National Insurance Contributions (Increase of Thresholds) Bill

Baroness Penn Excerpts

2nd reading
Wednesday 30th March 2022 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

[Baroness Penn (Con)]

My Lords, I beg to move that the Bill be now read a second time. At a time when the UK faces the twin challenges of recovering from the Covid pandemic and responding to Putin’s appalling attack on Ukraine, my right honourable friend the Chancellor’s Spring Statement set out how we will build a resilient and growing economy that will allow us to respond to such crises at home and help our friends abroad in times of need. At the heart of that Statement was a three-part plan to support families with the cost of living, support growth in the economy and ensure that the proceeds of that growth are shared fairly.

While our tax plan will deliver significant benefits to both people and the economy, it is also underpinned by the principle of fiscal responsibility. We have ensured that we maintain space against our fiscal rules, we have continued to be disciplined and we have carefully considered the macroeconomic outlook. It is particularly important that the Government take this prudent approach because, in the next financial year, we are forecast to spend £83 billion on debt interest, the highest amount on record and almost four times the amount we spent last year.

These figures underline why the Government cannot shy away from some tough decisions. That is why the health and social care levy announced last year will remain in place. We need to safeguard a source of funding for our NHS and for those who need care throughout their lives. However, as the Chancellor pointed out, a long-term funding solution for the NHS and social care is not incompatible with reducing the tax burden on working families. This brings me on to the specifics of this national insurance contributions Bill, which is a key element of the Chancellor’s tax plan.

The Bill legislates for the two employee and self-employed NICs measures set out by the Chancellor in his Spring Statement. Noble Lords will be aware that it has long been the Government’s ambition to promote tax cuts for working people and to simplify the tax system. That is why since 2010 we have taken millions of people out of income tax by raising the personal allowance from £6,500 to its new level of £12,570. However, as my right honourable friend the Chancellor explained, the equivalent national insurance thresholds remain at around £3,000 lower. As a result, at the last general election the Prime Minister pledged to increase NIC thresholds, and in 2020 the Government took a significant step forward to this by increasing the threshold to £9,500.

The Bill’s first measure will increase the NIC primary threshold and the NIC lower profit limit to £12,570 from 6 July. These are the thresholds at which employed and self-employed respectively start to pay NICs. The increase in these thresholds of around £3,000 will equalise the NICs and income tax thresholds and in doing so create a fairer and simpler tax system. As the Chancellor has explained, this means that people will be able to earn £12,570 a year without paying a single penny of income tax or national insurance. This is the largest increase in a starting threshold ever and the largest single personal tax cut in a decade, reducing the tax burden by £6 billion for 30 million people across the United Kingdom.

On an individual level, a typical employee will see their tax bill reduce by £330 in the year from July, while the equivalent saving for a self-employed worker would be worth over £250. In addition, around 70% of all workers will have their NICs cut by more than the amount that they will pay through the new health and social care levy. Further, over 2 million people will be taken out of paying class 1 and class 4 NICs and the health and social care levy altogether, so many people will feel the benefits of this tax cut very soon.

However, the Government recognise that this is a big change for many employers and payroll software providers. We believe that the July implementation date strikes the right balance between ensuring that individuals benefit from the increase as soon as possible, while giving employers and payroll software providers time to update and test their systems. This avoids millions of taxpayers having to make manual claims for refunds at the end of the tax year and employers having to make payroll corrections.

The Government are also aware of the huge pressures faced by those working for themselves but earning low amounts due to the rising cost of living. To support this group, the Bill gives the Treasury the power to lay an affirmative statutory instrument. This will mean that, from April, those with profits between £6,725 and £11,908 will not pay class 2 NICs, and this will rise to £12,570 from April 2023. This measure will benefit half a million self-employed people, saving them up to £165 a year. This group will still be able to receive NIC credits just as they have done in the past. As a result, their ability to access the contributory benefits and build up state pension entitlement will be unaffected. Taken together with the increase to the primary threshold and the lower profits limit, the Government will meet in full their commitment to ensure that the first £12,500 that an individual earns is free of tax.

The Bill represents the largest cut to personal tax in a decade. It rewards workers while supporting those lowest earners and, ultimately, the Government believe that the Bill will make a real difference to people’s lives at this challenging time. I commend it to the House and beg to move.

