National Insurance Contributions (Secondary Class 1 Contributions) Bill

Viscount Trenchard Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Londesborough, who has made a most interesting and thought-provoking speech. I declare my interest as deputy chairman of the Royal Air Force Benevolent Fund, which, in common with other charities, is adversely affected by this Bill.

I thank the Minister for providing this opportunity to debate the centrepiece of the Government’s first Budget: the unexpected large increase in national insurance contributions. Whether the maintenance of NI contributions as a separate tax is logical or not is a separate question. I agree with what my noble friend Lord Forsyth said so eloquently and with what the noble Lord, Lord Macpherson, and the noble Viscount, Lord Chandos, said on this subject.

If we have a separate national insurance tax paid by employers and employees, the balance between employers’ and employees’ contributions should appear reasonable in the light of what the tax is theoretically supposed to do. I submit that the Bill before your Lordships today fundamentally alters that balance. It is bound to lead to employers telling their staff—in particular their part-time staff—that their pay rises will be less than they would have been because employers’ contributions have increased so disproportionately. Even if rigidity in the labour market means that employers may not pass on all the additional costs in the first year to their employees, the OBR forecasts that workers will bear 60% of the costs of the increased contributions initially, rising to 76% in later years.

The Government claim that the increase in the employment allowance and the removal of the £100,000 threshold will substantially mitigate much of the increased burden on small companies. However, the Treasury forecasts that the increased contributions will yield £23.18 billion in 2025-26, before any behavioural changes. Can the Minister tell the House what the yield would have been if there had been no increase in the employment allowance? This would help your Lordships understand what proportion of affected workers benefit from the increase. To be precise, can he tell us what proportion of employers benefit compared to those that do not, and what proportion of employees are employed by employers that benefit compared with total employees?

The other principal effect of the changes, as predicted by the Chartered Institute of Taxation, and by my noble friend Lord Mackinlay in his excellent speech, is that employers will seek to secure the services of workers by contracting them on a self-employed basis rather than as employees. The Bill will further increase the differential in the burden of tax and national insurance between those in employment and those engaged as self-employed. The consequence is likely to be an increase in false self-employment. Does the Minister agree that, if the Government’s policy leads in that direction, it would be most unfortunate and, paradoxically, have the reverse effect on the rights of the affected workers from that which the Government otherwise seek to achieve? I am not arguing in favour of their approach to employees’ rights, only saying that under existing law employees have rights which self-employed workers do not.

It is relevant that the public sector is largely unaffected by this Bill, since public sector workers are exempt. It represents yet another huge transfer from the private sector to the public sector. The private sector will therefore have to work all the harder to generate the growth that the economy as a whole so badly needs.

The increase in employers’ NI contributions will hit small businesses in the hospitality and farming sectors hard. Farming businesses are having to sustain a double whammy anyway, as a result of the accelerated withdrawal of the direct payment scheme and the new restrictions on APR and BPR. Many small businesses in the farming and hospitality sectors do not benefit from the increase in the employment allowance. It is also relevant that they employ many part-time workers, for whom the employers’ NI contributions are increased quite disproportionately.

I ask the Minister, please, not to continue to argue that the large increase in employer NI contributions is not a breach of the Government’s manifesto commitment. It was specifically promised over and over again that there would be no increase in national insurance. It is disingenuous to suggest that a reasonable person would consider that the promise covered only the employee’s part of national insurance contributions; a reasonable person would not think that.

The OBR, the IFS, the Resolution Foundation and many others all say this is a tax on working people. Andrew Lewin said at Second Reading in another place that the Labour Party had chosen national insurance to fund the rescue that the public services need. The public spending audit, conducted by the Treasury after the general election, found that the higher level adopted for public sector pay awards accounted for an additional £9.4 billion over the amount the previous Government had set aside for this.

The Government are still talking about a so-called black hole of £21.9 billion, but the OBR’s review explains it very differently. After the £9.4 billion of unbudgeted pay increases, the next biggest component is normal reserve claims, amounting to £8.6 billion. The OBR’s review draws attention to its limited resources, which affect its interaction with the Treasury, and suggests that the degree to which the Treasury shares information with the OBR will need to change. Was it not inevitable when the OBR was set up that we would be led down this path? This will lead to a further slippage of powers from the Chancellor and Treasury Ministers to a burgeoning OBR. I wonder whether the Chancellor will not rue the day the Government introduced the Budget Responsibility Act.

The OBR had pencilled in growth of 2% for 2025-26, but recent economic forecasts point to the likelihood of some sort of recession. The economy is now suffering from the effects of the tax changes—for which businesses are already preparing—and the effect on inward investment of the coming changes in workers’ rights. The Bill before your Lordships today has already led firms to reduce plans to expand their staff and postpone new investment projects.

When the Government came to power, they promised they would be very supportive of business and that the country would enjoy the fastest rate of growth among the G7 countries. How much has changed in such a short time. We have not heard much in recent weeks about the promise made by the Chancellor that the tax rises in the Budget would be the last ones. Does that commitment still hold, or have the Government resiled from that commitment as well as others?

The high public sector pay awards have helped fuel a new boost to inflation, which has led to higher interest and mortgage rates for longer than we all hoped. As many noble Lords have said, the Government’s Budget is already damaging growth. The Minister has been asked many questions, and I am looking forward to his answers.