halve in the second year of implementation, so there will be lots of new compliance costs and an uncertain future.

If the Government are confident that this measure will not materially damage SMEs, they should welcome the opportunity to demonstrate that through an independent review. If they are serious about growth, entrepreneurship and avoiding further damaging U-turns, they should look at the cumulative picture. Given the scale of pessimism now facing the small business community and the stakes for employment and growth, I urge the Government to accept this amendment. SMEs do not trust the Government to act in their interests. If the Treasury were to adopt such an amendment—as well as the associated one for Northern Ireland, where there are so many SMEs—perhaps this trust might start to be rebuilt. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I have added my name to all of the amendments in this group. Again, I think that they are very important. I am pleased to have added my support for my noble friends Lady Neville-Rolfe, Lord Altrincham and Lady Kramer—if I may call her my noble friend—as well as for the noble Lords, Lord de Clifford and Lord Londesborough. All of them are picking up on the huge risks that are being posed in terms of additional administrative costs, burdens and complexity for small and medium-sized businesses, charities and social enterprises, which, as my noble friend Lady Neville-Rolfe explained, have already had so many extra burdens placed on them.

I reiterate that I hope that the Minister will recognise that we need this analysis and this type of work before we make the primary legislation that we are considering here, rather than afterwards. I also hope that, if the Minister does not have ready answers, modelling or analysis that would address the issues these amendments are trying to understand in more detail, we can, as we have heard before in Committee, put some of this on hold until we have a better understanding of what the real-world impacts will be.

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[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords who have spoken in this debate. First, I will address Amendments 18 and 24 in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, which would exempt small and medium-sized enterprises, charities and social enterprises from the Bill.

The Government agree on the importance of supporting small businesses and ensuring that they are not unduly impacted by these changes. Small and medium-sized enterprises are far less likely to offer pension salary sacrifice than larger businesses. According to Nest Insight, around 33% of small businesses offer pension salary sacrifice to their employees, compared with 83% of large businesses. In addition, employees of small and medium-sized enterprises are far less likely to have contributions exceeding the £2,000 cap; only 10% of employees in SMEs have pension contributions through salary sacrifice exceeding the cap. Exempting small and medium-sized enterprises in the way suggested by the amendment would therefore introduce significant additional complexity into the tax system and would be disproportionate given the limited impact that this policy is expected to have on these businesses. The Government are engaging with employers and other industry stakeholders ahead of these changes coming in.

Similarly, Amendments 26 and 27 in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham, Lord Londesborough and Lord de Clifford, would require a review of the impact of the Act on small and medium-sized enterprises. As I have already said, the Government agree about the importance of supporting small businesses. The changes in the Bill will mainly impact larger employers, which are much more likely to use salary sacrifice and to have employees who are contributing above the £2,000 cap.

More widely, the Government are delivering the most comprehensive package of support for small and medium-sized businesses in a generation through the small business strategy, unlocking billions of pounds in finance to support businesses to invest and removing unnecessary red tape. Ahead of the cap coming into operation, the Government will continue to work closely with employers, payroll administrators and other stakeholders to ensure that the changes are implemented in the least burdensome way for businesses of all sizes currently using salary sacrifice.

In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.

[Baroness Neville-Rolfe (Con)]

My Lords, if the Government truly wish to support SMEs and charities, they should not press ahead with a measure that those enterprises have told us—I gave a great deal of evidence, and we have heard this from others as well—will damage them, increase their operating costs and complexity and reduce their ability to offer options to their employees. The noble Baroness, Lady Altmann, put the case well.

The noble Lord, Lord Londesborough, with his unique experience of SME businesses, reminded us of the dire situation facing SMEs, with significant numbers closing down, as one can see on almost any high street. My noble friend Lord Ashcombe emphasised the cumulative effect and rightly added energy prices to the problems that SMEs and charities are facing. The Bill will raise employment costs at a time when companies are already stretched to boiling point.

The noble Lord, Lord de Clifford, illustrated the problem with information drawn from the impact of NICs on his business, which I found particularly compelling. He is very keen to have the hope—I think that is the right word—that will arise from the proposed review. My noble friend Lord Mackinlay reminded us of the large number of NEETs who are out of work, as well as of how we now have higher youth unemployment than the EU, generating what he referred to as a tipping point.

My noble friend rightly raised—I hope that the Minister will come back on this—the key unanswered question of whether the £2,000 cap will apply per employee across multiple employments. We must have an answer on that because it will make a great deal of difference, especially to smaller operations. I am impressed by the fact that, for the first time, my noble friend has agreed to support a carve-out for SMEs and charities, on which I have campaigned for the past 11 years.

The Minister and I have often exchanged views on SMEs, but this is an opportunity for him to make a concrete change to the Government’s policy on this matter, do something to show that the Government listen to SMEs and small social enterprises and provide them with a bit of relief from the mountain of complexities piled on them. I urge the Government to think again and make a positive change to the Bill in this area. It would not be expensive, but it would protect jobs and businesses, help our economy and, above all, reduce compliance costs for both this vital sector and the officials who are taxed with policing the changes and gathering revenue.

Lastly, I reiterate my support for the review of SME recruitment and retention proposed by the noble Baroness, Lady Kramer, in the light of the cumulative NICs changes that we have seen over the past 18 months. Like her, I hope that the Government are listening. For now, I beg leave to withdraw the amendment, but we will, I think, want to revert to the position of SMEs and charities when we come back on Report later in the spring.

Amendment 12 withdrawn.

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Moved by

[Baroness Neville-Rolfe]

31: Clause 3, page 4, line 5, leave out subsection (2) and insert—
“(2) The provisions of this Act, other than this section, may not come into force unless and until the conditions in subsections (2A) to (2C) are met.(2A) The Secretary of State must undertake an independent review of the impact of this Act on employers.(2B) The report must in particular consider—(a) the direct and indirect costs incurred by employers as a result of this Act,(b) the effect of the Act on employer pension contributions and the use of salary sacrifice arrangements,(c) the additional compliance costs necessitated by this Act, and(d) any consequential impacts on employment practices, workforce retention or remuneration structures.(2C) The Secretary of State must publish the report of the review and lay it before both Houses of Parliament.”Member’s explanatory statement
This amendment makes commencement of the Act conditional on the publication of an independent report on its impact on employers.

[Baroness Neville-Rolfe (Con)]

We will finish at 7.45 pm.

[Lord Wilson of Sedgefield (Lab)]

There is agreement on my side that we will go on for a little while after that.

[Baroness Neville-Rolfe (Con)]

Sorry—I was advised that there is no agreement beyond 7.45 pm.

