National Insurance Contributions (Employer Pensions Contributions) Bill

Lord Davies of Brixton Excerpts

2nd reading
Wednesday 4th February 2026 Lords Chamber

[Lord Davies of Brixton (Lab)]

I thank my noble friend for presenting the Bill to the House. I speak as a friend of the Bill, although I suspect I will be its only friend apart from the Front Bench.

I do know something about the subject. I am a strong supporter of tax relief for pension provision—it is one of the foundations of a successful pension system—but that does not mean that we provide tax relief without limit. How much tax relief we provide is a question. You cannot logically adopt the line that every extra bit of tax relief is to be justified. The case has to be made.

I have listened to both speeches so far and read the articles in the press, and really the opposition to this change is all a bit overcooked. The total amount of tax relief granted to pension provision, occupational and contract based, is enormous, but the amount that is lost through this Bill is limited: it is marginal. It is obviously a significant amount to the individuals concerned but, looked at as an overall policy objective, the amount that is being reduced here is limited.

I have always regarded salary sacrifice as an illogical nonsense. It really makes no sense. It is a form of regulatory arbitrage and I have always thought that it was vulnerable to changes in government policy. What I had not realised, since I was active in advising members and employers, was how much it has grown in recent years. This is really the point: there was life before salary sacrifice became so popular. People still saved for their pensions and still received good pensions. The argument that this whole structure depends on salary sacrifice is nonsense.

The whole concept of salary sacrifice is based on a false dichotomy: that in some way, employer contributions are distinct from employee contributions. They might have a different label on them but they all come from the same employment package. It is fungible, to use a popular word. There is no real difference and to have one type, the employee contribution, which is subject to national insurance contributions and another form, the employer contribution, not subject to them is and always was nonsense, so I welcome this Bill.

There are practical problems to be addressed. We will have two days in Committee to look at those. Two days in Committee for what is effectively a one-clause Bill seems quite surprising, but maybe there are issues. How does it work for different periods of payment and people who have changing incomes during the year? How does it work for people with more than one job and how do we achieve confidentiality of an individual’s income from one employer rather than another?

There is also something that is a new term to me: optional remuneration arrangements—OpRAs. That appears in some way to limit the extent to which contracts can be changed. I think we will have to look at that carefully because, on the one hand, the way it is being done will lead to attempts to manoeuvre around the legislation; at the same time, we do not want it to cause problems with the jobs market. There will be behaviour change and, again, I would be interested in my noble friend’s views on how that will work.

I have run out of time. I support and welcome the Bill and I look forward to an interesting period in Committee when we will get the details right.

--- Later in debate ---

[Lord Altrincham (Con)]

I thank the Minister for leading this debate and for his customary courtesy in listening to all the observations of noble Lords. There is a common observation that there is nothing new in tax. Maybe this Bill is a small Bill; the noble Lord, Lord Davies, says it is a trivial matter that does not really need our scrutiny. Nevertheless, it is a moment in taxation when we are taxing savings—

[Lord Davies of Brixton (Lab)]

I actually said that I was looking forward to discussing it further in Committee. It certainly does require our attention.

[Lord Altrincham (Con)]

I stand corrected.

This is a moment in taxation when we move towards taxing savings. It is against a backdrop in which policy has been relatively settled in this area in recent years. There was an understanding that we need to provide private sector pensions. Quite broadly, there was cross-party support for auto-enrolment; it has been quite successful. Against this background of a degree of consensus, we are now introducing—in a small but nevertheless important way—the taxation of savings. We made the changes towards auto-enrolment not just for social benefit reasons but to protect the state. It is important to remember that we are doing this also because the liability for retirement is falling on the state, and it became urgent to do something about this and to make sure that there was private provision to offset this rising cost.

With this Bill, we find ourselves at a moment when the tax system begins to eat itself. It would be illusory to suggest that there will be any gains from taxing savings, because the liability that will accrue to the state will likely be greater. That is because the returns to invested pensions over time will, in almost all cases, exceed the growth of the state, as the noble Lord, Lord Davies, knows from his time in pensions, and it is the growth of the state that provides the tax income that can support people. So the gap will be very wide if people do not save in private sector pensions.

