Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2022

Lord Davies of Brixton Excerpts

Wednesday 23rd February 2022 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, I thank the Minister for her clear introduction of the measures in these regulations. I intend to speak solely to the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2022. What really interests me about these regulations is that they come with the report from the Government Actuary which we should have had when we discussed the Government’s Bill to drop the triple lock. It would have been so much more informative to have those discussions with the figures before us, rather than discussing them in the abstract. This might be a minority taste, but I am particularly looking forward to later in the year when we will have the quinquennial review of the National Insurance Fund.

What disappoints me is that, in accordance with the regulations, these reports are laid before the House, which provides only limited scrutiny. I could ask questions now, but, with all due respect to the Minister, it would be unfair to ask her to answer detailed questions. It would be useful in some way to provide a forum where we could have a more detailed discussion of what is in the Government Actuary’s report. I do not know whether this has been the practice of the House, but speaking for myself, I could enter into a very detailed discussion about the Government Actuary’s report and what it tells us about the financing of the national insurance scheme.

Chart 1.2 on page 8 of the Government Actuary’s report shows how the balance in the fund is going to increase. It is projected to increase year by year over the next six years by amounts varying between £2.1 billion and £10 billion. These are massive sums being paid into the National Insurance Fund. At least it raises the issue of the use of that fund in order to provide benefits to which people have contributed.

According to the draft timetable, we will get the social security uprating order before us on 9 March. Since we now have available the Government Actuary’s report, it would be helpful to have the opportunity to ask more detailed questions about the relationship between the increases in the order and the information presented to us by the Government Actuary.

I will highlight just one aspect, and this is truly a Treasury point rather than a Department of Work and Pensions point. It is a bit odd, because the regulations are really more of a social benefit issue than a Treasury issue. I am not complaining about that, but the oddity is that the Government Actuary’s report reveals to us that, because the upper earnings limit has been frozen to keep it in line with the upper-rate tax threshold, the take of national insurance contributions is actually going to decline at a greater rate because everyone’s earnings are increasing. This is actually a regressive move. The freezing of the upper-earnings threshold for income tax purposes is a progressive move. It makes higher earners pay that little bit more, but the freezing of it for national insurance purposes is actually a regressive move, because it puts proportionately more of the burden of paying those contributions on lower earners.

I am sure that is not a specific government objective, but it is an oddity of the way the system is being operated. It reflects the fact that higher earners do not pay national insurance contributions. Maybe they could pay a bit more in order to support the taxation system. The fact that they stop paying most national insurance contributions at the upper earnings threshold is perhaps something we should bear in mind in the thorough rejigging of the tax system that I would favour.

With those few remarks, I support these regulations.

[Baroness Kramer (LD)]

My Lords, I will start by addressing the social security regulations. Struggling through the alphabet soup that characterises these SIs brought home to me how hard hit so many low-wage people will be by the Government’s additional national insurance contributions levies. With inflation running at 7%—now some are expecting 8%—energy prices up by as much as £700 a year and most wages barely rising, this is not the time to hit low-income people with a 1.25% increase in NICs.

Using NICs rather than income tax to raise government revenue was always cruel because it drags in workers on wages below the income tax threshold and excludes a raft of high-income people. But the SIs reveal further subtle changes which I had not appreciated. The Government have been clear that income tax thresholds will be frozen to drag more low earners into income tax and more modest earners into higher-rate tax. But I—and, I suspect, others—did not anticipate a read-across into national insurance contributions. The upper earnings limit, the upper secondary threshold, the apprentice upper secondary threshold and the upper profits limit are all frozen, if I understand the SIs correctly, instead of increasing with CPI. They will pull more people into higher NICs payments, including many young people and apprentices. I would like to hear from the Minister how many people are impacted by the decision not to increase these thresholds by CPI and how much additional money is being raised by the Treasury as a consequence.

On the other side of the coin, CPI is being used to raise the lower earnings limit above which an earner gains access to certain state benefits; in other words, it will reduce the number of people eligible. What will the impact be on benefit recipients, how many will lose benefits, and how many will get reduced benefits and by how much? Why was there no consultation on issues that, frankly, are so significant? These are presented to us as though they are “routine changes” but they are not routine changes to people’s lives, as the Explanatory Memorandum tries to claim.

We then come to changes in the state pension. Pensioners are now being driven into poverty, certainly fuel poverty. How can the Government justify excluding the earnings component from the triple-lock calculation, and increasing pensions by only 3.1%, particularly with inflation galloping away? As I say, it is now expected to hit something between 7% and 8% over the year. I suppose that if next year inflation continues to be high, the Government will exclude CPI from their calculation, arguing that this year set a precedent for manipulating the formula while paying it lip service.

I notice that the notes suggest that raising the state pension by 8.3% this year, which would happen if it was based on average earnings, would increase the pension base and, over time, compromise the National Insurance Fund. If one is concerned about the health of the fund, why are the Government deliberately depleting it by offering employers NICs at zero rate in freeports? I think I have described this before as a fundamental problem. Freeports attract money laundering and other forms of crime because of their lack of transparency and now there is the possibility of an attractive tax package as a further incentive and, indeed, a depletion of the National Insurance Fund as a consequence, which presumably justifies many of the increases that we have seen in these SIs. Will the Minister finally tell us the cost of that giveaway of national insurance contributions at zero rate in freeports? I have been struggling to find the number; it may well be available, but I have struggled to find it.

My last comment is on the other statutory instrument, the tax credits SI, which raises by CPI the annual rates of working tax credit and child tax credit, and weekly rates of child benefit and guardian’s allowance. Although this meets the formula, today’s experience for people on low incomes is one of very high inflation, especially on the basics of life, including heat and food. Many would say that we are facing a crisis now, but that the economic pressures on families will get far more acute as the year moves on.

I have here a very brief note from the Child Poverty Action Group. It points out that

“benefits are due to increase by 3.1%, just as inflation is predicted to peak at 7.25%.”

I think that may be understated; people are now talking about a higher rate of inflation. The note continues:

“Energy bills are due to increase by 54% in April, and these families are set to spend three times the share of their income on energy, compared to better-off families … The council tax rebate scheme will mitigate around 40% of that cost through spring and summer, leaving families in poverty to cover around £35 in additional energy bill each month.”


I come from a part of London where house prices are extremely high, and many fundamental homes are above band D, but the people living in them are on very low incomes. They, of course, will get none of that council tax rebate benefit. The note goes on to say that

“180,000 families subject to the benefit cap will see no increase in their benefits come April. The cap hasn’t increased since 2016, while the cost of living has increased by around 16% in that time.”

Are the Government prepared to rethink? This is an exceptional year of inflation, so choosing the figure of 3.1% has a great artificiality to it; it would not in most years, but it does in this one. Will they simply restore the weekly £20 uplift in universal credit, which would make a substantial difference to the families who will be hit? Will they reconsider the national insurance contribution increases and shift instead to a money-raising mechanism that looks at income tax and higher earners? Will they unfreeze the tax thresholds, which is a way of increasing income tax without obviously saying that one is going to do it? Frankly, one way to pay for all of this would be a windfall tax on the fossil fuel companies whose profits have soared because of world conditions, not because of their own efforts.

I am not going to oppose this SI, but I hope that the Government will not be complacent and think that the changes have gone through with their consequences unrecognised.