My Lords, I beg to move that this Bill be now read a second time. The Bill has two purposes. First, it allows us to deliver the NICs aspects of the personal tax package announced during Budget 2007. By allowing the upper earnings limit to be aligned with the point at which higher rate tax starts to be paid, the Bill will allow regulations to simplify the UK’s tax and NICs system significantly. From April 2009, there will be just two main rates of income tax, and they will apply to the same bands of earnings as the two rates of NICs, creating one of the simplest personal tax structures of any developed country.

Secondly, these proposals maintain the settlement achieved in the Pensions Act 2007 which are central to the Government’s commitment to provide a solid and simpler state pension. By bringing forward the introduction of the upper accrual point, the Bill maintains the timetable for the removal of earnings-related state second pension to that recommended by the Pensions Commission. That will mean that by around 2030, the very complex earnings-related structure of the state second pension will be withdrawn, leaving behind a wholly flat-rate scheme that will be simple to administer and simple for contributors and pensioners to understand.

I would like to explain each of those purposes in more detail, starting with the changes to the upper earnings limit. This is part of a package of reforms to the personal tax system announced at Budget 2007. That package is not for parliamentary debate today, as the majority of the changes are being legislated for in this year’s Finance Bill. Noble Lords will be aware of the broad thrust of the package and of the proposal for further measures following debate around the withdrawal of the 10 per cent income tax band. However, I remind the House that the reforms will take 600,000 more pensioners out of income tax, and 200,000 more children out of poverty.

A central part of the package is to align the national insurance upper earnings limit—the point at which Class I NICs become payable at 1 per cent rather than 11 per cent—with the level at which higher rate income tax becomes payable. The same will happen to the upper profits limit, which is the equivalent point for the self-employed—the point at which NICs become payable at 1 per cent rather than 8 per cent.

As announced, moving both limits will be a two-stage process. In this tax year, the upper earnings limit—the UEL—will be increased to £770 per week. In 2009-10, it will increase again to be aligned with the level at which higher rate income tax becomes payable. It is the second stage of that increase which requires the change to primary legislation under the Bill. At present, the maximum level of the UEL is restricted to seven and a half times the primary threshold, the point at which NICs start to be paid. To align the two systems from 2009-10, that link needs to be removed, which is what the Bill makes possible.

I am sure that the House will want to know that there will be effective parliamentary scrutiny of the level of the UEL once the restriction of it being no more than seven and a half times the primary threshold is removed. The setting of the UEL is currently subject to the negative resolution procedure. However, I am pleased to be able to tell the House that the annual regulations for setting the level of the upper earnings limit will now be subject to affirmative resolution procedures, so that for the first time noble Lords and Members of the other place will have the chance to debate any changes. This approach is consistent with the way in which changes to upper profits limit and lower profits limit for class 4 National Insurance contributions paid by the self-employed are made. They, too, are able to be set without restriction, but are subject to the affirmative procedures. It will also be consistent with the setting of the lower earning limit once it is no longer linked to the level of basic state pension when that becomes earnings linked. The Delegated Powers Committee, which examined the Bill and the powers it contains, did not make any comment. Therefore, I feel sure that these clauses guarantee a fair compromise between allowing detailed legislative scrutiny without imposing excessive burdens.

The Bill’s second purpose is to maintain the policy position on S2P that was settled in the Pensions Act 2007. S2P grew out of SERPS but with significantly improved coverage for lower-paid workers and people with parenting or caring responsibilities, typically women. Currently around 2.1 million carers, over 90 per cent of them women, and about 6.1 million low earners, almost 60 per cent of them women, are accruing entitlement to S2P. As a result of reform, around 1 million more people will accrue S2P from 2010, and approximately 90 per cent of them will be women.

The Pensions Act 2007 reformed S2P. It greatly simplified the first element of the pension which was designed with particular emphasis on the low paid and carers. It also made provision gradually to withdraw the second element of S2P, the earnings-related component. It may be helpful to recap briefly the background to that policy development, and to do so I need to take you back to November 2005 and the second report of the Pensions Commission. The commission analysed the advantages and disadvantages of a single-tier state system, folding basic state pension and S2P pension in together, but found that the transition between now and a simple single-tier pension was too complex and that buying out that complexity was unaffordable.

Instead the commission reasoned for an earnings-uprated basic state pension supported by a second-tier state pension and looked at three options for that second tier. The first option was that new accruals to S2P would cease immediately with an earnings-related national auto-enrolment scheme taking its place. The second option was to carry on as now under the current structure of S2P where the earnings-related element will be gradually eliminated by the mid-2050s. The commission’s third option was to accelerate elimination but still maintain some earnings-related compulsion for a transition period.

The commission recommended the third option as the best way forward, and in our Green Paper of May 2006 we accepted the commission’s recommendation on the withdrawal of earnings-relation. Our reasoning, drawn from the commission’s, was that a simpler flat- rate S2P, combined with an earnings-uprated basic state pension, will provide the solid foundation that will give people the confidence to save in personal accounts. It also avoided a sudden reduction in the contracted-out rebate and with it a reduction of support for defined benefit schemes that an immediate end to earnings-relations might cause.