That is the unfunded liability that stands behind this tax change. That liability could be very wide for the cohorts who are affected by this: middle-income earners who might have 30 more years of saving. Quite small amounts accumulating over 30 years can make an enormous difference to their retirement: it is enormously important. But, in the absence of those savings, regrettably, the state will be exposed. Therefore, the Government need to tread very carefully when making these changes, because the credit of the Government rests on securing some stability to future liabilities. Growth in this area of future liability is extremely important for investors in our bond market, and we need to make sure that they do not feel that there is a rebalancing here towards current taxation income against liabilities in the future.

I turn to the themes that have been raised so far, starting with fairness. As my noble friend Lady Neville-Rolfe explained, the Bill is, in practice, aimed not at higher earners but at earners around the middle of the income distribution. Among this group will be a large number of younger workers, already taxed quite heavily, and among them graduates required to repay the student loan. This initiative is a quite specific transfer from the young to the old. These groups are being encouraged to behave responsibly—as the noble Lord, Lord Londesborough, mentioned—and to put aside savings.

For employees, the Bill raises fundamental questions of fairness and coherence. Two individuals may arrive at precisely the same level of pension saving yet be treated very differently for national insurance purposes, depending solely on how that saving is structured. Direct employer contributions remain exempt, while salary-sacrificed contributions above the threshold do not. This difference undermines neutrality in the tax system and distorts incentives away from arrangements that many workers actively rely on to manage affordability and long-term planning.

Quite a few noble Lords mentioned complexity. We should also consider the burden on employers, particularly those operating within tight margins and employing large workforces. Professional advisers in the pensions and benefits sector have warned that increased payroll costs and added administrative complexity may prompt businesses to reconsider pension enhancements and lead to a contraction of workplace pension ambition itself. That was mentioned by my noble friend Lady Altmann.

Businesses that have structured remuneration packages in good faith around existing rules now face not only higher contribution costs but a new layer of administrative complexity. The introduction of a £2,000 cliff edge creates a compliance burden that is wholly disproportionate to the revenue that it is said to raise. For many firms, this is a material increase in payroll expenditure. There is good evidence that employer costs could account for a substantial share of the projected yield.

We have already seen the dampening effect of recent national insurance increases on recruitment and wage growth. To compound that pressure risks discouraging the forms of workplace pension generosity that public policy has long sought to encourage.

The distributional effects further complicate matters. For those earning above the higher earnings threshold, portions of what is, in essence, deferred income are drawn back into the national insurance net at marginal rates aligned with current earnings. The result is a reclassification of pension saving itself. Contributions made today attract national insurance, while withdrawals in retirement continue to attract income tax. Although these are different fiscal instruments, the policy makes pension saving resemble present consumption rather than deferred provision, creating the perception and often the reality of taxation both on entry and exit. This matters because the architecture of pension policy rests upon encouraging individuals to defer consumption, to assume responsibility for the later years. The messaging around this is sensitive, as my noble friend Lord Leigh mentioned.

The Government keep changing pension policy, so we might expect taxpayers to become better at adjusting behaviour. In this case, we have heard that some employers are encouraging employees to increase salary sacrifice now, which will of course reduce tax receipts in the short term and may reduce student loan repayments. The younger cohorts have learned to adjust their student loan repayments using the salary sacrifice scheme. Taxpayers may be hoping for a policy change later and would be rational in expecting some adjustment here, particularly for graduates. Given this uncertainty, we are asking for an independent assessment of the policy.

We have already witnessed the economic cost of uncertainty generated by repeated speculation and late clarification in fiscal policy. To proceed now with a measure that introduces fresh complexity and perceived inequity risks compounding that loss of confidence at precisely the moment long-term saving most requires reassurance.