[Lord Wilson of Sedgefield (Lab)]

It has been agreed with the clerks and everyone that we will go beyond that to 8 pm so that we can try to get it all finished.

[Baroness Neville-Rolfe (Con)]

Well, I have been told that there is no agreement beyond 7.45 pm. I do not have a Whip in here.

[Lord Wilson of Sedgefield (Lab)]

That is not my fault.

[Baroness Neville-Rolfe (Con)]

What happens if we do not finish this group?

[Lord Wilson of Sedgefield (Lab)]

We will stick with 8 pm. If we start now, we will be able to finish it by then; if not, we will not.

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[Baroness Neville-Rolfe (Con)]

My Lords, my amendment in this group seeks to make the commencement of this Act conditional upon the publication of an independent review of its impact on employers.

The Government’s decision to cap national insurance relief on salary sacrifice pension contributions at £2,000 per year has been presented as a measure targeted at higher earners, but the reality, as those of us who have spoken to businesses up and down the country know, is rather more complicated than that. This is not simply a matter of adjusting the tax affairs of a few well-paid executives. This measure hits employers directly and in ways that Ministers have not thus far adequately costed or explained. For small and medium-sized enterprises in particular, the costs are not trivial. Many have structured their entire remuneration and pensions offerings around salary sacrifice arrangements. They have done so because it is administratively straightforward, it benefits their staff, and it has had the backing of the previous Government as a sensible way to encourage workplace pension saving. Those businesses now face not only higher employer national insurance costs but also the compliance burden of unpicking arrangements that may have been in place for years.

Let us be plain about what this means for a small business. We are talking about firms with perhaps 20 or 30 staff, businesses that do not have large HR departments or in-house tax teams. They will need to review every employment contract, revisit their payroll systems and, in many cases, seek professional advice to understand their new obligations. What is particularly troubling is that we have not seen from the Government anything approaching a comprehensive assessment of these impacts. We know that HMRC consulted last year, but it got a dusty answer. The OBR has produced some high-level revenue estimates, which do not reassure us, and we know from the Treasury note that it expects this measure to raise several billion pounds by the end of the Parliament. But what we have not seen, and what employers and employees alike are entitled to expect, is a proper independent analysis of what this means in practice, especially for SMEs and middle-income employees.

There has been no serious attempt to model the indirect costs, the effect on employer pension contributions, the likelihood that firms will scale back their own contributions to compensate for higher tax costs, or the impact on workforce retention where salary sacrifice has been used as a recruitment and benefits tool. The OBR itself has acknowledged significant uncertainty in its projections, noting that revenue yields are highly sensitive to behavioural change—a very important point—and yet the Government press ahead without the evidence base one would expect for a measure of this scale.

My concern—which is shared by a range of voices in the pensions industry and in business groups and among those who have looked carefully at the measure— is that, in restricting salary sacrifice without proper analysis, the Government risk undermining the very pension-saving behaviours they claim in other contexts to support. As the ABI has put it, savers and the pension system need stability. What we should not be doing is swapping pension stability for short-term revenue raisers.

The Minister has cited a number of statistics on the numbers whom HMT anticipates will be affected, but these fail to recognise that the Government have almost no idea of how employers and, therefore, employees would respond and be affected by those changes. As I have already mentioned, the OBR has said that there is a high level of uncertainty over the size of the behavioural response. If an employer stops offering a salary sacrifice because of the compliance costs and complexity, as many of them have warned they will, then every one of their employees will be affected. So how can the Minister say that 74% of basic rate taxpayers will be left unaffected when HMT has no idea how the organisations employing them will react to the Bill? Indeed, the detail is still unclear. The point many noble Lords have raised stands: the Bill brings a great deal of uncertainty, and the Treasury does not understand the wider effects of what it is proposing—thus my wish to delay commencement until we have a clearer view.

I welcome Amendment 32 in the name of the noble Baroness, Lady Kramer, which references the OBR’s supplementary forecasts. I do not want to steal her thunder, but the issues this forecast raises are numerous. Of particular concern are the behavioural changes that it anticipates. The OBR estimates that behaviour reduces the 2030-31 yield by around 48% compared with the static figure. Employers are assumed to redirect pay growth into employer contributions, employees are assumed to shift into relief at source or net pay arrangements, and there are additional pass-through effects into wages and profits. In other words, nearly half the static yield depends on assumptions about how employers and employees respond. The options open to employees and employers are numerous, and they have three years to think about it.

Another serious concern highlighted is that HMRC does not hold comprehensive data on salary sacrifice usage. As we understand it, the modelling used by the OBR relies heavily on ASHE survey data and historic APSS 107 returns to estimate bonus sacrifice behaviour. The OBR therefore assigns this measure a medium-high uncertainty rating with particular uncertainty around behavioural responses and the size of the bonus sacrifice base. This policy is uncertain. How will it affect savings, how will it affect behaviour and, significantly, how much will it raise and for how long?

I know others may have questions for the Minister, but the new arrangements come into operation in 2029-30 and, as we have all been saying, there is time for more questions to be asked and answered and for more work to be done. I hope the Minister will look at these various amendments positively. I thank the Deputy Chairman for his clarification on timing, and I beg to move.

[Baroness Kramer (LD)]

My Lords, the noble Baroness, Lady Neville-Rolfe, has relieved me of the burden of trying to explain the primary clause within my amendment, which would require a formal review and report on the OBR supplementary forecast information release. As she said, this came out on 5 February, I understand in response to an FoI request, which, frankly, is no way to provide information to Parliament. As she said, it concludes that behavioural response to the measure—and that is key to the impact that this Bill will have—is highly uncertain. The further detail that she provided is so similar to what I would have provided that I am not going to repeat it. I thank the noble Lord, Lord de Clifford, for also signing this.

The other part of the review would cover the operational remuneration arrangements and the impact on pension adequacy and salaries. I know the Minister thought he covered this issue, but I think he could tell that in the Room uncertainty continues. Further clarification is needed around this issue because employers are going to be looking for that. This is an opportunity to provide it.

I have to say that I do not think I have ever seen an OBR report that is so filled with the word “uncertainty”. Obviously, it stands behind what it has written, but it does not feel like a report that has been written with a great deal of confidence. That confidence needs to be in place for Parliament to act on legislation.

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[Lord Livermore (Lab)]

My Lords, as I have already said, it has been published in various places, and I do not see the need to bring that into one place, as the noble Lord asked.

