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Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2023

Volume 827: debated on Wednesday 22 February 2023

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2023.

My Lords, I shall speak first to the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2023. These regulations set the national insurance contributions limits and thresholds, as well as the rates of a number of national insurance contributions classes, for the 2023-24 tax year and make provision for a Treasury grant to be paid into the National Insurance Fund if required. While the scope of the regulations under discussion today is limited to the 2023-24 tax year, I will also note where the Chancellor has committed to maintain certain thresholds at their current levels in future years.

National insurance contributions, or NICs, are social security contributions. They allow people to make contributions when they are in work in order to receive contributory benefits when they are not working, for example, when they are retired or if they become unemployed. NICs receipts go towards funding these contributory benefits, as well as the NHS.

I begin with NICs for employed and self-employed people. The primary threshold and lower profits limit indicate the points at which employees and the self-employed start paying class 1 and class 4 NICs, respectively. In the Spring Statement 2022, the Government raised the primary threshold and lower profits limit from £9,880 to £12,570 to align with the income tax personal allowance, fulfilling the Government’s ambition of ensuring that the first £12,500 earned by individuals is tax free. These changes were implemented in July 2022. In the Autumn Statement 2022, to ensure that the tax system supports strong public finances and that those who are able to pay more do so, the Chancellor announced that these thresholds would be fixed until 2028.

At the same time, the Government are fixing the lower earnings limit, which will remain at £6,396 per annum, or £123 per week, in 2023-24; and the small profits threshold, which will remain at £6,725 in 2023-24. Fixing these thresholds will mean that more low-earning working people will still gain entitlement to contributory benefits and build up qualifying years towards their state pensions without paying NICs.

In the Spring Statement 2022, the Government also announced that self-employed individuals with profits between the small profits threshold and the lower profits limit will continue to build up national insurance credits without paying any class 2 NICs. Class 2 NICs will now be paid above the newly introduced lower profits threshold, which is also set at £12,570 to align with the NICs lower profits limit for class 4 NICs—again delivering the pledge that the first £12,500 earned is tax free.

The upper earnings limit, which is the point at which the main rate of employee NICs drops to 2%, and the upper profits limit, which is the point at which the main rate of self-employed individuals’ NICs drops to 2%, are aligned with the higher rate threshold for income tax. That threshold will also be fixed at £50,270 until April 2028.

The flat cash rate of class 2 NICs will increase from £3.15 in 2022-23 to £3.45 in 2023-24, in line with inflation. Self-employed people earning below £6,725 may pay class 2 NICs voluntarily to protect their entitlement to certain contributory benefits.

Class 3 NICs allow people to voluntarily top up their national insurance record. The rate for class 3 will increase in line with inflation from £15.85 a week in 2022-23 to £17.45 a week in 2023-24.

I turn to employer NICs. The secondary threshold is the point at which employers start paying employer NICs on their employees’ salary. In the Autumn Statement 2022, the Chancellor announced that this threshold will remain at £9,100 in 2023-24 and will be fixed at this level until 2028. This supports the public finances, while ensuring the largest businesses pay the most, and the employment allowance, which the Government raised from £4,000 to £5,000 last April, means that the smallest 40% of businesses pay no NICs at all. The thresholds at which employers can claim NICs reliefs for employees who are under 21, apprentices under 25, veterans and new employees in freeports have also been fixed in these regulations.

The regulations also make provision for a Treasury grant of up to 5% of forecasted annual benefit expenditure to be paid into the National Insurance Fund—NIF—if needed during 2023-24. A similar provision will be made in respect of the Northern Ireland National Insurance Fund. The report from the Government Actuary’s Department—GAD—laid alongside the re-rating regulations forecast that a Treasury grant will not be required in 2023-24, but we have included this provision as a precautionary measure. This is consistent with previous years, as the Government consider it prudent to make a provision at this stage for a Treasury grant.

I turn to the Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2023. The Government are committed to delivering a welfare system that is fair for claimants and taxpayers, while providing a safety net for those who need it most. These regulations will ensure that tax credits, child benefit and guardian’s allowance increase in line with the consumer prices index, which had inflation at 10.1% in the year to September 2022.

In summary, this proposed legislation makes changes to the rates, limits and thresholds for national insurance contributions, provision for a Treasury grant, and increases to the rates of tax credits, child benefit and guardian’s allowance in line with prices. I hope noble Lords will join me in supporting these regulations, and I beg to move.

