National Insurance Contributions (Increase of Thresholds) Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading
Wednesday 30th March 2022 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, back in 1986, in my second job in Her Majesty’s Treasury, I was in charge of advising on national insurance and the National Insurance Fund. Here I am, 36 years later, speaking in this debate.

I will confine my observations to two points. First, my working life has seen this extraordinary transfer of revenue raising from income tax to national insurance. As other speakers have observed, national insurance is chargeable only on earnings, not on rental income or dividends. The relevant facts are that, when I became an adult, the national insurance rate was 5.75%; it is now 13.25%, so it has more than doubled. Over the same period, the basic rate of income tax has been cut from 34% to 20%, and it is now planned to reduce it to 19%. This is an extraordinary shift and one that both Conservative and Labour Governments have been prepared to implement, presumably because they regard taxpayers as more willing to pay national insurance than income tax and, sadly, opinion surveys bear that out. The fact is that both are taxes, and this is classic sleight of hand and smoke and mirrors which, as a former Treasury official, I should admire but I find it difficult so to do.

I will make my second observation briefly. I am actually in favour of the proposals in this Bill. I am in favour of lifting people out of national insurance. Of course, it is a new policy to seek to align the starting rate for national insurance with that of income tax. I remember Gordon Brown—in fact, I was advising him on that Budget—announcing it in 1999 and implementing it in 2001. Year after year throughout the 2000s, their starting points were aligned.

That was brought to a sorry end by Brown’s decision—again rightly, in my view, but unfortunately it had difficult consequences—to abolish the 10p rate of tax. As that resulted in losers, Mr Darling had to raise the personal allowance in mid-year and it was too expensive to raise the national insurance allowance. The two have ceased to be aligned ever since.

There is a more serious point to make. This Government have chosen, sensibly, to align the starting points of employee and self-employed national insurance with the personal allowance. When Gordon Brown was Chancellor he went one step further, which had a certain logic, which was to raise the employer allowance, which I believe is called the secondary threshold. In economic terms, whether you charge national insurance on employees or employers, the net effect is the same, because wages adjust. I am just slightly disappointed that the Government have, in a sense, sold the pass on employers, because this is also a burden on employment. When the Minister responds, I would be interested if she could explain why they have chosen to load the tax cut on employees. I recognise that employees vote and employers hardly do, or at least in fewer numbers, but it is a disappointing turn of events.