On Amendment 32, the OBR’s economic and fiscal outlook and its supplementary forecast publications set out how behavioural responses have been considered in certifying the costing. Some of these behavioural assumptions were also published in the policy costing note accompanying the Budget. The supplementary forecast information was drawn from analysis and data supplied to the OBR by the Government ahead of Budget 2025, in line with the standard process by which the OBR scrutinises and certifies costings. The Government’s published costings therefore already reflect these behavioural effects, and the OBR has certified these costings in the usual way. Given that the material reference is already publicly available and has been fully reflected in the certified policy costings, it is not necessary to review the OBR’s supplementary forecast.

If the noble Lord, Lord Londesborough, will forgive me, I will write to him with the answer to his specific question. In the meantime, given the points I have made, I respectfully ask noble Lords not to press their amendments.

[Baroness Neville-Rolfe (Con)]

My Lords, I am grateful to all noble Lords who have spoken in this debate—a shorter debate than we probably needed—and I am particularly grateful to the noble Baroness, Lady Kramer, and the noble Lord, Lord de Clifford, for drawing out so clearly the scale of the uncertainty that we are facing here.

The Minister has referred to various costings and has described them as conventional, but the truth is that the tax impact notes that have been published are inadequate, as indeed were parallel information notes published last year when we were discussing the national insurance changes of £25 billion. As a result, the consequences we are now seeing in the economy were not, to my mind, adequately flagged up.

However, where a policy is acknowledged by the OBR to carry medium to high uncertainty, and where almost half of the projected yield depends on a behavioural response that is not known in advance, I think the data that we have is incomplete. It is therefore reasonable to pause and require an independent assessment, and we have time for that. The alternative is that the Government legislate blind and then ignore the impact of the measures they take, as they did last year. In this case, of course, it will be a long time before we know the impact, because the measures will come into play in 2029-30.

In matters of pension saving and employment costs, stability and predictability are essential. If the Government are confident in their policy, they should have nothing to fear from the independent scrutiny that we have proposed. But time is late; we have reached the witching hour, and I beg leave to withdraw the amendment.

Amendment 31 withdrawn.

National Insurance Contributions (Employer Pensions Contributions) Bill

Baroness Neville-Rolfe Excerpts

Report stage
Thursday 5th March 2026 Lords Chamber

Moved by

[Baroness Neville-Rolfe]

1: Clause 1, page 1, line 10, after “tax” insert “at the higher or additional rate”
Member’s explanatory statement
This amendment would exempt basic rate taxpayers in England, Wales and Scotland from the £2,000 cap.

[Baroness Neville-Rolfe (Con)]

My Lords, I am pleased to be opening our deliberations on Report by speaking to a powerful group of amendments tabled by not only the Opposition but noble Lords from across the Chamber. This group in many respects shows the scale and breadth of the concerns that are held by noble Lords with respect to this Bill.

My first amendments in this group seek to exempt basic rate taxpayers from this policy. I am grateful to noble Lords from across the House who supported Amendment 1 in Committee and who recognise the seriousness of the issue that it seeks to address. This Bill is a mistaken Bill. It will limit incentives to save into pensions and reduce pensions adequacy. In our lively Committee discussions, Peers with business and tax experience and knowledge of pensions and payroll exposed its failings. The responses from the noble Lord, Lord Livermore, did not allay our concerns. On the contrary, they reinforced them.

The Government have been clear in the Bill’s Explanatory Notes and in Statements made in this House and the other place that this policy is intended to target higher earners. That is the stated purpose and the political justification, but it is not the reality. The Society of Pension Professionals has told us that around one-quarter of those who use salary sacrifice and who will be caught by these changes are basic rate taxpayers. When this was put to the Minister, he did not dispute it. In fact, he went further. He told us that around 74% of basic rate taxpayers currently using salary sacrifice will be protected by the £2,000 cap. That is the current position and, as far as I know, does not allow for wage inflation in the period before the measure takes effect. That could increase the number of basic rate taxpayers who are affected.

The new arrangements take effect in 2029-30, conveniently helping the Government with £4.7 billion of revenue to satisfy their fiscal rules in that crucial year. However, the Minister’s exclamation means that 26% of basic rate taxpayers will not be protected. More than one in four basic rate taxpayers using salary sacrifice will be hit. The Minister also acknowledged that some people earning under £30,000 would be affected. Let us pause on that. This is a policy presented as targeting high earners, yet it will impact workers earning under £30,000. Surely that is, by the Treasury’s own admission, a fundamental contradiction between rhetoric and reality. For a basic rate taxpayer, the 8% national insurance charge represents two-fifths of the value of their income tax relief. In practical terms, the marginal cost of this policy is four times higher for a lower-paid worker than for someone on a higher income. That is a very different definition of a progressive tax. The lower your income, the greater the relative blow.

Our amendment offers the Government a straightforward way out. By exempting basic rate taxpayers from the cap, we would align the policy with its stated objective. If the aim is to target higher earners, let us do precisely that. Let us not drag lower and middle earners into a measure that they were repeatedly told would not affect them. Lower savings today mean lower retirement incomes tomorrow, and lower retirement incomes tomorrow mean greater reliance on the state. That is neither fiscally prudent nor socially responsible.

This is closely related to another of my amendments in the group, Amendment 7, which would require that regulations made under Clauses 1 and 2 should explain the basis on which the Treasury considers certain employed earners to be higher earners for the purposes of the national insurance charge and how the contribution limit reflects that assessment in Great Britain and Northern Ireland. This amendment, which we also tabled in Committee, received a wholly inadequate response. I asked the Minister who in the Government’s view were higher earners. I asked for a number. Was it people on £50,000 a year or £60,000 a year? The Minister refused to give one. Indeed, he did not engage with the point at all. Remember, some basic rate taxpayers will be affected by this policy. They are not higher earners. The Government should be honest about that.

Amendment 7 seeks to ensure that when regulations are forthcoming—and there are a lot of them provided for in the Bill as it stands—the Treasury will do the right thing and explain how the regulations meet the policy intent of affecting only higher earners. It would not impose costs on the Treasury or affect how the policy works but would ensure that we get an explanation of how lower and medium-income workers are to be protected. That is the Government’s stated aim. If the Minister is confident that regulations will meet the Government’s own test, he should accept this amendment.

The final one of my amendments to which I wish to speak, Amendment 29, concerns SMEs and charities. Throughout the passage of this Bill, and in debates far beyond it, many of us have warned about the cumulative burden this Government are placing on smaller employers. Think about the Employment Rights Act, the minimum wage hikes, the spiralling business rates, U-turns and uncertainty, compliance and regulatory costs and, indeed, the previous NICs hike. The list goes on. Each item is a policy that damages small and medium-sized enterprises in our country. They include family firms, start-ups, local manufacturers, high-street shops, care providers and charity and community employers. They often do not have in-house tax teams or compliance departments. They do not have margins that allow them quietly to absorb new fiscal shocks. Many do not offer salary sacrifice, but some do and more may do so now that it is more in the public consciousness thanks to this change.

