National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

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

My Lords, I am in no doubt that taxes have to rise. The spending decisions made by the last Government—or rather the lack of them—the cost of the pandemic, higher interest rates and increasing demographic pressures all point in the same direction. Therefore, with a heavy heart, I broadly support the Bill.

In a sensible world, the Government would not have made the manifesto commitments on personal taxes that they did. For my part, I would have preferred to see an increase in income tax, as Denis Healey implemented in his first Budget, or even an increase in VAT, as Sir Geoffrey Howe and George Osborne implemented in their first Budgets. But we are where we are, and I recognise that tearing up a manifesto commitment in a first Budget rarely ends well for a Chancellor. It is much better to raise a large tax a little than lots of small taxes a lot. Those who oppose the Bill really need to explain how they would fill the void which its defeat would leave.

My main worry about the recent Budget is that it did not go far enough in stabilising the public finances. Fiscal headroom is remarkably small, long-term interest rates remain stubbornly high, and spending pressures—in particular those relating to the so-called triple lock on pensions and to the National Health Service, social care and defence—are as likely to increase as to decline. Although I remain an optimist about Britain’s long-term growth prospects, given the global move to protectionism there is every chance that the economy will underperform over the next 18 months.

I understand the concerns about the impact of this tax increase. We should be in no doubt that national insurance is indeed a tax on jobs; generally, the more you tax employment, the less you will get of it. The change will undoubtedly add cost pressures, both for the public and the voluntary sectors, which the Government will need to address. But in assessing the impact of this measure, we need to recognise that the economy is close to full employment; indeed, that is one of the reasons why it has been so easy for inflation to take root in recent years.

It is important to look at national insurance in the round. The incidence of employers’ national insurance is almost identical to that of employee national insurance. The last Government cut the rate of employee national insurance from 12% to 8% earlier this year. They should not have done so, since that only added to the deficit, but they did, and I am happy to make a virtue of its economic impact in the labour market broadly off-setting the negative impact of the measure in the Bill. The cuts in employee national insurance make it cheaper to employ people; the rise in employers’ national insurance makes it more expensive. The net effect is broadly neutral, and many have argued that it would have been a lot easier to cancel the employee cut and leave employers’ national insurance unchanged, but here we come back to the manifesto commitment.

I will confine my remaining comments to how national insurance contributions might develop from here, given that whoever is in power in the decades ahead will be under pressure to raise more in tax. First, I worry that national insurance rates are too high and income tax rates too low. During my adult life, the combined rate of national insurance has risen from 14.5% to 23%, while the basic rate of income tax has fallen from 34% to 20%. The only reason I can see for this change is a belief that taxpayers are less averse to paying national insurance than income tax. However, the evidence for that is increasingly thin. More significantly, to use the language of the last century, the trend has benefited rentiers and capitalists at the expense of the workers.

Secondly, if Governments remain determined to keep income tax and national insurance separate, I would encourage the Treasury to consider the base for national insurance contributions. As I said, it is anomalous that national insurance is not chargeable on interest income, dividends or rents. It is also anomalous that employees cease to pay national insurance at pension age. I declare a personal interest, since I will reach pension age in six months’ time.

Thirdly, there is the issue of the self-employed. I completely understand why the Government have chosen not to increase self-employed national insurance in the Bill. The last Chancellor who sought to do so was, after all, the noble Lord, Lord Hammond of Runnymede, and that was what is known in the trade as a courageous decision—I was not entirely surprised when he was forced to back off very quickly. There may have been some logic for the self-employed paying lower national insurance when we still had income-related benefits to which they were not entitled, but those days are very long gone. As the OBR and others have pointed out, the Bill will encourage employers to find ways of recasting their employees as self-employed. I therefore ask the Financial Secretary what plans the Government have to make this more difficult.

Finally, I encourage the Government to consider how the costs of an ageing population will be financed. I have long argued the case for a health and social care levy paid by employees, employers and the self-employed. The last Government were sensible enough to introduce one—indeed, its abolition is one of the only surviving measures of the notorious Truss-Kwarteng mini-Budget—and sooner or later, and probably not in this Parliament, a Government will have to return to such a levy. As and when that happens, I would encourage the Treasury to consider as wide a base as possible, the better to keep the rate down. In the meanwhile, painful though it is, I see no alternative but to support the Bill.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Macpherson of Earl's Court Excerpts

Committee stage
Tuesday 21st January 2025 Grand Committee

[Lord Ahmad of Wimbledon (Con)]

My Lords, briefly, I agree with much of what the noble Baroness, Lady Kramer, said. But again, to dwell on the coalition, she and I served in the same Government, so agreeing with her is not unusual for me.

I wanted to make a brief point. Both previous speakers highlighted the impact on the hospitality industry. The figures are quite startling. There will be an impact of about £1 billion on the industry itself, thereby impacting 750,000 workers. As we have just heard from the noble Lord, Lord Londesborough, the impacts of this are already being felt by an industry which is already challenged. We should look at this again. Perhaps in a later group when we talk about the importance of impact assessments it will again be underlined that we do not just need reviews. Doing the work beforehand, consulting and working with the industry is an essential prerequisite to ensure that these changes are not detrimental and lead to a depression of growth, which I know ultimately was not the intention of the Government, as they stated.