National Insurance Contributions (Employer Pensions Contributions) Bill

Lord Davies of Brixton Excerpts

Committee stage
Tuesday 24th February 2026 Grand Committee

[Baroness Coffey (Con)]

My Lords, I somewhat understand where the Government are coming from in trying to get rid of salary sacrifice entirely—by the way, it is still available for employees of the House of Commons or the House of Lords for the on-site nursery. One thing that the Government seem to have missed out is that they have not provided a lot of information on how they have reached the figure of £2,000. It feels as if they are looking for £4 billion or £5 billion to pay for things such as getting rid of the two-child limit on universal credit—not child benefit; every child gets child benefit. It feels like a short-term measure, as one of my noble friends has just pointed out, to hit certain policy objectives before the next general election. The challenge here is the long-term consequences of where people are putting into their pensions today. The other thing the Government do not seem to have considered is that it is not usually employees who decide the percentage that they are required to contribute to the salary sacrifice scheme. That is normally decided by the employer.

More generally, we are starting to see this awful approach of people on rather modest earnings reducing the amount of money they put into a pension for the future, with all the knock-on costs that other noble Lords have pointed to, but I would go further. How much money is paid towards housing costs and similar is increasing at a significant rate, so it becomes this odd sort of choice where people are trying to do the right thing. Admittedly, this may currently benefit lots of people. That is why Amendment 1 is so important, instead of “How can I take from Peter to pay Paul?” We know the other significant cost of pension tax relief is to make sure that we do not have doctors and consultants reducing their number of hours. So those sorts of policy changes have already been made, and this Government decided not to do that, even though it applies to bankers and all the other people who earn significant amounts of money.

Before Report, I think it is worth the Government setting out in more detail where they got their figures from and why they have ended up at this point instead of just, fairly glibly, saying this will not affect earners. We need more detail. The information put forward by HMRC is basically an insult to everybody reading it by trying to suggest that somehow it gives us a proper tax impact and information notice. It really does not. If we approached this in a more evidence-based way, there would start to be more support and understanding of what the Government are trying to achieve. The Government are trying to find some more money, but at the moment it feels as if they are hitting younger people, people still at certain parts of their career who are already stretched, and this is the way that they are able to make a contribution to their future. As has already been pointed out, it may not be so good for higher rate—and that is okay; people make policy choices when they vote for parties, although, as my noble friend Lord Leight of Hurley pointed out, this was not in the manifesto. I would be grateful to the Minister if he could commit to a more detailed assessment to share with the Committee before we return to this on Report.

[Lord Davies of Brixton (Lab)]

I support the Bill. It is an eminently reasonable approach to the difficult financial situation in which we found ourselves when the Labour Government took office. No one likes increases in taxation—it is easy to say “No, no, no”—but given the outcome of the election, some increase in taxation was required.

I listened to the debate with interest, including the points raised on student loans in relation to Amendments 3 and 16. I do not understand it, but I hope that my noble friend the Minister does and that he can give a satisfactory response.

I am a bit concerned when people talk about the Bill “penalising” people. Taking away an advantage struggles to be a penalty. The idea of salary sacrifice makes no sense; it is regulatory arbitrage and a sort of kludge that has no real justification. It is also unnecessary. The idea that the pension system will suffer greatly from the removal of this particular tax relief is fanciful. Some people regard the golden age of pensions as having been 10, 20 or 30 years ago; virtually no one then had salary sacrifice and yet schemes boomed and people saved for retirement. We cannot sustain an argument that providing an adequate pension for most people requires this form of salary sacrifice, particularly when £2,000 is being allowed.

As I said at Second Reading, I disagree with the idea that this is, in some way, a mortal blow to pensions— I may exaggerate slightly, but there was continual suggestion that this was a severe blow to people’s attempt to provide themselves with a decent pension. It is interesting that people who are arguing to keep this salary sacrifice are those who, at the same time, oppose the triple lock, and yet the triple lock is doing far more than this would do for people on low incomes to secure an adequate income in the future, so I do not accept that argument about impact.

The important issue is that this bit of tax relief on pensions should be seen in the context of the overall tax relief on pensions. What is the right level overall of providing relief through the tax system for pension provision? We all know it is substantial; it is enormous. If you count all the different forms it could take, it comes to about £90 billion. When the scheme has matured, this will take away £2.5 billion. That is why I said at Second Reading that it is marginal; it is not crucial for the future of pensions.