My amendment simply says that, where the employers are a small or medium-sized enterprise, or a charity or a social enterprise, the provisions of this clause should not apply. If the Government’s intent is to truly address behaviours concentrated in large corporates then they should have no difficulty accepting that smaller employers ought to be shielded.

--- Later in debate ---

[Lord Livermore (Lab)]

I am grateful to the noble Lord. I think the position remains the same, though.

[Baroness Neville-Rolfe (Con)]

My Lords, I thank all noble Lords who contributed to this debate. I welcome the noble Lord, Lord Freyberg, to the fray and thank the Minister for his responses. He did not respond to the question raised by my noble friend Lord Ashcombe, the noble Lord, Lord de Clifford, the noble Baroness, Lady Altmann, and me about who high earners are and why those in the £40,000 to £50,000 band should pay 8% not 2%—four times higher. Indeed, why has the £2,000 limit been chosen in the first place?

On SMEs, on which I will also divide the House later, I think the lower incidence of the use of salary sacrifice actually makes the case for not imposing the complexities and administration of salary sacrifice on SMEs and charities. I will leave my noble friend Lord Leigh to wind up on student loans.

I am afraid that we on these Benches are unconvinced that the Government are meeting their policy objective of protecting workers on lower and medium incomes. As my noble friend Lord Leigh said, we are not sure that the Government are even going to raise the desired revenue. The Bill obviously hits those on lower and medium incomes and the protections are not in the Bill, which would ensure that the Government’s own policy objective is achieved. What is the hurry? I would like to test the opinion of the House on exempting basic rate taxpayers from the £2,000 cap.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I will slightly anticipate the noble Baroness, Lady Rolfe, moving Amendments 9, 10, 24 and 25, which would require affirmative resolution for key elements of the Bill. Frankly, I do not think I have ever seen a Bill for which affirmative action was more required. In the other amendments, which have been brought forward so eloquently from across this House, we have some flavour of the extraordinary complexity.

I suspect that decision-makers at the top of the Government thought that this was something really simple, and that they were just going to put a cap on, with the rest being relatively easy to manage. However, the actual management of this is a complete nightmare. I cannot believe that a Bill that has been through the House of Commons already is on Report in the House of Lords, and yet we still do not know if the cap is going to apply to each employee or to each employment—which, to my mind, is two different Bills.

I completely agree with the noble Lord, Lord Leigh. I can see the nightmare of people wondering, “If I say this sentence, will I be caught by operational remuneration? Do I have to pretend, wink, or make sure I do not put anything down in an email?” We should not be putting people into situations where they have to try to work out how they handle this whole range of arrangements. The noble Lord, Lord Freyberg, knowing the creative industry so well, has thrown further complication into this. I very much suspect that the Government had absolutely no idea of the mare’s nest they were getting themselves involved with. I wish these issues had been teased out before this point.

The response brought forward by the noble Baroness, Lady Neville-Rolfe, of at least having affirmative resolution gives us some possibility of trying to scrutinise what has happened. This is an extraordinary situation. We do not know the core character of this Bill, so we will be dependent on those working through the affirmative resolutions to decide how on earth they will deal with what will turn out to be the form that eventually comes before us.

[Baroness Neville-Rolfe (Con)]

My Lords, I begin by thanking noble Lords with amendments in this group—my noble friends Lord Fuller, Lord Mackinlay and Lord Leigh and the noble Baroness, Lady Altmann—for their proposals, and for their forensic questions on the detail of the schemes and on any guidance that the Government might issue to minimise errors and problems.

There are numerous shortcomings in the Bill around operational detail and how everything will apply in practice. The reality is that we have very little clarity on how the Bill will work. It is designed to apply to a very narrow and limited set of employment and remunerative circumstances, and anyone who falls outside that definition has to wait for regulations, which will not be subject to the affirmative procedure.

We have no clarity on how the policy will apply to people working in numerous jobs. Is the cap per employment or per person? If it is per person, it will be very difficult to administer. We also need to know where responsibility for enforcement lies. There is no clarity about people with fluctuating remuneration: will they be penalised for saving during higher income periods because they hit the cap in some years and have no income to pay into pensions in others? What about anyone who has an unconventional pattern of remuneration for their job or jobs? How will it work for them? We have heard already that the arrangements for student loans are unclear, even after recent discussion, and we heard from my noble friend Lord Mackinlay about GDPR and from the noble Lord, Lord Freyberg, about the off-payroll rules. That is quite a lot of detail that has to be worked out.

My amendments in this group would help to deal with that by ensuring that all regulations would be subject to the affirmative resolution procedure, aside from those designed to increase the cap—that would be positive if it goes up, and you would not need to have an affirmative resolution because it would be beneficial. I am very grateful to the noble Baroness, Lady Kramer, and my noble friend Lord Ashcombe for their understanding and their vocal support for having this extra scrutiny.

When the regulations are developed, they will apply the cap to thousands of people and businesses who will be drawn into complications for the first time. My proposals would not impose a cost on the Exchequer or undermine what the Government are trying to do; they would simply ensure that, when the Treasury comes up with an answer to the questions that have been raised today, we will get a meaningful chance to debate and scrutinise the answers, as we are doing with the Bill at the moment. The Government really should have put the detail in the Bill but, in the absence of that, my amendments would ensure that we retain as much oversight as possible as the detail comes through. I can think of no reason why the Minister would not adopt the affirmative resolution if he cares about oversight, due process and the scrutiny of a policy which will affects millions of people. There are 7.7 million people using salary sacrifice and Amendment 9 should be an obvious amendment to support.

[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords who have spoken in this debate. I will begin by addressing Amendments 6, 22, 36 and 39, tabled by the noble Lords, Lord Mackinlay of Richborough, Lord Fuller, Lord Leigh of Hurley and Lord de Clifford, and the noble Baronesses, Lady Altmann and Lady Kramer, which seek clarity on the operation of the cap. I listened carefully to the requests made in Committee and again today to provide further reassurance to employers, payroll providers and individuals. Having put noble Lords’ concerns to officials in HMRC and the Treasury, I am pleased to confirm to your Lordships’ House that the cap will operate in line with other limits and thresholds within the national insurance regime. That is, the £2,000 cap will apply to each employment an individual undertakes.