The Pensions Act 2007 introduced a device for withdrawal: we would freeze the upper point for accruals in S2P. This new upper accrual point would be set at a time and a rate which would mean that earnings-related accruals within S2P would cease around 2030, keeping to the commission’s proposed timetable. The upper accrual point replaces the upper earnings limit in both S2P and rebate calculations and was planned for introduction from 6 April 2012 at the earliest. However, the upper accrual point now needs to be introduced earlier in order to ensure that our S2P reforms can be delivered as intended with a fully flat-rated S2P from around 2030.

The Bill therefore implements the Chancellor’s announcement in the Pre-Budget Report in October 2007 that the introduction of the upper accrual point would be brought forward to 6 April 2009. The need for this change results from the above-inflation increases in the upper earnings limit which we have just been discussing. If introduction of the upper accrual point is not brought forward, there would be knock-on effects to the pensions reforms introduced in last year’s Pensions Act. These knock-on effects would include delays to the timetable for delivering a flat-rate state second pension because, if left to 2012, the upper accrual point would have been introduced at a higher point than was originally expected. The above-inflation increase in the upper earnings limit would also have meant higher earners potentially making small but nevertheless unintended gains in their pensions over and above the pension White Paper reforms because S2P accrues on the portion of earnings between the lower and upper earnings limit, a band which will become wider.

A further effect would have been a larger than expected increase in the band of earnings on which contracted-out rebates are paid. This is because the rebate reflects the S2P forgone and is, again, paid on earnings between the lower and upper earnings limit. The group that would have benefited from this increase in the rebates would have been higher earners accruing higher pension entitlements than intended under the pension reforms. By introducing the upper accrual point in 2009 rather than 2012, the Bill prevents most of these anomalous gains as well as returning the timetable for the removal of earnings-related state second pension to that recommended by the Pensions Commission. While the proposal to introduce the upper accrual point in 2009 will affect some high earners, S2P accrual and rebates for this group are still expected to be higher than those envisaged in the pension White Paper reforms. They will still see significant gains from our overall package of reforms on state pensions. In future, someone earning at the level of the UEL today will be gaining around £45 a week in state pension. Those are the outcomes we promised under the White Paper and those are the outcomes we will still deliver.

This new point, the upper accrual point, will be introduced at the level of the upper earnings limit for 2008-09, which is £770 per week. From April 2009, the upper accrual point will replace the upper earnings limit as the threshold for the calculation of both S2P and contracted-out rebates. It is proposed that it will be frozen in cash terms at its introductory level, while the lower earnings limit and lower earning threshold will continue to increase annually, as now, in line with prices and earnings respectively. The combination of all three thresholds will mean that the band of earnings on which the current earnings-related state second pension and contracted-out rebates are based will reduce year on year. As a result, future accruals of S2P will be wholly flat-rated with no earnings-related element.

This change will mean that from 6 April 2009 all employers will need to calculate, record and report additional information for employees with earnings above the upper accrual point. Although this will require changes to their payroll records, the information is essential for both S2P purposes and the calculation of contracted-out rebates and was something that was already on the horizon with the intended introduction of the upper accrual point in 2012.

In conclusion, this is both an important and a necessary Bill. It helps us to implement a personal tax package that increases simplicity while reducing child poverty and removing many pensioners out of income tax. It also allows us to return to the timetable for the introduction of a simple flat-rated state second pension scheme. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)

My Lords, I am sure that I speak for the whole House in thanking my noble friend the Minister for such a clear explanation of the Bill. It is narrowly drawn, but it has wide-ranging implications, or so I shall seek to suggest. I shall not go into the flattening of S2P—I understand the logic of that and think it is sensible. Instead I shall raise two issues. The first is some issues concerning the alignment of NICs and tax bands. The second, which will not surprise my noble friend, is the issue of buy-back.

NICs and tax thresholds have always been curiously connected. It was not until 1975 that we constructed LELs and UELs, as we currently understand them, as a self-enclosed system with a crude ratio in which LELs were about a quarter of average earnings and UELs at about one and a half of average earnings. In 1985, the then Government removed UEL for employers but not—although it is often suggested by those to the left of me, and perhaps even by those to the right of me—for employees as well. A few years back, the Government also separated the LEL from the tax threshold. I cannot find out when, but it may have been when we introduced tax credits to replace family credit. I am not sure about that. We now have a primary tax threshold that is £10 or so higher than LEL, which itself is now quite arbitrarily attached to the level of the basic state pension, which is a benefit. Finally, in a move which separates the national insurance upper limits from benefits, we are reconnecting UEL to the upper tax threshold. So we now have alignment of the tax and benefit system at the top but some rather curious connections at the bottom, where LEL runs. It is those connections that I want to explore now, particularly as they very much interact with those who are also experiencing the loss of the 10p tax band.

It is even more complicated than that. At the bottom, we have a tax credit threshold at 16 hours’ work, which gives you tax credits. It is different from the LEL because you can run several small jobs together to qualify, but if you do get tax credits, that passports you through to national insurance, notwithstanding your being below the LEL on all other grounds. LEL is still for some arbitrary reason attached to the basic state pension and gives entitlement to contributory benefits. The question I want to ask my noble friend—as I gave the department notice of it yesterday, I am confident he will have an answer to it—is whether this LEL will rise with earnings from 2012 as will pensions, rather than with RPI as at present. At the bottom is the primary threshold, PT, at which point you pay tax.

