National Insurance Contributions (Increase of Thresholds) Bill

Lord Davies of Brixton Excerpts

2nd reading
Wednesday 30th March 2022 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, this Government are collectively incapable of shame. I hope that, even if she cannot admit it, the Minister understands the shame that is inherent in the overall package coming from the Spring Statement. We will discuss the package in general tomorrow; I hope to intervene in that debate.

Coupled with the changes in personal taxation in the Spring Statement, this Bill is a deceit on the National Insurance Fund. I am a strong supporter of a fair and effective national insurance scheme with adequate benefits in retirement as well as in sickness and unemployment, funded by national insurance contributions paid while at work, coupled with a necessary Treasury supplement. This concept still has widespread support, even if we have strayed some way from its achievement in practice. The fact that we still use the term “national insurance” after more than 70 years is testimony to the strength of the idea. The Government’s proposals here and in the Statement ride roughshod over this concept and treat the idea of national insurance with contempt, making changes to national insurance contributions as a short-term political fix.

The impact of the Bill’s proposals on personal taxation must be judged in the context of the overall package. As such, they constitute a total travesty by being a paradigm of incoherent and unfair taxation policy. In effect, we have a promise of a cut in the standard rate of income tax some time in the future that is effectively being funded by an increase in national insurance contributions. In other words, a cut in progressive taxation is being funded by an increase in a more regressive form of tax.

National insurance contributions are regressive because of the upper threshold, above which the contribution rate is much lower. Such a ceiling originally made some sense in the context of flat-rate benefits and flat-rate contributions, but we have moved on from that era and there is no justification for relieving higher earners of their share of the contribution towards paying for our national insurance benefits.

National insurance is also regressive in the sense that it applies only to earned income, whereas in the past it applied to what was then referred to as unearned income, leaving massive opportunities for taxation arbitrage. This is something indulged in by people with higher incomes: they pretend that their earned income is what used to be termed unearned income, as I said. You can go to fancy accountants and they will sort it for you so that you end up receiving income that it is not subject to national insurance. Regrettably, it is a regressive tax. Those issues need to be addressed, but the Government have used regressive taxation to fund a cut in progressive taxation. This is nonsense and they should be ashamed of it.

It would appear that the Bill is necessary only because the Government suddenly realised that the increase in the levy would impact on people with lower incomes, so by increasing the lower threshold they relieved the pressure on a band of lower-income recipients, but it does absolutely nothing for those below the lower earnings limit. There is no benefit for them at all, and they are the people in the greatest need. It is all very well for the Minister to claim that this is helping people on lower pay, but it is not helping those on the lowest levels of pay. That is, if not a crime, a deceit on the public.

Let us discuss the Spring Statement in full tomorrow, but we have to see the Bill for what it is. It is a deceit on the National Insurance Fund, using the resources available to national insurance to achieve a short-term political fix because the Government stumbled into a situation where they were worried about the impact on the lower paid.

National Insurance Contributions (Increase of Thresholds) Bill

Lord Davies of Brixton Excerpts

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

So those are the amendments that I am putting forward, although I will not press them, as I say. But I put the Minister on notice that those issues will remain long-term threads in the kinds of discussions we will have on the issues that are raised. I suspect that they will eventually get through to the public consciousness.

[Lord Davies of Brixton (Lab)]

My Lords, I am a bit unclear about quite how this process works, but given the limited number, I will not worry too much about that. I will not repeat my Second Reading speech but will actually make a Committee point—in theory, it is really a Clause 2 stand part point, but we might as well take everything together.

It is clear that a casual reader of the Explanatory Notes and the legislation would be totally fazed by what on earth class 2 and class 4 contributions are—let alone what primary and secondary contributions are. The whole system could be designed to confuse, although it is really like this because it has been altered over the years and has moved away from what was originally quite a logical structure.

My question for the Minister is in relation to classes 2 and 4. Contributions by the self-employed have become a mess and need to be sorted out because, first, they are confusing and, secondly, they create the opportunity for arbitrage—to use that word for the second time today —between employment status and self-employment. Effectively, the self-employed have an advantage in terms of their national insurance contributions, and, because of the way the lower threshold is being changed, that advantage is being increased. Is this an issue that the Treasury has considered, and does it think that it is time for a more thoroughgoing reassessment of how the self-employed pay national insurance contributions?

I thank the noble Baroness, Lady Kramer, for her use of the word “fungible”, which is always to be welcomed, and for getting the term “unearned income” through the Table Office. I have to presume that, because it is unqualified and unexplained in the amendment, it is a term that is still defined in legislation. It was used widely many years ago but clearly created problems, and it is now no longer used in general parlance, but it is obviously still there in the legislation. Could the Minister explain how this fits into the present taxation structure?

[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.