To be clear, each employment will be treated separately for the purposes of the contributions limit for national insurance contributions. Any individual who has more than one employment and who sacrifices salary in more than one of those jobs will be able to do so independently in each case. Only 2% of those using salary sacrifice for their pensions have more than one job, and not everyone in this small group can or will use salary sacrifice in both their jobs. None the less, the approach I am confirming today provides clarity, aligns with the existing principles of the national insurance regime, and avoids the operational and administrative risks and burdens that could arise from attempting to operate a single cap across multiple employments. I confirm that this will be set out in legislation in subsequent regulations. The Government will also continue to engage with employers, payroll providers and other stakeholders to work through the detail of the policy ahead of its implementation.

I turn to Amendments 2 and 3 and the corresponding Northern Ireland Amendments 18 and 19 from the noble Lord, Lord Fuller, which each seek to introduce a carryover mechanism for any unused amounts of the cap allowance, including for those with fluctuating earnings.

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Moved by

[Baroness Neville-Rolfe]

9: Clause 1, page 2, line 19, leave out from “4(6A)” to end of line 21
Member's explanatory statement
This amendment and others in the name of Baroness Neville-Rolfe would make most regulations subject to the affirmative procedure, except those solely increasing the contributions limit. They ensure parliamentary scrutiny of the policy’s operation, particularly in relation to people with irregular earnings, multiple jobs or atypical remuneration patterns.

[Baroness Neville-Rolfe]

My Lords, I beg leave to test the opinion of the House.

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Moved by

[Baroness Neville-Rolfe]

10: Clause 1, page 2, line 21, at end insert—
“(b) after subsection (1), insert—“(1A) Subsection (1) does not apply to regulations under section 4(6A) which make provision only for increasing the amount of the contributions limit for a tax year.””Member's explanatory statement
This amendment and others in the name of Baroness Neville-Rolfe would make most regulations subject to the affirmative procedure, except those solely increasing the contributions limit. They ensure parliamentary scrutiny of the policy’s operation, particularly in relation to people with irregular earnings, multiple jobs or atypical remuneration patterns.

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Moved by

[Baroness Neville-Rolfe]

16: Clause 1, page 2, line 27, at end insert—
“(5) The amendments made by this section do not apply where the employer—(a) is a small or medium-sized enterprise, or(b) is a charity or social enterprise which meets the conditions in subsection (6).(6) The conditions are that—(a) the employer meets the definition of a small or medium-sized enterprise in section 465 of the Companies Act 2006 (companies qualifying as medium-sized: general), and(b) the employment is carried out wholly or mainly for the purposes of that charity or social enterprise.(7) In this section—“charity” has the meaning given by section 1 of the Charities Act 2011; “social enterprise” means an undertaking which—(a) has as its primary purpose the achievement of social or environmental objectives, and(b) principally reinvests its profits for those purposes;“small or medium-sized enterprise” has the meaning given by section 465 of the Companies Act 2006.”Member’s explanatory statement
This amendment exempts small and medium-sized enterprises, and small and medium-sized charities and social enterprises, from the provisions of the Bill in Great Britain.

[Baroness Neville-Rolfe (Con)]

My Lords, I wish to test the opinion of the House on this amendment relating to SMEs and charities.

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Moved by

[Baroness Neville-Rolfe]

17: Clause 2, page 2, line 38, after “tax” insert “at the higher or additional rate”
Member's explanatory statement
This amendment would exempt basic rate taxpayers in Northern Ireland from the £2,000 cap.

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Moved by

[Baroness Neville-Rolfe]

24: Clause 2, page 3, line 31, leave out from “4(6A) to “shall” in line 32
Member's explanatory statement
This amendment and others in the name of Baroness Neville-Rolfe would make most regulations subject to the affirmative procedure, except those solely increasing the contributions limit. They ensure parliamentary scrutiny of the policy’s operation, particularly in relation to people with irregular earnings, multiple jobs or atypical remuneration patterns.

--- Later in debate ---

Moved by

[Baroness Neville-Rolfe]

29: Clause 2, page 3, line 41, at end insert—
“(5) The amendments made by this section do not apply where the employer— (a) is a small or medium-sized enterprise, or(b) is a charity or social enterprise which meets the conditions in subsection (6).(6) The conditions are that—(a) the employer meets the definition of a small or medium-sized enterprise in section 465 of the Companies Act 2006 (companies qualifying as medium-sized: general), and(b) the employment is carried out wholly or mainly for the purposes of that charity or social enterprise.(7) In this section—“charity” has the meaning given by section 1 of the Charities Act 2011;“social enterprise” means an undertaking which—(a) has as its primary purpose the achievement of social or environmental objectives, and(b) principally reinvests its profits for those purposes;“small or medium-sized enterprise” has the meaning given by section 465 of the Companies Act 2006.”Member's explanatory statement
This amendment exempts small and medium-sized enterprises, and small and medium-sized charities and social enterprises, from the provisions of the Bill in Northern Ireland.

--- Later in debate ---

Moved by

[Baroness Neville-Rolfe]

31: After Clause 2, insert the following new Clause—
“Review of impact on small and medium-sized enterprises(1) The Secretary of State must, within 12 months of the passing of this Act, lay before Parliament an independent report assessing the impact of the provisions of this Act relating to employer National Insurance contributions on small and medium-sized enterprises, including social enterprises in Great Britain and Northern Ireland.(2) The report under subsection (1) must, in particular, assess the impact on—(a) administrative and compliance costs arising from changes to payroll, pension and benefits administration,(b) the complexity of operating salary sacrifice and workplace pension arrangements,(c) the operability of these changes for those in receipt of irregular remuneration, those with seasonal working patterns or those with multiple employments(d) employment costs, and(e) the ability of small and medium-sized enterprises to attract, retain and reward staff.(3) The report under subsection (1) must assess the impact of this Act in the context of the cumulative impact of changes to employer National Insurance contributions affecting small and medium-sized enterprises since July 2024.”Member's explanatory statement
This amendment requires the Treasury to commission and lay before Parliament an independent review of the impact of the Act’s employer National Insurance provisions on small and medium-sized enterprises and social enterprises, including administrative complexity and employment costs, and in the context of the cumulative effect of recent changes to employer National Insurance contributions.

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[Baroness Neville-Rolfe (Con)]

My Lords, Amendment 31 is in my name and that of my noble friend Lord Altrincham. I thank the noble Baroness, Lady Altmann, and the noble Lord, Lord Londesborough, for putting their names to it. I will also speak to Amendment 33 in the name of the noble Baroness, Lady Sater, a charity professional in the best meaning of the word. She is very sorry not to be here today. Her amendment is in the same spirit as ours, and she is right that the impact on charities is very important and should be kept under review.