If the LEL rises with earnings, because it is attached to the basic state pension which will rise with earnings, the gap between it and the primary tax threshold, which I presume will be largely RPI’d, will narrow over time: LEL will rise faster than the primary threshold. Equally, if average earnings rise faster than the minimum wage, an increasing number of people will fall below the LEL, though working 16 hours a week at minimum wage, and lose entitlement to contributory benefits.

In discussion on the Bill in the Commons, everybody fretted about what was happening at the top; nobody looked at what was happening at the bottom. I am sure that my noble friend can allay my fears. However, if LEL rises with basic state pensions and its earnings links, what are the implications for those, especially women whose earnings are rising less fast, who are on the minimum wage or who work part time? Will they become progressively disfranchised from contributory benefits? If the primary threshold remains RPI’d, does it mean that LEL and primary threshold will, as with the UEL, again become realigned over time, reconnecting the lower earnings limit with the tax threshold, both at bottom and at top?

It is clear that the higher that the LEL rises, the more people, such as partnered women in part-time jobs and disabled people in part-time work, are potentially excluded from contributory benefits. The simple answer would be to break the link with the basic state pension level and allow LEL to remain below that at which the BSP rises, because people would otherwise drop out of the contributory system. My noble friend may be able to give me other reassurances about the distributional effects. Real issues surrounding who will be eligible for a contributory system will arise if we do not think ahead about what is going to happen to LEL if it continues to be connected to a BSP that will be earnings-linked rather than RPI-linked.

My second point is that those who are currently disconnected from contributory benefits, especially for BSP, have an incomplete national insurance record. I rather doubt that my noble friend can give me the reassuring reply that I would like also on this.

Those who are savvy or well-heeled, or who have parents or husbands with the same fortunate attributes, can buy back their missing national insurance contributions as they go along, back to a further six years. But poorer women may well have missing years long before their previous six years. They may have had children before 1978; they may have dovetailed together several part-time jobs—if they are not eligible for tax credit, they do not get into the NI system; they may be service wives accompanying husbands abroad; or they may have extended caring responsibilities for older people. As a result, they would have a shortfall on their record which they could not cover under existing rules, meaning that only a quarter of women, compared with 90 per cent of men, currently retire with a full BSP. The Government’s figures are higher only because widows inherit a full BSP from a contributory husband. Therefore, the relevant statistics are about not when they retire but what they currently enjoy on average during their retirement.

The situation of those pensioners will improve from 2010, and dramatically so from 2020, thanks to the Government’s Pensions Bills, but in the mean time there will be a sandwich generation which as it retires is dependent on the support of partners or the state to fund their retirement even though they would like to help themselves by co-purchasing missing years back beyond the six-year rule. We are talking about women who, as we have argued previously in this House, keep several generations afloat: their own older children, their grandchildren, their partner or husband and often elderly parents as well. By supporting others they will often have lost the chance to support themselves, at least with a pension of their own.

We debated this matter very fully last summer. I am considering tabling similar amendments to this Bill to allow buy-back beyond six years by amending the 1992 social security Act. I hope that if I do so the House will be minded to support me as fully and extensively as it did last summer when the Government faced their biggest defeat since 1997. I am sure the House would forgive me if the amendment introduced delays to the passing of the Bill.

If I propose such a measure, I hope that my noble friend will not tell me on behalf of Her Majesty’s Treasury that it cannot be afforded. The cost of such an amendment, with sensible hurdles in place, would run on average at about £25 million a year, declining sharply after 2030. The current Exchequer contribution to class 3 buy-back contributions is of the order of £450 million for the last year for which I have figures. Each and every year it fluctuates by more than the cost of this would-be amendment. That fluctuation in contribution, and its scale, seems to bother nobody one bit. We cannot suddenly start to worry about the cost only when it comes to helping poorer women help themselves.

As those missing years are bought by all and sundry, including by Ministers and ex-Ministers, I hope we will not be told that it is poorly targeted. We do not know. I have asked and been told that the Government do not collect information about who currently receives this benefit by way of class 3 contributions. I suspect that it is poorly targeted. If we do not ask the questions, we cannot be seriously worried about the issue. Therefore, suddenly to put it on the back of some poorer women is inappropriate.

The third argument that has been run is that of risk: if poorer women knew that at the end of their working lives they could buy back missing years they would not do it during the course of their working lives. This is to presume a rationality which is sadly missing from the lives of women who possibly in many cases do not even understand the reduced married women’s stamp. In any case, we are dealing with a transitional generation, those who from about 2105 to 2020 will certainly enjoy the benefits of the Pensions Act and the reduced number of contributions they will need to make—only 30 years. Therefore, those women who are now 50 to 60 cannot revisit their past behaviour and change it in perverse ways that my noble friend or HM Treasury might think unacceptable. That behaviour is already there; we need to be able to help them to help themselves.