My Lords, I wish to speak to the child benefit uprating regulations, which of course I welcome, as there had been fears that the Government would resile from the convention that the benefit should be uprated in line with inflation. Before we get carried away, however, it is important to remember that even after this increase, child benefit will be worth over 16% less than it was in 2010, due to its having been cut and frozen. Do the Government ever intend to make good that cut, the product of austerity policy, which disproportionately hit children in a number of ways?

Earlier this month in the Commons, the Financial Secretary to the Treasury emphasised that

“Child benefit is an incredibly important form of state assistance”.—[Official Report, Commons, 2/2/23; col. 200WH.]

Last year, in your Lordships’ House the noble Viscount, Lord Younger of Leckie, stated

“Child benefit ensures that families receive predictable, consistent support from the Government for the additional costs of raising a child”

and went on to say

“the Government are committed to making the benefit system simple and navigable for claimants. Child benefit is therefore a simple and well-understood benefit, paid at a consistent flat rate to parents”.—[Official Report, 8/7/22; cols. 1213-14.]

That is certainly true in theory, and was so in practice in the past, but try telling that today to those caught by the high-income child benefit charge which passed—I will not say celebrated—its 10th birthday last month. That 10th birthday was marked by highly critical pieces in the Sunday Times and the Telegraph, the latter referring to the charge’s bizarre rules. I resist the temptation to make the case against the charge in principle, other than to remind noble Lords that it is not only a parent’s child benefit that can be at stake but their pension credit, if they do not claim child benefit because of the charge.

Instead, I want to focus on the fact that the £50,000 to £60,000 income band, above which child benefit is withdrawn, is exactly the same in cash terms as it was when introduced 10 years ago. According to the Resolution Foundation, the recent note of which I am drawing on, if uprated in line with CPI the figures today would be £64,000 and £77,000. This total freeze in the threshold has serious, and in some cases bizarre, consequences.

The Resolution Foundation estimates that

“around 2 million families, or 1-in-4 … of those with children, will have some Child Benefit effectively partially or fully withdrawn because one person has an income over £50,000”.

This compares to one in eight when the charge was introduced 10 years ago. In other words, the proportion of those with children affected has doubled. It estimates that one in 13 families—that is 600,000—has someone earning between £50,270 and £60,000, and thus experience high marginal tax rates of 55% for one child, 63% for two children, and 71% for three children, with a further eight percentage points for each additional child.

The Resolution Foundation describes

“a relatively small, but rapidly rising, number of families”

who are in the bizarre position of being entitled to universal credit while also having their child benefit withdrawn. It argues that the result is

“truly punitive marginal deduction rates”

of 80% for those with one child, 83% for those with two children and 87% for those with three. In practice, the rates could be even higher, but I will spare noble Lords the additional complications.

UC recipients affected are likely to have high rents or childcare costs. In the absence of official figures, the foundation estimates that, from April, roughly 50,000 families will fall into the child benefit charge/UC trap, and that there could be 90,000 by the end of the decade. Can the Minister confirm these estimates, and say how the Government justify this state of affairs? Is the Resolution Foundation correct to say that the charge thresholds are currently set to be “frozen forever”, given that there is no statutory obligation even to review them? Will she take back to the Treasury the message that it is high time they were reviewed, even in the absence of such a statutory obligation?

The Resolution Foundation rightly describes this as “a serious design flaw”, and argues that

“no rational policy maker would ever have drawn up the current system”.

It warns:

“Unless we are to accept that ever-more families will face a £10,000 stretch of income where there is no point in seeking higher earnings, the Government will have to fix this situation”.

Not to do so, it suggests, is “unserious”.

I cannot believe that a Government who care so much about incentives and marginal tax rates are willing to countenance the continuation of a situation that can only get worse at the expense of a growing number of families with children. At the very least, the Chancellor should announce a rise in the thresholds in next month’s Budget.

My Lords, I too thank the Minister for setting out these two instruments. I also thank my noble friend Lady Lister for her attention to the detail of these matters and to the ease with which an apparently rational change can compound itself through the complexity of the rules into extremely unhelpful marginal tax rates. I hope the Minister will give her some comfort that there will be some review in the foreseeable future of the very high marginal tax rates emanating from these complex rules.

The Minister outlined an increase in tax credits, child benefit and guardian’s allowance of 10.1%—that is, CPI inflation between September 2021 and September 2022. While acknowledging that further instruments are to come on other social security benefits, I will make some general points about the current economic context and the Government’s approach.

Families across the country have faced an incredibly difficult time of late, with household bills climbing significantly. Although there has been energy support for low-income households, there has not been equivalent help as they face soaring food, phone and broadband bills. Food inflation has been running at far higher than 10% for many months, leading many households to cut back and to a worrying number of parents skipping meals to provide for their children.