His Majesty’s Official Opposition will continue to be a voice for small and medium-sized enterprises. We have heard, time and time again, from small businesses about the weight of burden that this Government continue to pile upon them—tax after tax, regulation after regulation. The Minister did not even answer my question at Question Time this morning about whether he would consider options for exempting SMEs from the burden of regulation. This amendment presents such an opportunity for the Government and would demonstrate that they listen; to show that they take seriously the mountains of complexity heaped upon small businesses and small social enterprises; and to provide some measure of relief and some acknowledgement publicly that these cumulative pressures cannot be ignored indefinitely.

The Minister suggested in Committee that only some 10% of employees in small and medium-sized enterprises have pension contributions through salary sacrifice that exceed the proposed cap. That may well be the case today, but with public awareness, more SMEs may introduce it. We on these Benches would like to see that figure grow, as saving for a pension is one of the most desirable and cost-effective methods of saving, as I am always explaining to the next generation. Salary sacrifice is also one of the few tools available to a small employer competing against a large corporation for talent and productive workers.

An independent review over a year would allow us all to consider the impact of the changes on SMEs and charities. I beg to move.

[Baroness Altmann (Non-Afl)]

My Lords, I have added my name to Amendment 31, and I support Amendments 32 and 33. All these amendments seek to help the Government to recognise that there is a serious impact if this Bill goes through as currently proposed, particularly on employers in smaller and medium-sized companies. I believe that the Minister confirmed that some 99% of employers in auto-enrolment are SMEs. The costs of complying with pension auto-enrolment have already been significant. Some of those employers have been advised that it is a “no-brainer” for them to use salary sacrifice as a way of mitigating some of the extra costs involved in having to provide pensions for their staff who want to stay in them.

We have imposed these extra costs on employers already; some employers have been good enough to put in more than the auto-enrolment minimum. What this Bill would do is to pile extra costs on to them, because if they are using salary sacrifice, they will have to renegotiate employment contracts, change payroll software systems, change the information that they give to their workforce about their pension arrangements and answer lots of questions that are bound to arise as a result of any of the changes that are proposed.

It should therefore be incumbent on the Government—indeed, it is quite astonishing that this was not already done before we got the legislation—that there is a proper, independent review of the costs imposed on smaller and medium-sized employers as a direct result of this legislation. That should inform the way in which the legislation is implemented, so that we try to do whatever we can to avoid the kind of problems that we have seen, where there are implications for employment levels, salary levels and indeed for pension investment and provision as an unintended consequence of perhaps well-meaning legislation, or legislation designed to hit an entirely different target, that is potentially going to fall on both employers and their workforces. We have seen that the extra national insurance costs have had an impact on employment levels already. I ask the Minister again: what is the rush in getting this legislation on to the statute books before we know its implications and what it will mean in practice for the corporate sector? First, can the noble Lord explain the rush and, secondly, consider putting this on hold until the full implications are better understood?

--- Later in debate ---

[Baroness Neville-Rolfe (Con)]

My Lords, I thank noble Lords for their contributions to this debate, which is an important one, and I am grateful to those who spoke in support. We heard from the noble Lord, Lord Freyberg, about the positive implications for the creative sector, and of course my noble friend Lord Leigh, who is very much in touch with trade representative bodies and charities, supported the amendment. The noble Lord, Lord Londesborough, raised again the question of data, which we were talking about at Question Time, and his concerns about the demise of SMEs under the burden of red tape.

Finally, I strongly support the noble Baroness, Lady Kramer, and the Federation of Small Businesses, which is such a useful source of information, on the need to be able to keep employees happy and to retain them. The same is true in charities and social enterprises, as I am sure my noble friend Lady Sater would say if she had been able to be with us today.

The case for a comprehensive and independent impact assessment of this legislation on small and medium-sized enterprises and social enterprises could not be clearer, nor, I am afraid to say, could the Government’s failure to undertake one. We have heard today of the depth and breadth of concern, and that is why we have voted and agreed on an exemption for SMEs and charities. But there is a risk that this will be rejected in the other place, in which case this review will be even more important.

Although some documents have been published, as the Minister said, the Office for Budget Responsibility’s own analysis points to significant uncertainty surrounding the effect of these measures. That uncertainty is not a reason for the Government to look away; it is precisely the reason that they must look more closely. When the OBR itself signals uncertainty, the duty falls on the Government to acknowledge what they do not yet know and to commit to finding it.

That brings me to an important matter which the Minister may want to comment on or follow up, perhaps in the next group. The Government announced last year a commitment to reduce the administrative burden on business by 25%. I remember welcoming that announcement. It was not a quiet aspiration buried in a footnote; it was a public commitment made with fanfare. Yet if the Government’s answer whenever we ask about the administrative impact of a specific policy is simply that such an impact cannot be measured, one must ask how precisely the Government intend to meet that target.

I fear there are only two conclusions. Either the Government have a means of measuring administrative impact, which they have chosen, curiously, not to deploy on this occasion, in which case they should do so, or the commitment to reduce the burden on business by a quarter was an empty promise from the outset.

But we have had a good debate today, and time is getting on. In the circumstances, I beg leave to withdraw my amendment.

Amendment 31 withdrawn.

National Insurance Contributions (Employer Pensions Contributions) Bill

Baroness Neville-Rolfe Excerpts

3rd reading
Thursday 12th March 2026 Lords Chamber

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, the cost of pension salary sacrifice was set to treble to £8 billion a year by the end of this decade. That increase has been driven mostly by high earners, with additional rate taxpayers tripling their salary sacrifice contributions since 2017. This includes individuals sacrificing their bonuses without paying any income tax and national insurance contributions on them. The status quo is neither fair nor fiscally sustainable. We simply cannot afford to allow the cost of pension salary sacrifice to balloon, benefiting predominantly higher earners.

The Bill therefore introduces a cap of £2,000 under which no employer or employee national insurance contributions will be charged on any pension contributions. It protects ordinary workers by using salary sacrifice and limits the impact on employers while ensuring that the system remains fiscally sustainable. The majority of those currently using salary sacrifice will be unaffected.

Saving into a pension, including via salary sacrifice, will also remain hugely tax-advantageous under these changes. The Government currently provide over £70 billion of income tax and national insurance contributions relief on pension contributions each year. That spend will be entirely unaffected by these changes. These are fair and balanced reforms. They protect lower and middle earners. They give employers many years to prepare. They preserve the incentives that underpin workplace pension saving and they ensure that the tax system is kept on a sustainable footing. I beg to move.

[Baroness Neville-Rolfe (Con)]

My Lords, as we said at Second Reading, in Committee and again on Report, this is a poorly conceived Bill, because it prioritises the hope of short-term tax gain over the far more important task of sustaining a system that encourages and rewards responsible pension saving. Throughout the Bill’s passage, we have sought to examine it line by line to see what the Government’s policy will actually mean in practice, and what has become clear is deeply troubling.