Finally, relevant to affordability—I have a couple of remarks on this—is the state of the National Insurance Fund, which can only be used for contributory benefits, apart from the NHS supplementation. Obviously that fund does not sit there as a piggy bank; it allows for reduction of the borrowing requirement which in turn is a form of not-so-hidden subsidy to other services. The guidelines from GAD are for a 16.7 per cent balance, which I calculate as about £12 billion on current levels of contributory benefit expenditure. The balances are growing fast; the figure now—for the current year, I think—is forecast at £42 billion, as opposed to £12 billion. That is equivalent to 65 per cent of benefit expenditure, rather than 16.7 per cent. The balances are also growing each and every year—by £5 billion, then £6 billion and £7 billion—because more people are earning and paying higher contributions, while fewer people are drawing out.

I repeat; there is a £5 billion addition, rising to £6 billion and £7 billion, yet we cannot have £20 million from a fund devoted to contributory benefits. Of course, given the demographics and the earnings link to BSP, these surpluses will begin to flatten from 2012 on, but while employment remains high—and with the raising of the state pension age, which also puts into the Exchequer a contribution equivalent to about £5 billion a year, but is excluded from nearly all discussion—that flattening will take some time to occur. I suspect we will be well into the 2020s, depending on unemployment figures, before we even begin to come back near GAD’s recommended figures. By that time, the cost of these buy-back proposals will have dwindled to the stuff of margins of error.

I am confident that if the National Insurance Fund were in deficit and required a taxpayers’ contribution, we would be told quite sharply that there was no money available for increases in certain benefits. If my noble friend will forgive me, I will tease him that such arguments, interestingly, only ever seem to run in one direction.

I am entirely content with the clauses in this Bill as it stands, but it is about reading the silences—the things not said. I am hoping that the House will continue to investigate and explore my particular concern about the connections between the tax threshold at the lower earnings level and buy-back on the other in further stages of this Bill.

My Lords, the fact that we are debating this Bill in detail at all reflects a curiosity of parliamentary procedure. In the minds of voters, this Bill relates to tax; that is how national insurance is perceived. From a parliamentary perspective, it relates to contributions to that extraordinary and almost mythical creature, the National Insurance Fund—about which almost everyone is completely ignorant. However, it does, and therefore we have the joys of debating it at length in your Lordships’ House.

As the Minister explained, the Bill contains but two principal proposals. When the Bill was debated in another place, Ministers explained that the first, the increase in the upper earnings limit for national insurance, was part of a carefully balanced package. He repeated that principle this evening; however, unfortunately for the balance, another component of the package was the abolition of the 10p tax rate. That, of course, is now being reversed. It would be cruel to ask the Minister to explain current government thinking on how it is to be reversed, and therefore I will not, but any discussion of these measures in the context of a balance is now completely redundant.

The other argument used, and used again this evening, was that this is a simplification measure. It is, and we welcome it as such. We are in favour of tax simplifications, but both we and the Government like a tax simplification that also, as it happens, brings in an additional £1.5 billion in revenue. We should have more of those. Our complaint here is simply that the Government should be clearer that one consequence of this measure is to raise that amount of money. I do not think I heard the Minister explain in any detail in his introductory speech that main consequence of this measure—and it is, arguably, one main reason behind it. Given the way in which the Government are perceived, if they are raising £1.5 billion—a quite significant sum—they ought to come clean about that and not pretend by hiding behind the fact that this is a simplification measure.

There have also been rather exaggerated claims in another place by the Government about the benefit that this additional revenue will bring, not least on child poverty. In their wilder moments, Ministers in another place almost seemed to suggest that child poverty and many other social ills were to be solved, virtually at a stroke, by this relatively modest amount. Getting to the bottom of how the money will actually be spent would, I suspect, be a fruitless exercise. However, the Institute of Chartered Accountants in England and Wales has come up with a relatively modest and sensible suggestion; namely, to ask the Government to publish their projections of how much of the extra revenue raised will be allocated to the National Insurance Fund and the NHS. Could the Minister express a view on whether the Government would be minded to accede to such a request?

The second proposal in the Bill is to introduce the upper accrual point in relation to state second pensions. Unlike the Minister and the noble Baroness, Lady Hollis, I am a mere toiler in the vineyard of Treasury matters and have never graduated to a detailed understanding of pension legislation. I suspect that even though we have a Committee yet to come on this Bill, I will not qualify even at the end of our deliberations.

In general terms, however, as the Minister knows, these Benches have been extremely critical of the Government’s priorities on pensioners—in particular, on pensioner poverty. We have been critical of pension credits, not least because 40 per cent of eligible pensioners do not claim them, and have argued the case both for a speedier reintroduction of the link between state pensions and earnings, and for a move toward a citizen’s pension, particularly as a means of moving to deal with the scandal of women who receive little or nothing by way of a state pension.

I do not intend to repeat to your Lordships this evening all of the arguments in favour of those policies. However, what happens to the extra revenue that is raised under this proposal? I believe that it is likely to be up to £450 million a year. In debates in another place, Ministers said that that sum was accounted for in the 2007 Red Book. I have looked at that, and while the figure may be included in one of the broader totals, I was not able to see it identified anywhere separately. I accept that that may be a result of my slipshod reading of the Red Book, but I would welcome some clarification from the Minister on how that additional revenue is accounted for in that statement; to a casual or even semi-qualified observer, it is very unclear at present.