The issue of tax relief on pensions is controversial. Think tanks love a report on tax relief on pensions. None of them is proposing an increase in tax relief on pensions, yet this is the way that we are heading. The Government’s figures—which no one has disputed—suggests that more and more people will seek more and more salary sacrifice to get more and more tax relief on pensions. Yet when the think tanks look at these issues, they say, “Well, no, it should be targeted towards the lower paid”. If anyone thinks that this will cause problems—I am looking at the noble Baroness, Lady Kramer; I think the Liberal Democrats have supported, or toyed with, the idea of having a flat-rate tax relief on pensions—I suggest that moving to a flat-rate tax relief on pension contributions will cause an absolute nightmare.

There is one point here that I accept. My noble friend the Minister can take it as a helpful suggestion rather than a criticism, but the use of the term “higher earner” could have been judged better. Noble Lords will be pleased to know that I have a spreadsheet, which calculates the impact that people suggest this measure is going to have. Of course, the 2% and 8% feature means that there is a kink in the line of the relief that you get from salary sacrifice because, up to a certain level, you pay 8% contributions through national insurance and you are getting the relief at 8%. Then, after that, it is 2%. It is not that the Government are seeking out people to charge more money; it is the structure of the system.

Let us look at the figures. I sometimes have problems in these debates when other speakers quote figures because it is difficult to understand them without seeing them in writing with some explanation. I think that, in general, there should be a ban on quoting figures in these sorts of debate. However, I am going to quote some figures. The median level of contributions to a pension scheme is 5%—that is, between 4% and 6%—on median earnings below £40,000. Now let us take the higher figures: someone paying employee contributions of 6% with earnings of £40,000. They are using salaries in full on their contributions. For them, the change will be an extra £32 a year. Those are the figures we are talking about for those on median earnings and those on median contributions.

As has been mentioned, bonus sacrifice is clearly a separate issue. This is where the legislation is required. It is being exploited in these circumstances. The bonus should be enough. The bonus is of great value. Some people in the City get vast bonuses. The idea of using that money to exploit this illogical tax relief through salary sacrifice is abhorrent.

I support the legislation. The term “higher earnings” could have been handled better but the whole issue—people on median earnings paying very little more and complicating the system in order to remove basic rate taxpayers; perhaps my noble friend the Minister can tell us about the impact it would have on income—has been over-egged; that was, I think, the phrase I used before. This is an eminently reasonable measure to address the country’s financial problems.

[Lord Fuller (Con)]

My Lords, the noble Lord said that he cannot see the sense in this. Why do we have this incentive in the tax system? The answer is that it is the role of government to incentivise good behaviours, which include saving for your retirement, trying to climb the ladder and trying to do better for yourself, not least because, in so doing, you reduce your reliance on the state in later life. That is the sense of the salary sacrifice process.

This Government have perpetrated a series of attacks on youngsters at the start of their careers, graduates and people making a start in their working lives. The Renters’ Rights Act has driven up rents. The Employment Rights Act has made it harder for businesses to take a chance on somebody who may be unqualified or changing role. The Government are putting youngsters into unemployment with the jobs tax. Now this slim Bill will add many more cases—I am going to list them in a minute—of intergenerational unfairness. Let nobody say that Labour is on the side of the youngsters who want to get on.

--- Later in debate ---

I ask the Minister to consider carefully not just the wording of these amendments themselves but what they are signalling to the Government about this policy and the Bill, and whether we really should be doing this and rushing it through at this time.

[Lord Davies of Brixton (Lab)]

I spend most of my time in these debates about tax relief on pensions defending the existing system, because the people I tend to mix with regard that tax relief as grossly unfair. It obviously gives far more to the higher paid than the lower paid, and that is why there is widespread discussion of having flat-rate tax relief on pensions. If we were starting from scratch, I think we could do that, but we are not. We have to start from where we are.

Where we are is in having extremely high levels of, effectively, government subsidy for people to save for retirement, but that begs the question: what is the right level of tax relief for pensions? Does it just happen to be that we have alighted at the correct level, or is that an issue we are not allowed to discuss? Putting words into the mouth of the noble Lord, Lord Fuller, he seems to be adopting the argument: “The more the merrier—let’s increase it by even more”. No, there is a genuine question here. What is the right level of tax relief to encourage people to save for their retirements? It is a reasonably practical debate and, on this side, we have come to the conclusion, possibly as an interim measure, that it should be a bit lower than it is currently. That certainly does not justify the doom and gloom about this particular change—I have made my point several times.

