National Insurance Contributions (Increase of Thresholds) Bill

Lord Tunnicliffe Excerpts

2nd reading
Wednesday 30th March 2022 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this Bill. I also particularly thank noble Lords who have spoken; they all seem to have set up considerable hors d’oeuvres for tomorrow’s debate, which I expect to be rather wide-ranging.

This is the second fast-tracked Bill this Session which makes significant changes to the national insurance system. The first implemented a 1.25% increase to national insurance for 2022-23. In essence, it created the very problem that the Chancellor is attempting to solve with this legislation. When the Health and Social Care Levy Bill was considered by the Commons in a single day, on 14 September, MPs in all political camps expressed concern about the lack of time given for debate and scrutiny. The Prime Minister’s surprise announcement felt more like a distraction or political relaunch than a genuine attempt at tackling the problems faced by the NHS and social care.

The money raised by the levy is unlikely to deliver the results promised by the Government. There is no coherent plan for clearing the NHS backlog or making the care system function more effectively. Both sectors are desperately short of staff and the workforce is exhausted. Capacity, not cost, is the limiting factor. There is no good time to break a manifesto commitment not to raise national insurance. However well-intentioned the decision may have been, September 2021 was a particularly bad time to make it. Inflation was beginning to rise and expectations for the economy were being downgraded. It was already becoming clear that a long, hard winter lay ahead for many.

Your Lordships’ House also considered the Bill in a single day, in October of last year. With costs continuing to rise, concerns were again voiced that the new levy was a tax on jobs, as well as the wrong tonic for the NHS’s problems. In the intervening months, Back-Bench Conservative MPs have grown somewhat restless. With their postbags bulging, they have come to realise that the Labour Party and others had a point: this is the wrong tax increase at the wrong time.

Since the Health and Social Care Levy Bill passed, inflation has climbed rapidly to its highest level for 30 years—or, to put it another way, since the last Tory inflation crisis. According to the OBR’s updated economic forecast, the 2% inflation target will not be met until late 2023 or early 2024. Due to this, it is warning of the biggest drop in living standards since records began in the 1950s. Energy prices are at a record high, the medium to long-term outlook remains uncertain and the price cap will shortly increase by hundreds of pounds, further increasing the pressure on household budgets. Despite the Government’s attempts to paint the cost of living crisis as a consequence of the war in Ukraine, the writing has been on the wall for months. The energy price cap announcement, for example, was trailed for some time. The decision was taken and made public before Vladimir Putin launched his illegal invasion.

In light of events, the Chancellor has been pushed hard to abandon his planned tax increase on workers. Conservative MPs express disquiet both privately and publicly. There have been media reports of heated disagreements among Cabinet colleagues. Even the “Money Saving Expert” begged Mr Sunak for an intervention, warning that the scale of the problem is so great that his tips can no longer make any meaningful difference to people’s day-to-day finances.

Fiscal events rarely capture the public imagination but, with so many feeling the effects of current circumstances, all eyes were on last Wednesday’s Spring Budget—sorry, Spring Statement, but really it was a Budget. The omens were good. As is becoming the norm, newspapers had been briefed in some detail about a substantial package to ease the burden on family finances. More than two years after his appointment, the Chancellor even confirmed on Twitter that his work to provide

“economic security for our people”

would finally begin. Unfortunately, the package announced did not live up to expectations. Despite the Prime Minister doing his best to leave the option open during weeks of media interviews, the Chancellor decided not to perform the much-desired U-turn. Instead, he opted to offset some of the 1.25% national insurance increase by equalising NICs and income tax thresholds.

We therefore come to the second piece of fast-tracked NICs legislation this Session, with, once again, a day’s debate in another place followed by Second Reading in your Lordships’ House. We support any measure to help households through this unprecedented cost of living crisis. We will therefore support the passage of this Bill today. However, while we are passing it in March, as others have observed, its effects will be felt only from July. We understand the reasons why, but that delay could have been avoided had the Chancellor been more proactive in his response to the mounting crisis.

Let us not kid ourselves: despite this Bill, taxes are still going up for most households in one week’s time. Mr Sunak wants to be seen as a tax-cutting Chancellor, but the facts speak for themselves. The overall tax burden will still be higher, irrespective of changes to the NICs thresholds. Once we are past the worst, the freezing of tax thresholds will reverse the Government’s previous good work in removing people from tax. Many low earners will find themselves paying income tax and national insurance once more. Under current plans, the benefit derived from the promised pre-election income tax cut in 2024 will have been offset by other increases across the tax system.

The Spring Statement and, by extension, this Bill, do not represent a particular, fair approach to the challenges faced by so many across the country. When appearing before the Commons Treasury Select Committee on Monday, the Chancellor failed in his attempt to label this plan as progressive. No plan that knowingly and willingly pushes over 1 million people into absolute poverty can be described in that manner. However, we will have other occasions, including the Spring Statement debate tomorrow, to cover some of those broader issues. For now, it is for us to get this fast-tracked legislation through, to ensure that these changes can take effect in July. It may be a sub-optimal solution but, regrettably, it is the only one this Government are willing to offer at the current time.