The Government’s reluctance to commit to the usual uprating process when asked has caused a significant amount of anxiety for social security claimants across the country. For months, successive Prime Ministers and Chancellors—we have had many of each—ducked the question and even floated alternatives such as lower percentage increases or lump-sum payments. We are glad that the current Chancellor finally did the right thing, but I hope the Minister will acknowledge that months of indecision were not helpful for household planning or people’s mental health.

The second instrument gives effect to the annual re-rating of national insurance contribution rates, limits and thresholds. Although the Autumn Statement fixed many of those rates limits and thresholds at the 2022-23 level, some of them—class 2 and class 3 contributions—were increased by 10.1%. This will bring tens of thousands of individuals into national insurance by the 2027-28 tax year. However, the Government have not been prepared to specify what the practical impact will be. The statutory instrument’s Explanatory Memorandum refers to a small tax increase in cash terms but, with household budgets as stretched as they are, any increase is likely to cause concern. This was the subject of a debate in another place, but Minister Atkins was unable to provide a figure. Can the Minister do so today?

We do not oppose these measures, so I will not detain the Committee any longer. However, once again, I hope that the Minister will acknowledge that the Government could have provided certainty sooner. Let us hope that they do better later this year.

My Lords, I thank both noble Lords for their contributions to today’s debate.

I am glad that the noble Baroness, Lady Lister, recognised the significant uprating of child benefit brought forward in these regulations. I note her point about the overall value of child benefit if you look at it over a longer time period. Child benefit is one of many ways in which the Government support families with children. Over the same period, we have introduced other significant measures, such as free school meals for infants and 30 hours of free childcare.

On the figures and analysis that the noble Baroness brought forward on the child benefit high-income charge, I am afraid that I cannot confirm them as they go beyond the scope of the regulations we are discussing, but I will take her comments back to the Treasury and ensure that they are considered properly.

I am grateful to the Minister for that. However, can I also point out that there may be other forms of support but, in terms of financial support for children, it is not just child benefit that has been cut in real terms? All financial support for children has been cut in real terms: tax credits, universal credit, whatever. The fact is that families with children have been disproportionately hit by austerity.

In some ways, that takes me on to the comments from the noble Lord, Lord Tunnicliffe, about the broader decision to uprate benefits by 10.1%, which has been welcomed across both Houses, at a time when families face significant pressures. That process followed the normal course for the uprating of benefits.

It is important to recognise that other significant support has been put in place at the same time to help those families to which the noble Lord referred. This includes not just energy support through the £400 energy bills support scheme and the £150 council tax rebate scheme for most households living in a property in council tax bands A to D; it also includes the targeting of support for millions of the most vulnerable households through cost of living payments, which were targeted specifically at those on means-tested benefits, pensioners and those who receive disability benefits, who are less able to meet those cost of living pressures. That has been at the forefront of the Government’s mind. Benefits uprating has been an important part of addressing that, but we took action in advance of the uprating; that support continues into next year.

The noble Lord asked a specific question on the impact of the small tax increase in cash terms from the NICs changes in these statutory instruments. That refers specifically to the increases in class 2 and class 3 NICs, which were the only rates or thresholds of NICs to be uprated by inflation this year. To quantify a little for the noble Lord, the class 2 rate paid by all self-employed people earning more than £12,570 a year, as well as voluntarily paid by self-employed people earning less than £6,725 a year, has been set at £3.45 a week. That is an increase of 30p per person per week in that category. The class 3 rate, paid voluntarily by unemployed and employed people earning less than £6,396 a year who wish to add to their national insurance record, is set at £17.45 per week, which is an increase of £1.60. It is normal practice to uprate those cash rates of NICs by inflation each year. That was not a change to the normal process as announced at either the Spring Budget or the Autumn Statement. The change that took place was the freezing of those thresholds for years to come. It is that change which will, over time, bring in 55,000 additional individuals into paying NICs by 2027-28, the last year of the freeze, as a result of fixing the primary threshold and lower profits limit.

The one thing I would say to the noble Lord is that we increased that threshold earlier this year to £12,570 from 6 July. That was the largest ever increase to personal tax starting thresholds. The primary threshold is £5,100 higher in 2022-23 and will still be £3,700 higher by April 2028 than it would have been had those thresholds simply been uprated by inflation each year since 2010-11. I think that provides some context for the overall changes we have seen in NICs over that period. With that, I beg to move.

Motion agreed.