I am no longer a small business person, but for 30 years I was and I employed people who had multiple jobs. It is not a new issue. There is nothing new about the idea of employers having to cope with the complications of the national insurance system for people who have multiple jobs, particularly where, even with two jobs, their total income is more than the £1,250 that it is at present. It is not a new issue that employers are going to have to deal with. In principle, there is an additional complication; they have to sort out where the £2,000 limit applies. However, it is reasonable to expect employers to undertake those tasks. To be honest, I do not think that an ice-cream salesman is really a genuine example, but I may be wrong.

[Lord Fuller (Con)]

I take my territorial designation from Gorleston-on-Sea. When I was a boy, there was nothing better when the sun was out than going down to Della Spina’s, the ice-cream place. It is not just about ice cream; there are stately homes and all sorts of things that work with the weather. That is why I chose the example of the umbrella salesman or the ice-cream vendor. There is a whole part of the UK economy that depends on the weather. We have the most unpredictable weather, there are the most turbulent income and costs associated with that, and that boils down into variable emoluments. It is not just the market gardener or the farmer; it is the people involved in hospitality or whatever. To say that it is trivial demeans the pubs, the restaurants, the stately homes and that wider part of the visitor economy, which is particularly visited on the coast and in coastal communities. I wonder whether the noble Lord would like to reflect on the somewhat dismissive way in which he put that huge part to one side. Millions of people work in these sectors; they would be disadvantaged by the Bill and that needs to be recognised.

[Lord Davies of Brixton (Lab)]

I accept the noble Lord’s reprimand. I was actually making another point, which is about how many ice-cream salespeople are operating salary sacrifice arrangements. That may not be immediately germane. In fact, the remarks that the noble Lord just made support my point. Those part-time employees and part-time employers are already having to cope with the problems that arise from multiple employments and how the national insurance system is not, in truth, tailored very well for those circumstances. I accept that.

[Lord Mackinlay of Richborough (Con)]

I would like to assist the noble Lord, Lord Davies, on multiple employments. For an employer faced with an employee with multiple employments, which is not uncommon, it has no reference at all to the individual employer—it is of no interest. An employer runs a payroll scheme only for the amounts that that employer pays that employee. If there is a second employment, it is for that employer to deal with how much they are paying that employee. There is no interaction between the employers to say, “Do a management of NIC”. This goes to the heart of the problem with Amendment 33.

There is only one example where an employer has to take any notice of multiple employment, which is when their employee may have a second employment that is above the ceiling for paying the maximal national insurance. That is where you have a system of form CA72A, which is supplied by the employee to the DWP. The DWP may not actually do anything about it; I have found in most cases in my professional career that the DWP seems to lose the paperwork and the employee has to make an after-year claim for the excessive NIC that has been deducted. That is the only example where the second employment may receive advice from the DWP to say, “Ah, only deduct 2% from this employee because they are paying maximal amounts on a primary employment”. I wanted to clarify the current situation across national insurance administration for double or triple employments. I hope that is of assistance.

[Lord Davies of Brixton (Lab)]

Yes; I thank the noble Lord for his advice. As I said, I have operated the system myself, and so he is really just making my point: the structures are there to deal with multiple employments. It is not being introduced to the issue by this particular measure. Obviously it would be more complicated with this measure—I accept that, and I look forward to my noble friend the Minister’s response on that issue—but it is not a new issue.

[Baroness Kramer (LD)]

My Lords, as with the previous group, the noble Lord, Lord Davies of Brixton, made a comment on what he thought was Lib Dem policy; it might be—I am just not sure. We have discussed simply kicking out all this complexity and having a flat rate of relief on pensions. After listening to the last debate, I think that that has probably accumulated a lot of votes from around this Room, because the complexity that we have had described under this group of amendments is absolutely extraordinary. The noble Baroness, Lady Altmann, referred to the banana skins, and I think the noble Lord, Lord Leigh, talked about it being a nightmare. I am troubled that all of this is being left to consultation with the industry and to future regulation and future guidance, as if it can all be absolutely sorted with a bit of quiet attention. But we have heard the problems of how you deal with the many cases where people have multiple employers.