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

My Lords, usually I have a lot of sympathy and respect for the noble Baroness, Lady Kramer, and my noble friend Lord Londesborough. However, on this occasion I am going to disagree, first, because if you cut tax in one area, you are only going to have to raise it somewhere else. It might benefit the hospitality industry, but some other industry is going to suffer as a consequence.

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

My Lords, I will try to be extremely brief because no doubt I will be interrupted again. The point I was making was that if you cut tax in one area, you are going to have to raise it somewhere else. That is always problematic.

There are two other reasons why I have some reservations about this amendment. First, it is often thought—the Financial Secretary will remember this because we worked together on measures in the early 2000s—that part-time workers are poor. However, if you look at the poverty statistics, many part-time workers live in quite affluent households. My point is that as a measure to target people on low income, this is a very blunt instrument. It is far better to target them through tax credits, or universal credit as it is now called.

My final points relates to having worked on national insurance over three decades or more and is about the danger of creating steps in the system. I remember large numbers of workers bunching below the lower earnings limit, which was totally understandable as it was in their interest and their employer’s interest. By creating steps in the system, you discourage people from moving up the earnings ladder. In the short term, I could understand that cutting national insurance for the self-employed would genuinely incentivise the employment of part-time workers, but once in place, over time the existence of the step would trap many workers in this part-time zone because their employers would not want them to cross the step that resulted in higher national insurance. I warn against targeted measures such as this as they tend to cause difficulty and disappointment.

[Baroness Neville-Rolfe (Con)]

My Lords, I thank all noble Lords for their contributions, particularly the noble Baroness, Lady Kramer. I regret that the noble Lord, Lord Bruce, is not in his place and associate myself with the request for some information about Scotland.

The amendments address a matter of real importance, which is the impact of the measures on part-time and seasonal workers, SMEs, hospitality and tourism. The noble Baroness, Lady Kramer, is right about the importance of part-time working in tourism, pubs, restaurants and events. That sector is sometimes neglected in public policy-making, but it is vital to growth.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Macpherson of Earl's Court Excerpts

Report stage
Tuesday 25th February 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I rise briefly to challenge the analysis of the noble Viscount, Lord Chandos. He claimed that if we took the health and social care levy employer element and what was proposed here, it would sort of level itself out. It would not. The employer element of the health and social care levy is roughly one third of the amount that is expected to be raised by this Bill. The two cannot be compared.

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

I support the comments from my noble friend Lord Hogan-Howe: I think that it is an important principle that Budgets should be determined by the House of Commons. Those who argue for exemptions should be obliged to explain how they will pay for the tax cuts in those exemptions. If you cut taxes in one area, they will need to be raised somewhere else. That will result in higher marginal rates for everybody else, which do far more damage than low ones.

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

Many apologies to the noble Baroness; I stand corrected. The cut in employee national insurance was considerable. Looking at the macro effects of employee and employer national insurance on the labour market, I regard the changes that have taken place as broadly neutral across the board.

[Baroness Fraser of Craigmaddie (Con)]

My Lords, I am not an economist, but I run a small Scottish charity that provides health services. I want to come back on some of the points raised.

I wish the noble Lord, Lord Eatwell, the noble Viscount, Lord Chandos, and even the noble Lord, Lord Macpherson, had had the recess that I have just had—looking at our employees, some of whom have been with us for over 20 years and are highly trained clinical specialists, and telling them that their roles are under threat of redundancy. As I said at an earlier stage of this Bill, I have not been able to participate in it as much as I would have wished because of its effects on my organisation, which are that people will lose their jobs and organisations will lose skill. Those are very difficult things to build up again.

Like the noble and learned Lord, Lord Wallace, I have been in touch with the Coalition of Care and Support Providers in Scotland. I am slightly concerned that these amendments do not cover health and social care services in Scotland. If he is to bring back an amendment at Third Reading, I will happily work with him on it.

I would love a simpler tax regime and would absolutely support it. The way to have one is not to have this national insurance increase—that would be very simple. The lists covered by these amendments are all of organisations that support public services and the public sector. These are services that many government agencies are required to provide by law, yet they are farmed out to organisations such as ours, as well as to CrossReach, Ark and others.

Frustratingly, this demonstrates a huge lack of understanding by this Government of how these measures will affect vulnerable people—the people who these organisations support. My organisation, Cerebral Palsy Scotland, is a regulated, registered charity, so we cannot put up prices. Our raison d’être is to make our services available to the most vulnerable who cannot pay for them, and so we cannot put up our prices. Yes, we may have benefitted last year from paying slightly less employers’ or employee national insurance, but all our providers—the people who clean our centres, help us with IT, empty our sanitary bins, and things like that—employ people and they are all putting up their costs. Our costs are rising, our national insurance is rising, and because of the minimum wage increases at the same time, it is becoming more and more expensive for us to employ people. The only thing we can therefore do is to cut our cloth and employ fewer people.

I do not understand these measures. I support having lists of different sectors, because these are the sectors that are delivering support that gives people choice, quality of life and control over their lives, and that support the NHS and the social care sector, which would otherwise be stuck. This is a measure that will not save public services, as the Minister has told us it has been put in place to do, but that will, I am afraid, crush them.