Much of the debate on this Bill in another place related not to these principal changes, however, but to one consequence of them and one issue of parliamentary principle. The consequential change is the abolition of the ratio, of 7.5 times, between the upper and lower earning limits. That ratio is long-standing, and the noble Baroness explained how it was established in the first place. It has been seen as a check on any Government’s ability to raise that limit without primary legislation and proper parliamentary scrutiny. The parliamentary principle, linked to that point, is that national insurance thresholds and limits can, of course, be changed by order despite the fact that the change in limit can have substantial consequences on revenue. The Minister explained that in future any changes to the upper limit will have to be by affirmative resolution in a statutory instrument. As we have debated many times in your Lordships’ House, this is very different from the level of parliamentary scrutiny that applies on measures that come in via primary legislation. I have considerable sympathy with the concerns expressed in another place on this issue.

There is probably a consensus among the parties that once the change to align the two limits—the upper NI limit and the threshold for higher rate national tax—has been brought about, they should remain aligned, and that the Government should not succumb to the temptation to raise the upper national insurance threshold above the starting point for upper rate income tax. There was considerable debate in another place about how that might be achieved, the problem being—as Members in another place sought to address when they tabled amendments—the completely different process and procedures for dealing with income tax and national insurance changes and the different timetable for introducing a national insurance change that starts at the beginning of the tax year and a tax change that starts at the beginning of the tax year.

No doubt we will explore some of these issues in Committee, but it seems to me that one could go some way towards dealing with this problem if the Government effected two things. First, they could confirm that for the remainder of this Parliament, at least, the upper national insurance limit would not exceed the threshold for the 40 per cent of income tax and that from now on changes to both those limits could be set out in the Pre-Budget Report. If they moved in step—which seems to be what the Government want and what there is a consensus on—people would be reassured; but if there was any attempt to hide the limit for national insurance purposes beyond the threshold for higher rate income tax, we would at least be forewarned before statutory instruments were introduced and there would be that much more scope for parliamentary debate.

We could, of course, begin to treat national insurance in legislative terms as if it were a tax, but that is probably too revolutionary a step and certainly way beyond the scope of this Bill.

My Lords, when we debated the Queen’s Speech last November, I said that we would greet this Bill with little enthusiasm. The intervening five months or so have done nothing to change that.

The noble Baroness, Lady Hollis, has used this opportunity to return to the fray on buy-back. The whole House was shocked when the Minister reneged on the commitment that he had given her during proceedings on the Pensions Bill. The noble Baroness, in her doughty way, has refined her attack and sought to deal with the objections that the Government have come up with. In particular, through the use of hurdles, she wishes to constrain the annual cost of implementing any buy-back proposals. I just say to the Minister today that the noble Baroness makes a strong case and, if she decides to pursue it in this Bill, without making any commitments, we will look very carefully at whether we can support her on the refined basis that she has put forward.

For all the Minister’s fine words, this is a money-grabbing Bill designed to pour a couple of billion pounds each year into the Treasury. It has a fig leaf of pensions and national insurance reform but money is what it is about. It is ironic that your Lordships’ House is able to consider this Bill in detail because, technically, it is not a money Bill. The noble Lord, Lord Newby, referred to this. I welcome the opportunity to consider this Bill fully and would welcome the ability of your Lordships’ House to consider the technical aspects of Finance Bills in future. But that is for another day.

As the noble Lord, Lord Newby, pointed out, it is little more than a fiction that national insurance is not a tax. The money goes into a mythical National Insurance Fund. But, as the noble Baroness, Lady Hollis, pointed out, there is a surplus building up in that fund. On the basis of the last accounts that I could trace, the Government Actuary recommended a balance of around £10 billion at March 2006, but at that date the fund had £34 billion in it—and so £24 billion had already been used to prop up the Government’s spending. Will the Minister say when the 2006-07 accounts will be available, as they seem to be overdue? What does he expect the figure to be on an up-to-date basis—say, at March 2008—and what impact will this Bill have on the surplus? The noble Baroness, Lady Hollis, referred to the increasing surplus that we expect to see from higher rates of higher national insurance payments being made. It is clear that the money which will be raised by this Bill is in substance an increased tax, because it is not needed for National Insurance Fund purposes. Rather, it will fund the UK’s budget deficit, which I remind the House is now outdone in relative size only by those of Pakistan, Hungary and Egypt.

The first thing that this Bill does is to increase the upper earnings limit so that employees pay national insurance at the full rate on more of their earnings. This was introduced by the Prime Minister when he was Chancellor as part of the package of income tax changes which have been so mishandled by the Government. Only those on middle incomes are affected by the raising of the upper earnings limit under this Bill, paying £ 1.5 billion a year as their contribution to the package. But we know, as the noble Lord, Lord Newby, pointed out, that another part of the package was the 10p rate abolition, which hit 5.3 million mainly single people on low earnings. We still have no details on how, when and to what extent that wrong will be righted. I am sure that voters, when they go to the polls tomorrow, will remember that the Prime Minister knows how to raise money but has no idea about how to do it with fairness and equity.