The noble Lord, Lord Mackinlay, made it clear that it is a relatively small handful of people who at present have to be dealt with through the Department of Work and Pensions to make sure that there is not a complexity. However, this would now apply to all kinds of people across a very wide range of activities and income. Trying to deal with the complexity of all these measures and delaying that has got us very disturbed. It is a bad principle for legislation. It is not that there is not a role for regulation and guidance, but that essentially should just be doing the finesse on a policy that has been clarified, whether it is in primary legislation, through evidence put before Parliament or through Statements made by the Ministers.

I think we have a real concern that this is going to turn out to be absolutely unworkable. The consequences of that, both for public finances and for individual decisions made by people, probably means that this legislation will collapse at some point. We ask the Minister to go back to the department and make it clear that clarity is absolutely necessary. If there are problems here that can never be reasonably and sensibly resolved, they should be recognised at this stage.

National Insurance Contributions (Employer Pensions Contributions) Bill

Lord Davies of Brixton Excerpts

Report stage
Thursday 5th March 2026 Lords Chamber

[Lord Freyberg (CB)]

My Lords, I apologise for not speaking earlier in the Bill’s passage. I have only recently become aware of how its provisions bear on freelance workers in the creative industries, and I hope the House will permit me to raise those concerns across the relevant groups. I declare an interest: I have worked both as a freelance editor on short-term contracts and on payroll, and I understand from personal experience how differently this legislation lands, depending on which side of that line a worker falls.

I support the amendments in this group, in particular Amendments 1 and 17, which would exempt basic-rate taxpayers from the cap, and Amendments 14 and 27, which would index the limit to the national insurance upper earnings limit, rather than fixing it at a flat £2,000.

The creative industries are built on short contracts. A set designer or director of photography may work for three or four different employers in a single year, such as a commercial house, a broadcaster or an independent film company, each engagement lasting weeks rather than months. Many of those workers are basic-rate taxpayers. The Government have consistently justified the Bill as targeting higher earners, yet, as we have heard, these are precisely the workers it will catch. Amendments 1 and 17 would correct that directly.

Amendments 14 and 27 address a related problem. A creative worker with a good year followed by a lean year faces a rigid £2,000 cap that takes no account of natural variation in earnings. Indexing the limit to the upper earnings limit would at least ensure that it kept pace with the economy.

Amendments 12, 26 and 13 would raise the cap to £5,000—or £10,000, as we have heard—which would substantially reduce the problem for those with fluctuating incomes, and I support the principle behind them.

Finally, Amendments 4 and 20 would remove from the optional remuneration rules any pension contributions where no cash alternative was offered. For a freelancer on a standard short-term contract, where the pension arrangement is simply a term of engagement, not a personal tax planning choice, that is a straightforward matter of fairness. I urge the House to support these amendments.

[Lord Davies of Brixton (Lab)]

I want to contribute, by supporting the Government, a bit of sense to this debate. We have heard so much doom and gloom, but what is the reality? What impact are these measures going to have? I am sure my noble friend the Minister will be able to tell us.

The first point to understand is that salary sacrifice for pension contributions really makes no sense. It is a form of regulatory arbitrage. It has never made any sense and it is notable that previous Governments have taken away almost all forms of salary sacrifice on other in-work benefits, without forecasting the end of incentives for working. I have always been against it in principle—I would be happy to see it removed entirely, but possibly that might be politically suicidal—but a £2,000 limit seems an entirely reasonable approach to providing some fair incentive without the opportunity for, in truth, gross inequality. We are told that this measure hits the lower paid and not so much the higher paid, but of course the people who make most use of this are people with enormous bonuses. That is where the money is going and these measures will stop that.

