Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022

Baroness Penn Excerpts

Tuesday 6th December 2022 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022.

Relevant document: 19th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, in the Autumn Statement, the Government set out their prioritisation for taxation to be fair by following two broad principles: first, that we ask those with more to contribute more; and, secondly, that we avoid the tax rises that most damage business.

Noble Lords will remember that the National Insurance Contributions (Increase of Thresholds) Act 2022 increased the point at which class 1 and class 4 NICs are paid to align with the personal allowance for income tax. As a result of that legislation, almost 30 million working people are better off. We are here today to discuss the final element of the Government’s ambition to align national insurance contribution thresholds with the personal allowance for income tax.

I note that, in its 19th report, the Secondary Legislation Scrutiny Committee raised these regulations as an instrument of interest. The regulations introduce a new threshold within class 2 NICs from which self-employed individuals start to pay class 2 NICs. This will be known as the lower profits threshold. Class 2 NICs will now be due only if profits exceed the new lower profits threshold, set at £11,908 for the 2022-23 tax year.

The new lower profits threshold will be aligned with the personal allowance. However, the threshold is being set at £11,908 for 2022-23 to reflect the fact that personal NIC thresholds were increased from July this year, meaning that individuals will benefit from an increased threshold for nine months of the tax year. For 2023-24, the self-employed thresholds will be set at £12,570. This means that no one will pay a penny of income tax or national insurance contributions on their first £12,570 of income from 2023-24 onwards, allowing people to keep more of what they earn.

However, this measure goes further. Class 2 NICs are the mechanism by which the self-employed become entitled to certain contributory benefits, such as the state pension and statutory maternity pay. To ensure that individuals do not lose access to their benefit entitlement, the existing small profits threshold will be maintained as the point at which the self-employed gain access to certain contributory benefits. This means that individuals will benefit from the increased threshold for paying class 2 NICs without losing their entitlement to contributory benefits.

This measure will apply retrospectively from the start of the 2022-23 tax year, in line with the provisions made in the parent Act. This means there will be no delay in this measure benefiting around 500,000 self-employed individuals, saving them £163.80 a year. Changes will be delivered via the annual self-assessment process for the vast majority of customers, following the end of the tax year.

These regulations fulfil the Government’s obligation to increase the point at which the self-employed pay class 2 NICs. Importantly, they ensure that thresholds are aligned and our tax code is simplified. I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, as a supporter and fan of national insurance, I did not want these regulations to pass unnoted. I am a believer in the national insurance system—I guess there are not many of us left—where people pay contributions and that provides entitlement to national insurance benefits.

It has been understood, from the beginning, that there are people in employment and people who are self-employed. For practical reasons, different sets of rules have to apply to each group of workers. Nevertheless, the objective should always be neutrality in the financial impact, otherwise it is bound to give rise to issues of financial arbitrage regarding being employed or self-employed. That is all well understood. I will avoid going off down the IR35 track; there will be plenty of other opportunities to pursue that.

On the face of it—I would be interested in the Minister’s views—this change might be seen as a move towards reducing inequality between the employed and self-employed. However, in practice, it increases the difference. The tell is the fact that there is a cost, in a normal year, of £100 million. In the context of the figures we have seen in recent Budgets, that is not an enormous sum, but it suggests that this is a move away from neutrality and that it further increases the advantages that people perceive in being self-employed as opposed to being employed, with all the problems that flow from that. The background to this is clearly the extent of the acknowledged problem of fake self-employment for financial reasons. Perhaps the Minister would indicate, in broad terms, quite how this change fits in with what I hope is an understanding that there should not be excessive financial advantages in being self-employed.

I heard what the Minister said about the changes to entitlement to benefits. I emphasise that, in achieving neutrality between employed and self-employed contributions, there should equally be neutrality between the benefits paid to people who have paid the different types of contribution.

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Of course, when considering this instrument we must also remember that the Government are freezing tax thresholds in the coming years. This means that some of those benefiting from this measure may find themselves paying NICs once again in future years. That will not come as a surprise to many, given successive Conservative Governments’ habit of increasing personal taxes, but it highlights the inconsistency of Mr Sunak’s thinking.

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their contributions to this brief debate. We discussed some of these issues when the parent Act was passed. We also discussed issues around the national insurance system with the introduction and then removal of the health and care levy.

In response to the noble Lord, Lord Davies of Brixton, the intention behind this change to the national insurance system, which I think reflects a longer-term ambition in the manifesto to align the income tax threshold and the NICs threshold, and the reason the measure was brought forward last spring, was to provide people with more money back in their pockets at a time when the cost of living was rising significantly. The most effective option to do this, particularly targeting it at lower-paid, self-employed people or workers, was an uplift in the NICs thresholds. Although it may not deliver on the wider ambition to have greater equality between NICs contributions from the employed and self-employed, none the less it had a very good policy rationale, one that the Government were keen to deliver on.

On that longer-term ambition, perhaps I should not have expressed it in that way because I do not think the Government have any intention at the moment to change how employed and self-employed NICs are treated. The raising of the threshold was a measure focused on helping people with the cost of living. It was seen to be an effective way to target resources at those further down the income scale. This SI seeks to complete the process that started with the Act, but we had to take the powers to do this last element because it was a bit more complicated and we needed a bit more time to work it through. I hope that answers the noble Lord’s question.

Motion agreed.