We agree that, in principle, the national insurance and income tax systems should be harmonised, but this Bill does not do that. There are still significant differences between the two, including the weekly basis of contributions and different bases on which national insurance and income tax are levied. Noble Lords should be aware that this Bill is not about reform; it is about grabbing £1.5 billion a year dressed up as reform.

The Government pretend that this Bill harmonises the upper earnings limit and the start point for the higher rate tax, but that is completely untrue. What the Bill does is to give the Government power to raise the upper earnings limit by order to whatever level the Government choose. There is no restriction on the amount at which the upper earnings limit can be set. The noble Lord, Lord Newby, referred to the loss of the constraint of the 6.5 to 7.5 times the primary threshold, contained in current legislation. The only constraint is the rather ludicrous one of there being an affirmative order. I agree with the noble Lord, Lord Newby, that that allows for insufficient scrutiny and we shall return to this area in Committee because we believe that some restrictions on the Government’s use of this power should be enshrined in legislation. I can tell the noble Lord, Lord Newby, that I have given some thought to a series of amendments that might achieve the alignment over the next two years but also put a constraint on the Government thereafter.

The second thing that the Bill does is to raise money for the Treasury by stopping the accrual of S2P above an upper accruals point from 2009-10. As I have already made plain to the House before, I have never understood how S2P actually works, but I am hoping next year when I reach pensionable age that I might find out whether I have accrued any. This change raises approximately £450 million a year, mainly through contracted-out rebates. We heard the Minister’s spin on this; it is all about implementing the Pensions Commission recommendations that the S2P should be flat-rated by 2030. The Government’s May 2006 White Paper, Security in Retirement: Towards a New Pension System, was very clear on the Government’s policy. It said at paragraph 3.13 that,

“we will … reform the State Second Pension so that it becomes a simple, flat-rate weekly top-up to the basic State Pension. Accruals will start gradually to become flat rate at the same time as we start to uprate the basic State Pension by earnings. We estimate that the State Second Pension will become completely flat rate around 2030 or shortly afterwards”.

The policy was to link flat-rating to earnings linking and the 2030 date for the completion of the flat-rating was a mere estimate.

All we know about earnings linking is that it will not start before 2012 but could start any time thereafter within the next Parliament, subject to the Treasury’s view of “affordability”. We also know that the Government’s finances are not in great shape and so there are considerable doubts about whether the commencement of earnings linking can be afforded in 2012 or even in 2015. We shall be exploring this further with the Minister. For today the key issue is that flat-rating the S2P is being started three years ahead of its earliest planned date and possibly six years ahead of the actual introduction of earnings linking. The Minister has rehearsed the Government’s line that they had to act because the increase in the upper earnings limit in Budget 2007 meant that, if nothing else were done, flat-rating would be delayed from the date of 2030. But the 2030 date was merely an estimate rather than a target and hence there is a degree of hypocrisy in now elevating it to target status.

In another place my honourable friend Mr David Gauke probed Treasury Ministers on this decision to bring forward the start of flat-rating. The answers that he received are somewhat incredible. Apparently the Treasury knew when Budget 2007 was put together that the UEL changes would increase the S2P accruals and would hence affect contracted-out rebates in the near term, and that this additional cost was included in the 2007 Red Book. I think the noble Lord, Lord Newby, was looking for revenue in the 2007 Red Book. Actually it was an additional cost that we are told is in the Red Book but I have not found it either. The Treasury also knew, apparently, that it would affect the flat-rating projections but it seems that the Chancellor, the other Treasury Ministers and Treasury officials thought it quite unnecessary to tell anybody about it at the time. Instead they waited until this Bill was considered in another place before coming clean on the issue. At best, this is Government at their least transparent.

Having increased the UEL, there were several options for achieving flat-rating. Given the Government’s existing policy statements, a disinterested observer might conclude that the most rational way was to realign from 2012 or from whenever earnings linking was introduced if that were later. Whether to flat-rate by 2030 would have been a separate decision affecting the speed of achieving flat-rating. Any observer who knows this Government would know that the Treasury would just see another stealth tax on offer and select the option which produced the greatest inflow to the Treasury. We have stopped counting the number of stealth taxes the Prime Minister introduced when he was Chancellor because the number grew so large, but this one has to qualify for a special prize for stealthiness.

We should also remember that the Government have form on using national insurance rebates. The last quinquennial determination blatantly loaded costs onto employers in order to save the Treasury money. The Government ignored the advice of their own Government Actuary as well as submissions made by employers and the pensions industry. The Government lamely tried to hide behind the words “cost neutrality” and “fiscal circumstances”—that is, the Treasury’s view of what it wanted to afford rather than what occupational pension schemes needed in order to compensate them for assuming contracted-out obligations.

In this Bill the Government are at it again, giving plausibility to their raid by describing the rebates in the impact assessment as “anomalous gains” for employers. When are the Government going to treat private sector occupational pension schemes, especially defined benefit ones which are most affected by the rebates, with respect? Do they really think that employers, already cheated out of their contracted-out rebate levels, think that these so-called gains are anomalous? The Government are doing everything possible to kill occupational pension provision and we will be discussing that again with the Minister when we reach the Pensions Bill. This is a miserable little Bill. I feel sorry for the Minister, who is an honest man, for having to come to the House to defend it.