Secondly, it is not an essential element in our current pension system. The key question that none of the previous speakers has addressed is: what is the right level of tax incentive for pension saving? That is a proper debate, and it cannot be answered by saying that more is always better. We have to draw up a fair judgment on where, and how far, tax incentives to encourage people to save for retirement should go. It is obvious that, if you reduce tax incentives, there will be an impact on people’s decisions. One impact that it might have is to encourage them to save more, because, if they have a target pension in mind, they will need to save more money than they did previously.

Thirdly, figures are quoted for the impact on individuals, particularly those under the higher-rate threshold. Well, I have a spreadsheet and I have calculated those figures, and, as I said at Second Reading and in Committee, the effect on basic-rate taxpayers on incomes around and above the median level is marginal. What sorts of figures do you think we are being told are going to have such a shattering effect on the pension system? For someone on median earnings, paying the median contribution rate, it is nothing. Maybe, if you earn a bit more towards the tax threshold, it will be something like £40 a year.

Now, nobody likes paying more tax. I could explain that the reason why there is this demand for more taxes is 14 years of mismanagement by the previous Government, but I will leave that to my noble friend. But it does annoy me that so much emphasis is placed on what is essentially a sideshow to the important questions of pension provision that we are going to have to address.

[Baroness Altmann (Non-Afl)]

As I think the noble Lord knows, I have enormous sympathy with everything he says, and there is a strong case for reforming and improving the incentives for low earners. However, does he not accept that, if you change for the worse the incentives on the people who earn least, for whom it is most difficult to contribute, there is bound to be an effect at the margin, however large or small the difference is? If your pension is giving you lower take-home pay because something you have is being taken away, that can have only negative consequences. Therefore, there are risks in this proposal as it stands.

[Lord Davies of Brixton (Lab)]

I thought I said in my earlier remarks that there will be a marginal effect: I accept that, although we do not actually know what that marginal effect will be. It is all hypothetical at the moment. One thing we do not know from the OBR figures is quite what the reaction will be and how people will adjust their behaviour between now and when this comes in.

I accept the noble Baroness’s point but, as I say, nobody likes paying tax and nobody wants to pay more tax. If you ask people whether they want to pay more tax they say no, but it has to fit in with the Government’s overall financial strategy.

Of course, only some people gain an advantage from salary sacrifice. Many private employers just do not offer it. The number is increasing all the time, which is part of the problem because it is increasing the cost. Nobody in the public sector benefits from salary sacrifice. We can, and will, have an interesting debate about public service pensions, but noble Lords should understand that it is unequal that people in the private sector can take advantage of salary sacrifice but people in the public sector cannot.

[Baroness Kramer (LD)]

My Lords, I thought it might be best to combine standing as a winder and talking for a few moments to the two amendments in this group that are in my name. I start by thanking the noble Baroness, Lady Neville-Rolfe, who made an incredibly powerful speech to introduce the whole series of amendments in this group. I thank her for signing my two amendments, Amendments 12 and 26. Amendment 26 is the Northern Ireland parallel to Amendment 12, so we need not treat it separately. I also thank the noble Lords, Lord Altrincham and Lord Londesborough, for signing my amendments. The noble Lord, Lord de Clifford, would also have signed them had space been permitted on the Marshalled List.

I also talked very extensively, both at Second Reading and in Committee, and I will try to discipline myself not to repeat those comments, particularly because speaker after speaker has so fully described the issues that are at stake. I find myself in complete disagreement with the noble Lord, Lord Davies of Brixton, which does not happen very often, but I think that the Government will recognise that, for a whole series of political leanings around the House, there is very common ground on this issue.

My Amendment 12, as others have described, would lift that limit on salary sacrifice contributions subject to NICs relief to £5,000 a year. I discussed in detail in Committee why I talked to various people and came to that number, but the key point I want to emphasise—others have made it, but let me make it again—is that it would strongly benefit younger people and quite low earners. We are looking primarily at the second decile of earners, who are probably on their first or second pay rise. They are still low earners and still living a life much more akin to that of a student. They are sharing accommodation and do not yet have mortgages, children or families. Many have, very responsibly, with the nudge that is given by this tax relief, been encouraged to start seriously saving for pensions, well in excess of that £2,000 benchmark that the Government propose.