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[Baroness Penn (Con)]

I will give it one more try and will then write if I have not managed to make myself clear. The amounts raised through the levy will all go to health and social care spending. They are not the only things that determine the overall amount of health and social care spending and therefore responsible bodies’ budgets. It is also my understanding that, in the forecasts produced by the OBR alongside the Spring Statement, even with the increase to the thresholds, the amounts forecast to be raised through the levy are more than previously anticipated when the levy was announced. I will undertake to write to the noble Baroness because I do not think my second or third attempt has satisfied her.

[Lord Tunnicliffe (Lab)]

I confess to being as confused as the noble Baroness, Lady Kramer. Please could the Minister write to all noble Lords who have participated in the debate.

[Baroness Penn (Con)]

I will do so and place a copy in the Library so that all noble Lords can access it. I believe I have addressed most of the points raised in this debate, but if I have not, perhaps I could address any outstanding points in my letter.

I reiterate my thanks to noble Lords for their contributions to this debate and for considering this Bill so quickly. In short, the Bill is a fundamental part of the Government’s plans to use the tax system to support households with the cost of living, boost the economy through support to businesses and help workers enjoy more of the proceeds of growth. I commend it to the House, and I beg to move.

National Insurance Contributions (Increase of Thresholds) Bill

Lord Tunnicliffe Excerpts

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

[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.

[Baroness Penn (Con)]

My Lords, on the first amendment tabled by the noble Baroness, Lady Kramer, which is on the timing of the threshold change, I am afraid I will have to disappoint her. The answer to the amendment and the point she raises has not changed in the last six days. The Government brought in immediate changes to help with the cost of living last Wednesday, such as the cut to fuel duty. However, for the threshold change, we are now just a week away from the start of the next tax year and more time is needed for employers, software developers and payroll providers to deliver this measure.

The noble Lord, Lord Tunnicliffe, asked why the Chancellor had not acted more quickly, given that we could see the pressures on the cost of living building, and the noble Baroness, Lady Kramer, referred to universal credit. The Chancellor took action on universal credit in the Autumn Budget, cutting the taper rate and increasing the work allowance. Therefore, those measures can come in from April.

The noble Lord also mentioned that people would need to wait until July for support with their energy bills. Of course, the Chancellor announced a £9 billion package of support for energy bills not in the Spring Statement but at the time of the announcement of the change in the energy price cap. People will begin to see the benefit of that through the council tax rebates we are offering everyone in bands A to D of £150, and the £200 off bills now to be paid back over the coming years.

July is the earliest that this policy can be implemented by all software developers. It avoids millions of taxpayers having to make manual claims for refunds at the end of the tax year and employers having to make payroll corrections. Overall, the delivery timetable strikes the important balance between ensuring that individuals see the benefits of the increase as early as possible and allowing employers and payroll software providers sufficient time to update and test their systems so that the change is delivered smoothly, and for individuals to enjoy the benefits at the same time.

The second amendment asks the Government to lay a report considering the impact of the Act on disposable incomes, including if they are combined with a reduction in the national insurance rates of 1.25%. Her Majesty’s Treasury publishes regular distributional analysis of the impact of tax, welfare and spending decisions on households. The analysis published at the Spring Statement shows that, in 2024-25, the tax, welfare and spending decisions made since the 2019 spending round will have benefited the poorest households the most as a percentage of their income. The impact of government policy since spending round 2019 on the bottom four deciles is expected to be worth more than £1,000 a year, while there will have been a net benefit on average for the poorest 80% of households.

The aim of the Government’s regular distributional analysis is to present a comprehensive picture of the net effect of tax or welfare changes on household incomes in the round. As each policy decision will have a different effect on households, presenting the total impact over a relatively long period provides a more robust and stable approach than looking at every policy individually. Fiscal events are the appropriate time at which to publish comprehensive analysis of this sort because they allow the full range of government policy to be analysed together, in combination with the most up-to-date forecasts from the OBR.

The final amendment from the noble Baroness, Lady Kramer, concerns the Government laying a report to consider the impact of the Act on earned and unearned income, including an assessment of the impact of the future reductions in income tax. She touched on the history of national insurance and why it is not charged on unearned income. National insurance contributions are part of our social security system, which is based on the long-standing contributory principle, centred on paid employment and self-employment, with employers, employees and the self-employed paying towards the protection of those who have been in the labour market. Payment of NICs builds an individual’s entitlement to claim contributory benefits, which then replace earnings in certain circumstances, for example if someone is unable to work or is retired. Unearned income is generally excluded from a liability to NICs as it is not derived from paid employment.

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[Lord Tunnicliffe (Lab)]

I thank the Minister for her courtesy and for making herself available to discuss the Bill.

[Baroness Kramer (LD)]

I join in those words from the noble Lord, Lord Tunnicliffe. We did not need to meet the Minister because, at this point, everything was looking very straightforward, but she made a very kind offer and it was appreciated.