My Lords, it has been an interesting debate. I am flattered by the noble Baroness’s concern but I am happy to bring this measure before the House and I am very grateful to the small band of noble Lords who have gathered tonight to comment on it.

Before I respond to each of the points raised, let me remind the House of the two purposes of the Bill. First, it allows the Government to deliver the package of personal tax reforms announced at Budget 2007, in particular by allowing the upper earnings limit to be aligned with the point at which higher rate tax starts to be paid. This Bill makes possible a major simplification of the UK’s tax and NIC system. I believe that has a measure of support from the noble Baroness, Lady Noakes, although I acknowledge that there is not an identity between the tax and NIC systems. We are not suggesting that there is. Secondly, the Bill is looking at providing a solid and simpler state pension. I will come back to the issues as to why we have advanced the introduction of the upper accrual point in a moment.

I will move on to the individual points raised and start with my noble friend Baroness Hollis. She asked specifically about the lower earnings limit and its link to the basic state pension and expressed a concern that when pensions are increased by earnings, this could drag up the lower earnings limit and therefore exclude people from benefit. It is typical that my noble friend focuses on the lower paid when others have looked at the other end of the scale. This problem was identified and the Pensions Act 2007 makes amendments to break the link between the LEL and the basic state pension from when the basic state pension becomes earnings linked. Breaking that link will avoid the issue that my noble friend has focused on.

The noble Baroness, Lady Noakes, and my noble friend referred to the issue of class 3 buy-back contributions. I reject the assertion that the Government have reneged on their commitment. What was set out at the time in the other place by my honourable friend Mike O’Brien and repeated by me here was that we would look to try and make the proposition work but having regard to fairness, affordability and simplicity. A lot of work has been done since our debates with HMT and HMRC and stakeholders have had some informal meetings to try and make the proposition work. Our priority and the priority of my noble friend, as expressed tonight, was to find an option which would particularly target women on low incomes living in this country. The challenge has been to come up with a proposition that fits that description. Poorer pensioners are likely to be better off if they are close to retirement under pension credit and it would therefore not benefit them to pay voluntary contributions. They may find themselves paying voluntary contributions and getting no benefit because there would be a withdrawal of pension credit pound for pound. The cost of six years of class 3 contributions is currently around £2,500 and around three quarters of households in the bottom three income deciles containing women aged 55 to 59 have less than £5,000 in savings.

My Lords, the whole point of being able to buy at the point of your retirement is that the increase in your pension more than pays for the cost, even if you had to borrow that money by loan.

My Lords, that depends on how long one is going to live. It is generally the case that people at or close to retirement do not wish to take on extra borrowing. Even if there is an arithmetic case for what my noble friend says—I accept that point—I doubt whether, as a practical matter, poorer households would want to take on that additional borrowing.

One concern is that those who could take advantage of the proposal are wealthy expatriates—men and women. We estimate on the original proposition that something like 65,000 people living overseas could benefit. I acknowledge, as indeed has the noble Baroness, Lady Noakes, that my noble friend’s subsequent amendment to the proposition, particularly to have a 20-year contribution threshold, certainly helps to reduce the cost and raise the barrier to exclude some of the non-residents, but there are potentially significant costs attached.

My message is that we need to continue talking about this issue. I want to emphasise my noble friend’s point about the changes made in the Pensions Act 2007. They will narrow the gender pensions gap and deliver fair outcomes to women and carers, and significantly improve women's state pension coverage. I will not go through the detail because we have discussed it before and the clock is moving on. The concern is about targeting. If we had a way of reaching those poorer women whom my honourable friend is most concerned about, as are we, there may be scope for moving forward on that matter.

My noble friend also asked about the National Insurance Fund and what would happen to the surplus. My noble friend is well aware that that surplus is invested back into the public sector. If it were not available, the Government, through borrowing or raising taxes, would have to find the wherewithal by other means to fund their current Budget.

My Lords, does the Minister therefore accept that it is fulfilling the function of a tax?

My Lords, we can debate the differences between income tax and NICs. For example, income tax is focused on all incomes and national insurance just on earnings. On income tax there is no age limit but for NICs there is a 16 to 60 or 65 age limit. Income tax works on a cumulative basis but NICs is based on an earnings period. The two are not the same.

My Lords, perhaps I can explain. I understand that they are on different bases. I was seeking to make the point that there is an accumulating surplus in the National Insurance Fund not needed for current purposes and not needed according to the Government Actuary’s Department calculations. It is going into the National Insurance Fund and is being siphoned off immediately into funding expenditure for which it was not designed in the same way that tax is used to fund expenditure. That was the point that I was making, not the technical underlying bases of how they are raised.

My Lords, nobody is trying to hide what happens to the resources that go into the National Insurance Fund. There is a surplus, but that is used to support other government expenditure.