As these people move on in their lives and acquire children and mortgages, their pension savings drop. Those very early savings that then have a chance to accrue over a working lifetime are very significant in the end result to the quality of pension that they receive. That is why we took an approach that we thought would, in a very simple way, enable this group of people to continue with that incredibly positive behaviour.

In this group, I will certainly support the amendments that the noble Baroness, Lady Neville-Rolfe, will choose to move. I want to make particular reference to the amendment from the noble Lord, Lord Leigh, on student loans. It is absolutely essential. The Government have recognised—at least, this is what I understood from the Minister’s responses in Committee and at Second Reading—that the Bill quite unintentionally puts serious additional costs on to graduates. I find it absolutely ridiculous that, having recognised that there is an unintentional impact and that it is problematic, the Government are not correcting it in this Bill. As far as I can understand, they are waiting for some future piece of legislation to make that change.

[Lord Davies of Brixton (Lab)]

May I just press the noble Baroness on the point she made about serious additional costs? Would she care to quantify what those serious additional costs are?

[Baroness Kramer (LD)]

Let me refer back to the example I gave in Committee. The noble Lord will be aware, on that additional contribution, that the graduates are paying the 8% additional in NICs but, on top of that, because it pulls them into scope of having to make repayments at the margin, the impact is 17%. It has a huge impact on graduates who are now just beginning to reach the level where they would have anticipated they would start to repay, and they suddenly hit this really serious spike. I think he has seen the numbers that some of the people have sent to us, and the Chartered Institute of Taxation could help him with those numbers if he wants to look at them. The Government, I think, recognise that problem but my answer is to fix it.

--- Later in debate ---

On the proposed new clause in Amendment 33, which concerns charities, the Minister might recall that I tabled three amendments to the NI Bill to exempt charities, social care homes and hospices. The Government did not accept any of those. Surely the Government want to help charities as much as possible, particularly those, such as hospices, that cannot raise revenue to compensate for any extra costs that this might incur to them. I therefore hope that the Government will consider this very carefully and show some flexibility.

[Lord Davies of Brixton (Lab)]

I have just two points. First, I am perhaps the only person in the House who believes in the National Insurance Fund. I am in favour of the National Insurance Fund in principle. It is a fund into which people pay contributions and accrue entitlement to benefits. I am therefore against a detached look at a very small part of the overall operation of national insurance; that would clearly be a mistake. You have to look at the whole thing together. I am not necessarily against that. I suspect that the Treasury will not be keen but, in principle, it is time for it.

However, my second point is that that makes sense only if we look at the tax treatment of pension schemes, which is the electric third rail of pensions politics. There has been a lot of discussion in the think tanks about the tax treatment, and proposals such as flat rate relief have been made. It is a massive subject—one that it is time to review. For the same principle, it would be wrong to look at this tiny part of the overall structure. I am therefore against the amendments, but the general principle—that the issue needs to be looked at—is a good one.

[Lord Londesborough (CB)]

My Lords, I support Amendment 31 in the name of the noble Baroness, Lady Neville-Rolfe, to which I have added my name. I also add my vocal support for Amendment 32 from the noble Baroness, Lady Kramer, which I should have added my name to but did not. Both amendments concern the impact on SMEs. I am more concerned about the “S” part of that acronym, because medium-sized businesses with payrolls of over 100 staff are a lot better equipped to deal with the provisions of the Bill. I heard the Minister saying that only 10% of this group apply for salary sacrifice, which is a glass-half-empty argument. It is precisely because of that that we should be very concerned about the 90% who are missing out entirely on salary sacrifice.

When we go back to Amendment 31 and look at the impact, the employment data this year for SMEs is utterly dire—on vacancies, payroll and employment, part-time and full-time. I will not go through all the data, but I remind your Lordships that only 10 days ago, the Federation of Small Businesses wrote a letter to the Chancellor of the Exchequer warning that one-third of its members are planning either to shut down their business this year or to reduce their headcount, and that should send a real chill down the spine. I simply do not believe that the Government understand what it is to develop and foster a thriving SME ecosphere, on which, at the bottom of the pyramid, our economic growth utterly depends. I therefore throw my support behind these two amendments.