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[Baroness Penn (Con)]

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

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

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

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

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

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

[Baroness Kramer (LD)]

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

[Baroness Penn (Con)]

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

[Lord Tunnicliffe (Lab)]

I confess to being as confused as the noble Baroness, Lady Kramer. Please could the Minister write to all noble Lords who have participated in the debate.

[Baroness Penn (Con)]

I will do so and place a copy in the Library so that all noble Lords can access it. I believe I have addressed most of the points raised in this debate, but if I have not, perhaps I could address any outstanding points in my letter.

I reiterate my thanks to noble Lords for their contributions to this debate and for considering this Bill so quickly. In short, the Bill is a fundamental part of the Government’s plans to use the tax system to support households with the cost of living, boost the economy through support to businesses and help workers enjoy more of the proceeds of growth. I commend it to the House, and I beg to move.

Bill read a second time and committed to a Committee of the Whole House.

National Insurance Contributions (Increase of Thresholds) Bill

Baroness Penn Excerpts

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

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful to the noble Baroness, Lady Kramer, for tabling these amendments and facilitating a short Committee debate. Had we been afforded more time to look at the Bill, and had its scope been different, we would no doubt have seen far more amendments tabled and therefore had a number of very interesting debates. However, the Government know that they are behind the curve when it comes to the cost of living, and we must therefore deal with their piecemeal proposals at pace as they come forward.

Amendment 1 would accelerate the timescale for raising the NICs threshold for class 1 contributions. Although it was acknowledged during the Spring Statement that this change would take place only from July, many will have missed that important detail. The Minister will shortly tell us that this time is needed for payroll systems to be updated, and so on. As somebody who believes in due process, I am somewhat persuaded by that argument, but does she agree that, had the Chancellor acted quicker to deal with people’s genuine financial concerns, systems could have been fully operational by next week?

The rising cost of living has been making headlines for several months; it is not a new phenomenon, and I would be surprised if this has not been under active consideration for many months. There was certainly no need to wait until late March to make the announcement and publish the relevant legislation. After all, the health and social care levy was announced, seemingly at random, outside the usual cycle of fiscal events. Can the Minister confirm my understanding that higher class 1 contributions between April and July will stand, rather than the excess being given back throughout the tax year, or at its end, as a rebate? In that case, does that not raise the question: when is a tax cut not a tax cut?

We know that for many, the benefits derived from threshold equalisation will not be sufficient to offset the 1.25% increase in contributions. For them, it will not feel like a tax cut. The decision to cover only three-quarters of the tax year will inflict additional pain on many in the coming weeks and months. The energy price cap is going up on Friday, but the Chancellor’s somewhat lackadaisical cavalry will arrive only in July. It is little wonder that people across the land are frustrated.

Turning to Amendments 2 and 3, I can certainly see the appeal of forcing the Chancellor to face up to the reality of his decisions. Amendment 2 focuses on disposable incomes. We know from analysis carried out by the Institute for Fiscal Studies, the Resolution Foundation, the Joseph Rowntree Foundation and others that April’s full suite of tax changes will leave people across much of the income distribution with less. The Treasury continues to insist that its proposals are progressive, but the fact remains that a real-terms cut to social security payments will leave many at the lower end of the income scale facing genuine financial difficulties. The Government say they want people to turn away from high-cost credit and use low or no-cost credit responsibly. The best way to encourage such behaviour is not to push people into poverty and debt in the first place.

Amendment 3 relates to the tax burden attached to earned and unearned income. The Government are increasingly fond of increasing taxes on workers. Given the announcement about income tax, it seems it is in order to fund giveaways which benefit other groups, such as landlords and investors. I have no issue with the people who benefit from unearned income, but that should not necessarily be given preferential treatment over wages in the tax system.

I look forward to the Minister’s response, as the amendments raise important issues. Ultimately, however, it is not for us to amend a Bill of this nature, given that it passed through the elected House without issue. We may not agree with the Government’s approach, but they must have their Bill and own any fallout that comes from it.