This measure risks deterring pension savings. It will hit those on lower and middle incomes, including some earning under £30,000 a year. It will impose yet more compliance, payroll and administrative burdens on business, particularly on small businesses and charities that are already under considerable strain. It will particularly penalise those who are repaying student loans.

Against that background, I am proud of the scrutiny that the House has brought to the Bill. Your Lordships have approached it with care, expertise and determination to improve it where we can. As a result, with unusual speed, good order and good humour, the House agreed five amendments last week which seek to limit some of the Bill’s most damaging consequences.

First, our Conservative amendments ensure that basic rate taxpayers, those on the lowest incomes, are protected from the NICs charge. If the Government insist that this policy is directed at higher earners, not those on modest incomes trying to save for their retirement, this should be explicit in the Bill.

Secondly, we proposed an exemption for small and medium-sized enterprises and small charities. These organisations are the backbone of our economy and our communities, and they should not be burdened with yet more payroll, compliance and administrative costs as a result of this policy. We have all seen the impact on them of last year’s £25 billion hit.

Thirdly, we proposed that most of the regulations under the Bill should be subject to the affirmative procedure. Given the uncertainty that surrounds how these provisions will apply, it is only right that Parliament has the opportunity to scrutinise those regulations properly.

Fourthly, my noble friend Lord Leigh of Hurley successfully secured an amendment to limit the impact of the Bill on those repaying student loans, who would be hardest hit by the measure.

Finally, the amendment by the noble Baroness, Lady Kramer, raised the cap to £5,000, helping to mitigate some of the worst impacts of the Bill on those least able to bear them.

In recognition of the seriousness of the issues raised by the Bill and the progress made here, I shall take a moment to thank a number of noble Lords for the diligence with which they have scrutinised it. I am particularly grateful to my noble friends Lord Leigh of Hurley, Lord Fuller, Lord Ashcombe and Lord Mackinlay of Richborough, and the noble Baroness, Lady Altmann. They have worked tirelessly, both with me and my noble friend Lord Altrincham, and their amendments have prompted important debates. I am also grateful to our Whips’ Office team, especially my adviser Oliver Bramley, for their unstinting and effective support, and I thank the noble Baroness, Lady Kramer, for the constructive way in which she has engaged with us during the course of the Bill. Hers has been a powerful voice in holding the Government to account.

More broadly, I thank other noble Lords across the House, including the noble Lords, Lord de Clifford, Lord Londesborough and Lord Freyberg, for their thoughtful contributions in scrutinising the legislation. Finally, it would be remiss of me not to thank the Minister for the way in which he has engaged with the House during the passage of the Bill. I am particularly grateful to him and his officials for their response to the letter I sent following Committee. It addressed a number of the questions raised during our debates and was both timely and informative.

I hope that, as the Bill proceeds, the Government will reflect carefully on the points raised and show a willingness to move on the issues that have united so many across this House.

[Baroness Kramer (LD)]

My Lords, this was a very short Bill but, frankly, I do not know how it got through the House of Commons and came to this House without clarity on the fundamental issue of whether we were talking about a cap that was per employee or per employment. I thank the noble Lord, Lord Livermore, for seeking the answers to that and making sure we were informed on Report. We were looking at two different Bills, not knowing which one we were working on, until we reached that point in the conversation, so I thank him.

I also join in saying that this was a collaborative effort, not in opposition to the Government but because we were of common mind across the Conservative Benches, my Benches and the Cross Benches—the noble Lords, Lord Londesborough, Lord de Clifford and Lord Freyberg, as the noble Baroness, Lady Neville-Rolfe, mentioned, all played a crucial role in this. I particularly congratulate my Benches on taking a vow of omertà not to speak on many occasions on the Bill so that we moved it rapidly through the House. I think the whole House was grateful that, on Thursday, when we finally came to vote, we were done in less than two hours rather than delaying everyone from departing on a Thursday. I thank my team very much for their discipline. I also thank Ulysse Abbate in our Whips’ office, who is new to this kind of work, but my goodness is he good at content and co-ordination.

This was a good example of people, having realised they are taking the same position, working together to make sure that it is effective. I very much hope that the Commons will appreciate the significance of the amendments passed to the Bill. Of all the Bills I have ever seen, this contains so many unintended consequences that, even if you believed in the fundamentals behind it, you would need to make substantial change for it to be in any way workable and not ending up targeting unintended groups, such as those on basic incomes. It would be devastating for people repaying student loans, which has to be fixed, and very difficult for SMEs. We chose different routes to try to make those changes and ended up with a very solid group of amendments. I thank the House for co-operating on this issue.

National Insurance Contributions (Employer Pensions Contributions) Bill

Baroness Neville-Rolfe Excerpts

Consideration of Commons amendments and / or reasons
Wednesday 25th March 2026 Lords Chamber

Moved by

[Baroness Neville-Rolfe]

At end insert “, and do propose Amendments 1B and 1C in lieu—

1B: Clause 1, page 2, line 23, at end insert—
“(3A) The amendments made by this section do not have effect in relation to basic rate taxpayers until the assessment required by section (Economic and behavioural impact assessment: basic rate taxpayers: Great Britain) has been laid before Parliament.”

1C: After Clause 1, insert the following new Clause—
“Economic and behavioural impact assessment: basic rate taxpayers: Great Britain
(1) The Secretary of State must—
(a) prepare an economic and behavioural impact assessment of the expected effects of the provisions of this Act on basic rate taxpayers in Great Britain, and
(b) lay that assessment before Parliament.
(2) The assessment must, in particular, include—
(a) an analysis of the expected behavioural effects of the provisions of this Act, including changes to pension contribution patterns, salary sacrifice arrangements, and employment practices, and
(b) an assessment of the expected impact on net incomes, pension savings, and pension adequacy,
for basic rate taxpayers.
(3) In preparing the assessment, the Secretary of State must have regard to—
(a) the adequacy of retirement incomes, and
(b) the effect of the £2,000 cap on long-term financial security,
for basic rate taxpayers.””

[Baroness Neville-Rolfe (Con)]

My Lords, I was disappointed that the Government sought to have all amendments passed by your Lordships’ House treated as engaging financial privilege. In light of this, we are unable to insist upon the amendments passed by your Lordships’ House. However, the issues we have raised remain of real significance. There is no sign that the Government have seriously engaged with the concerns we expressed. Significant features remain undefined.

The amendments we have brought forward today reflect a concern raised by many noble Lords on Report: crucially, that the Government have not undertaken the necessary analysis to understand how the Bill will affect basic rate taxpayers, those repaying student loans, and SMEs and charities.