I would particularly like to deal with the suggestion that this is all about raising revenue. I made it very clear in my opening remarks that this was part of a package. If you look at the components of that package, from removing the 10p rate there was a benefit of £8.6 billion. Reducing the basic rate to 20p cost £9.6 billion. The alignment of NICs created a surplus of £1.5 billion. Raising the aligned UEL and HRT by £800 a year—the inflationary increase—cost £0.25 billion. An increase in age-related tax allowances by £1,180 above inflation cost just short of £1 billion. There was a price tag of £1 billion for an increase in the child element of child tax credit by £150 above earnings and there were other components. Overall, that package cost £2.5 billion—before whatever might arise from the current look at two groups of people who have been debated extensively recently. It is simply not right to peel away one component and say that this is about raising revenue. It is not.

My Lords, may I clarify something? Is the Minister saying that this national insurance hike is just being used to fund tax effects elsewhere in the system? If so, in what sense is it national insurance and not a tax?

No, my Lords, I am not saying that. I am saying that the starting point in all this is to simplify the tax and national insurance system. The noble Baroness's party called for that and I thought in principle supported it. She referred to that earlier. Other commentators have supported it. The IFS has supported that alignment as a simplification of the system. If you are going to simplify the system, that is done by having various components at its point of introduction. It is absolutely right to do that. But it is entirely spurious to take out one component and say, “This is a tax increase. That is what this is all about”. That is absolutely not so. The noble Baroness, Lady Noakes, knows that full well because she can read the numbers as well as I can.

My Lords, I do not necessarily want to support the noble Baroness, because she is perfectly capable of making her own argument. However, if the Government raise taxes, by and large, they spend it on something. That does not mean that they have not raised taxes in the first place. That is what is happening here. It may be that the money is being spent on the most wonderful purposes that humankind has ever considered, but that does not negate the fact that in order to spend it you have to raise it. That equates to a tax.

My Lords, of course this particular item raises revenue, but it is part of a package, where there are costs from changing other aspects of the system. Surely, it is right to look at this in aggregate. You cannot seriously argue that you can pick one component and say that this is all about raising taxes. It is simply not the case.

The noble Lord, Lord Newby, asked specifically about projections and what changes would happen as a result of allocations of revenue collected between the UAP and the UEL—a point raised by the ICAEW. The introduction of UAP does not affect the overall application of NICs between the NIF and the NHS, which are calculated in accordance with Section 162 of the Social Security Administration Act 1992. It does not affect that at all.

The noble Baroness, Lady Noakes, asked about the latest accounts. I shall have to write specifically on the 2006-07 accounts, but I am advised that there is a Government Actuary’s Department report published in January 2008. I am not quite clear what period that covers, but I will write to the noble Baroness with more details.

My Lords, the latest stats that I could get were dated January 2007. I tried, exactly as the noble Baroness did, to find out whether there was a set of January 2008 stats. We are actually dealing with 2005-06 real figures and forecasts for the years thereafter. I am afraid that she is absolutely right: we seem to be running behind. Perhaps there is a good reason for that, but she is absolutely right.

My Lords, I will certainly make sure that all noble Lords who have contributed tonight will get a response on that. I do not have the details immediately before me.

The noble Lord, Lord Newby, and the noble Baroness, Lady Noakes, asked why we should allow changes to national insurance to take place by affirmative order and whether that gave the Government carte blanche to do things that they should not. We have been clear about aligning the UEL at the higher rate tax starting point just as we have been clear about aligning the primary threshold with the personal allowance—effectively the start of income tax. That latter point is dealt with by regulation. I can see no reason why the level at which employees stop paying NICs at the main national insurance employee rate of 11 per cent should be subject to primary legislative restrictions, when the point at which they start paying NICs has none. There is simply a symmetry about that.

My Lords, does the Minister think that there ought to be statutory requirements in relation to both ends?

My Lords, the arrangements in respect of the primary threshold have worked perfectly well since it was introduced and we have stuck by the commitment to maintain that alignment. That is what has happened in practice so I do not see why it should not operate at the other end as well.

The noble Baroness said that we should not have gone about the flat rating as we did. To reiterate the point: the need to bring forward the timing of the upper accrual point was driven by the change in the upper earnings limit. If that were not increased, there would have been no necessity. I believe that the noble Baroness is trying to make a point.

My Lords, the point I wanted to make—which I should not have done from a sedentary position, for which I apologise to the House—is that that is the Government’s spin on the position.

My Lords, I reject that. The various components of the settlement were very clear in the provisions that we debated last year, including when there could be an earnings-related uprating of the basic state pension. It was a carefully constructed package that had financial implications which had to be affordable. If one component changes, it seems entirely reasonable that we should try to end up where we would otherwise have been, where that settlement was going to take us, and that is what this is doing. Notwithstanding that, there is still some extra gain for higher earners beyond that which would have accrued to them under the original proposals, because by bringing forward the upper accruals point a few years early, there is still a longer time period by which that level of earnings would be within the S2P accruals. So it is entirely justified to do what we are doing in the Bill.

I hope that I have covered most of the points that noble Lords have raised; if not, I would be very happy to receive more interventions. I reiterate that this is a narrow technical Bill which is based on wider issues that are current at the moment. We will cover more of the detail in Committee. Trying to simplify the income tax and national insurance system, which is what this facilitates, and trying to make sure that our pension settlement consensus stays on track, where it should be, is the right thing to do. For that reason, I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Grand Committee.