[Baroness Penn (Con)]

My Lords, on the first amendment tabled by the noble Baroness, Lady Kramer, which is on the timing of the threshold change, I am afraid I will have to disappoint her. The answer to the amendment and the point she raises has not changed in the last six days. The Government brought in immediate changes to help with the cost of living last Wednesday, such as the cut to fuel duty. However, for the threshold change, we are now just a week away from the start of the next tax year and more time is needed for employers, software developers and payroll providers to deliver this measure.

The noble Lord, Lord Tunnicliffe, asked why the Chancellor had not acted more quickly, given that we could see the pressures on the cost of living building, and the noble Baroness, Lady Kramer, referred to universal credit. The Chancellor took action on universal credit in the Autumn Budget, cutting the taper rate and increasing the work allowance. Therefore, those measures can come in from April.

The noble Lord also mentioned that people would need to wait until July for support with their energy bills. Of course, the Chancellor announced a £9 billion package of support for energy bills not in the Spring Statement but at the time of the announcement of the change in the energy price cap. People will begin to see the benefit of that through the council tax rebates we are offering everyone in bands A to D of £150, and the £200 off bills now to be paid back over the coming years.

July is the earliest that this policy can be implemented by all software developers. It avoids millions of taxpayers having to make manual claims for refunds at the end of the tax year and employers having to make payroll corrections. Overall, the delivery timetable strikes the important balance between ensuring that individuals see the benefits of the increase as early as possible and allowing employers and payroll software providers sufficient time to update and test their systems so that the change is delivered smoothly, and for individuals to enjoy the benefits at the same time.

The second amendment asks the Government to lay a report considering the impact of the Act on disposable incomes, including if they are combined with a reduction in the national insurance rates of 1.25%. Her Majesty’s Treasury publishes regular distributional analysis of the impact of tax, welfare and spending decisions on households. The analysis published at the Spring Statement shows that, in 2024-25, the tax, welfare and spending decisions made since the 2019 spending round will have benefited the poorest households the most as a percentage of their income. The impact of government policy since spending round 2019 on the bottom four deciles is expected to be worth more than £1,000 a year, while there will have been a net benefit on average for the poorest 80% of households.

The aim of the Government’s regular distributional analysis is to present a comprehensive picture of the net effect of tax or welfare changes on household incomes in the round. As each policy decision will have a different effect on households, presenting the total impact over a relatively long period provides a more robust and stable approach than looking at every policy individually. Fiscal events are the appropriate time at which to publish comprehensive analysis of this sort because they allow the full range of government policy to be analysed together, in combination with the most up-to-date forecasts from the OBR.

The final amendment from the noble Baroness, Lady Kramer, concerns the Government laying a report to consider the impact of the Act on earned and unearned income, including an assessment of the impact of the future reductions in income tax. She touched on the history of national insurance and why it is not charged on unearned income. National insurance contributions are part of our social security system, which is based on the long-standing contributory principle, centred on paid employment and self-employment, with employers, employees and the self-employed paying towards the protection of those who have been in the labour market. Payment of NICs builds an individual’s entitlement to claim contributory benefits, which then replace earnings in certain circumstances, for example if someone is unable to work or is retired. Unearned income is generally excluded from a liability to NICs as it is not derived from paid employment.

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Moved by

[Baroness Penn]

That the Bill do now pass.

[Baroness Penn (Con)]

My Lords, it has been a brief Bill, so my comments will match that. As ever, I am grateful to all noble Lords for their interest in and contributions to the Bill. I am grateful to the House authorities and parliamentary staff for their hard work behind the scenes in turning this Bill around at short notice and on a single day.

I want to acknowledge the officials who have worked so hard on this Bill at pace: the Bill team, the policy teams at HMRC and Her Majesty’s Treasury, the lawyers in both departments, the Office of the Parliamentary Counsel and the clerks in this place. I also thank the noble Lord, Lord Tunnicliffe, the noble Baroness, Lady Kramer, and their researchers for being so adaptable and contributing to the Bill in their normal detailed and constructive way, also at short notice but with welcome brevity.

I could remind noble Lords of the benefits of the Bill a further time but, given that we have taken all stages in one day, I will refrain from putting them forward again. The Bill delivers a significant tax cut to many working people at a time when they really need it. I therefore commend it to the House and beg to move.