The most worrying thing about the Bill is that it will reduce the incentive to save, particularly among the less well paid. Whether Ministers like it or not, it strikes at the heart of this and will inevitably reduce pension adequacy. The Minister himself has admitted that many of those paying the basic rate of tax and even some earning under £30,000 a year will be affected.

Not only will the Bill affect savers and pensions adequacy, it will impose costs on businesses and charities. The detail on these points is, concerningly, seriously lacking. Our three amendments in lieu and the consequential amendments dealing with Northern Ireland require a proper assessment of the projected economic and behavioural impact of this policy on those three groups. Crucially, this work has to be carried out before the Act comes into force.

First, for basic rate taxpayers there is a very real concern that this policy will reach far beyond those it is ostensibly aimed at. Individuals on modest incomes—those paying tax at the basic rate—may find themselves drawn into its effects. They are ordinary working people, often making careful decisions about how much they can afford to save. Yet we have not seen a clear assessment of how their net incomes will be affected, how their pension-saving behaviour may change or what this will mean for the adequacy of their retirement incomes.

Secondly, for those repaying student loans, the interaction between salary sacrifice, pension contributions and student loan repayments is not straightforward. There is a real risk here that some individuals repaying student loans could face higher effective deductions from their income or altered incentives around saving for retirement. Our amendments would ensure that the Government properly assess the impact of these interactions.

Thirdly and finally, small and medium-sized enterprises and charities are the backbone of our economy and our communities. They operate with limited margins and limited administrative capacity. Changes to employment costs, compliance requirements or remuneration structures can have tangible effects on hiring, wages and growth.

The Government must be able to answer these questions. By how much will this Bill increase their costs? Will it change employment practices? Will it have an impact on wage growth or the critical area of job creation? This Bill would change how people save, how employers structure pay, and how organisations make decisions.

Our amendments would simply require the Government to set out clearly and transparently what the effects are expected to be. They would offer the Government a constructive way forward and would seem to get round the problem of financial privilege. In responding, it would be helpful if the Minister could explain more clearly precisely why these provisions do not come into force until 2029. It looks as if this matter is regarded by the Government not as a serious measure but as a nasty present to their successors.

[Lord Leigh of Hurley (Con)]

My Lords, I will speak briefly to this group of amendments in lieu. I am grateful to my noble friend Lady Neville-Rolfe for returning these issues to the House despite the very disappointing decision to cloak all our previous amendments in the financial privilege. Up and down the country, SME businesses are horrified by this. They have had a wall of difficult legislation sent their way, such as the national insurance increase and the Employment Rights Bill, so they have not focused on this, but those I talked to who have focused their mind on it are very unhappy to say the least with the possibility of this Bill affecting their business.

I want to focus on one particular issue. We have heard repeatedly in recent weeks of the position facing graduates repaying student loans, which is simply not fair. For those on plan 2 loans in particular, the picture is particularly stark: an anaemic jobs market, high rents, high living costs and, on top of that, what amounts to a 9% graduate tax with interest rates of around 6.2%, meaning that for many, full repayment is not possible. I urge the Minister and others to speak to their children or their grandchildren who will tell them that they are put off by this Bill.

This policy now risks making the matter worse. It threatens to increase the effective burden on graduates precisely when they are trying to do the right thing by saving for their retirement through salary sacrifice. They see the costs that are ahead of them when they retire. For many, particularly recent graduates, disposable income is already stretched to the limit with rents and the cost of living, so they have little scope to save beyond the auto-enrolment minimum, which, as we have heard, is insufficient to provide savings for their longer life. If the Government undermine the salary sacrifice regime, they risk entrenching a generation who simply cannot afford to save enough for their retirement.

In conclusion, that is why this amendment from my noble friend matters. It asks the Government to do what they should already have done: properly assess the impact of this policy in relation to student loans. I do not think anything the Minister said specifically addressed the issue of the impact on students. I did not see it in any of the Explanatory Notes or anywhere else. It may have been because they did not think it affected it or they did not realise it, but it has not been done. In the absence of that work, the least the Government can do is pause and consider the long-term consequences before pressing ahead. The Treasury now has the opportunity and the responsibility to get this right. I urge the Minister and all other Peers to do so.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords who have spoken in this debate.

On the topic of impact assessments, I remind noble Lords of the information that we have already published. The tax information impact note sets out the expected impacts of the policy on individuals, employers and the Exchequer. The policy costing note sets out detail on the costing of the measure, including the tax base, static costing and a summary of behavioural responses expected by employers and employees. The Office for Budget Responsibility published its economic and fiscal outlook, which provides the OBR’s independent scrutiny of the policy costing. The OBR also published a supplementary forecast note which provides additional information it received prior to last year’s Budget.

I also remind noble Lords that the expected behavioural impacts of this measure have been set out in the policy costing note and both the OBR’s economic and fiscal outlook and supplementary note. Both the Government and the OBR have been very transparent about the expected behavioural responses by employers and individuals.

The noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Londesborough, asked about the 2029 implementation date. As I have said already, we chose a long lead-in time of April 2029 to give employers maximum time to prepare for the changes. As I have mentioned before, HMRC is engaging with employers, payroll providers and software developers to deliver the changes in the most suitable way with the fewest administrative burdens for businesses of all sizes which use salary sacrifice.

The noble Lord, Lord Leigh of Hurley, spoke about small and medium-sized enterprises. I say again that the £2,000 cap means that 90% of employees and SMEs making pension contributions through salary sacrifice will be entirely unaffected. The noble Lord also mentioned students. He is absolutely right; as I said before, it is right that we focus on outcomes for younger generations, particularly given that, over the past 14 years, they saw their fees trebled, interest rates increased and maintenance grants scrapped. The £2,000 cap means that 90% of graduates under 30 repaying student loans who are saving into their pension are completely unaffected by this measure.

These are fair and balanced reforms. They give employers many years to prepare and they ensure that both our pensions system and the public finances are kept on a sustainable footing. The £2,000 cap protects lower-earning employees who use salary sacrifice to make pension contributions and preserves the tax benefit of salary sacrifice for all employees on the first £2,000 of their contributions.

Importantly, these changes leave the tax reliefs on regular pension contributions completely untouched. These reliefs are worth £70 billion a year and are available to all workers and employers, not just those who use salary sacrifice. For the reasons that I have set out, I respectfully ask the noble Baroness, Lady Neville-Rolfe, not to press her Motions. I beg to move.

[Baroness Neville-Rolfe (Con)]

My Lords, I am afraid that I am not satisfied with the Minister’s response, particularly on the question of the behavioural assessments that we have had. They are really not fit for purpose. I give notice that will I seek to test the opinion of the House on Motion A1 and, if successful, on further Motions.