Clause 1: Increase of primary threshold for primary Class 1 contributions
1: Clause 1, page 1, line 8, leave out “July” and insert “April”
Member’s explanatory statement
This amendment would bring forward the date of implementation of the increase in thresholds from 6th July 2022 to 6th April 2022.
My Lords, all the amendments tabled today are in my name and in a single group, so I am not going to take up too much of this House’s time, and I should also make it clear that I do not intend to divide on any of these amendments. However, I thought there were a few issues which needed some additional focus and emphasis. These amendments were tabled by my colleagues in the other place, but I am not sure that we got terribly good answers to any of them. It is always worth having a second go, and many of these points are ones that I would like to leave with other Members of your Lordships’ House for future discussions around these various topics.
The first amendment, Amendment 1 in Clause 1, has the effect of bringing forward the date of implementation of the increase in thresholds from 6 July 2022 to 6 April 2022. There were two reasons why I thought it was important to table this amendment for a second time, and I am going to quote from the Resolution Foundation:
“If we consider just the changes to Income Tax and NI due in 2022-23 and reflect that the NI threshold will not fall until July, earners on less than £25,000 will gain, and those above will lose from all the measures being introduced in the next fiscal year (if the NI threshold had fallen in April, this cut-off point would have risen to £32,000).”
That is the difference between people who benefit from the threshold change being brought in in April and those who will benefit by it being brought in in July. I am going to estimate—maybe the Minister will have the number—that there an awful lot of people whose annual earnings fall between £25,000 and £32,000. In fact, I am going to go beyond that and suggest that is very often a family income. It is not a starting income, or the income of someone who has risen rapidly up the promotion ladder. It has got to be a very common income for a large part of our working population. I do not know what those numbers are, but I am sure that the Minister could tell us, so I am quite concerned about a policy that, at a time of huge pressure on the cost of living, is denying a benefit to people who fall between that £25,000 and £32,000 salary or earned income group.
My second reason for tabling this amendment was the words of the Financial Secretary to the Treasury in the other place when dealing with issue. She said:
“Of course the Government want to help people with the cost of living as quickly as possible, which is why the Chancellor introduced a number of measures immediately … However, it was not possible to deliver the increase to the primary threshold from 6 April, which is in less than two weeks’ time. The Government are implementing the change as early as possible, from 6 July. It is not possible for the majority of software and payroll providers to deliver the measure for April.”—[Official Report, Commons, 24/3/22; col. 522.]
I just thought, “This one is a classic”: the assumption that the only way to deliver the benefit is through making a change to the software associated with the universal credit scheme.
When the Government of the United States sought to give people a helping hand with Covid, they simply cut a cheque and sent it to everybody who was a registered taxpayer. It seems to me that getting an appropriate list of the people who would qualify—with a starting date of 6 April to fill in and plug the two months—would not be much of a challenge for this Government. They do not have to go and change the whole universal credit system or require every employer to make a change; they could simply access the data and then find a way to make a rebate.
We often have this kind of siloed thinking. Here is a Minister who is in a sense saying, “I only wish I could find a way to do it”. So I wonder whether the Minister can go back and say to her department, “Of course we can find a way to do it; we just need to start thinking outside the box and not simply assume that what we have to do is some complicated and extensive programming problem. We simply need to find a way to send a rebate”. I suspect that most people would not mind a cheque—frankly, I suspect that most people would not mind if they had to wait a little time for it to come, provided it came. This ought to make the Financial Secretary to the Treasury exceedingly happy. These two issues highlight the impact of the delay and the fact that there are many ways in which that problem could be remedied. It just takes some lateral thinking.
The amendments in my second set are much more similar and come after Clause 3. Essentially, they concern reporting requirements. The concerns around transparency were well described at Second Reading. The noble Lord, Lord Macpherson, used the phrase “sleight of hand” in his speech; I used it slightly differently in mine. There is a great deal that is opaque, particularly in the way we relate income tax and national insurance contributions. As the noble Lord stressed, for many years, Governments have chosen to reduce income tax and shift the burden on to national insurance contributions because they are less visible and because, frankly, the public are under the impression that they are saving for their own pensions. Now, they are going to be under the impression that they are making an extra effort to help the NHS and social care; they will therefore accept an increase, whereas they would not have done had it been made to income tax. It has become very clear, however, that the whole thing is completely fungible; this notion that national insurance contributions are an entirely separate, protected, segregated, hypothecated pot is merely an accounting fallacy. It is all just smoke and mirrors.
The first of my two amendments would require the Secretary of State, within six months, to lay before Parliament a report on the impact of the Act’s provisions on disposable incomes. That is to try to tease out some of the arguments that the Minister made—which did not seem to have many numbers attached to them—that, overall, this would be extremely beneficial to a huge range of people. We would also like to see that same calculation done if combined with a reduction in the national insurance rate of 1.25%. It seems to me that this would provide a level of transparency that the public could understand and we in this House could argue about, having full possession of the facts and without the confusion of various different pots interacting with each other. It is probably because I come from a business background that I think that what you always need to look at is what happens at the bottom line. You must not get completely lost in the hedgerows, the highways and the woods—and I am afraid that that is where a lot of the discussion about what is happening in terms of support for the economy has found itself.
The second of my amendments would again require the Secretary of State, within six months of the Act being passed, to lay before Parliament a report considering the impact of the Act’s provisions on the levels of taxation on earned and unearned income. Again, that goes directly to the heart of the issue that the noble Lord, Lord Macpherson, raised: the switch, virtually unrecognised by the general public, from income tax, which covers all income, to a system of taxation that in effect falls primarily on workers. This is an important philosophical issue that needs to be highly transparent, and I do not believe that at the moment it is.
Of course, we wanted a second report looking at those measures, combined with a reduction in the basic rate of income tax from 20% to 19%. It would be really interesting to see how all of those measures add up when put together. Frankly, that level of transparency should be provided to this House.
So those are the amendments that I am putting forward, although I will not press them, as I say. But I put the Minister on notice that those issues will remain long-term threads in the kinds of discussions we will have on the issues that are raised. I suspect that they will eventually get through to the public consciousness.
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?
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.
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.
On the question of a report on this subject, the Government are committed to being transparent on the impact of any tax reforms on individual incomes. That is why the Government already publish tax information and impact notes—TIINS—ahead of implementation. As the national insurance contributions measures are due to be implemented from July, the impact of the provisions of the Bill have already been published in the tax information and impact note published on GOV.UK. That sets out that the increase to the primary threshold and lower profits limit is a tax cut on earned income, which is income from employment or self-employment. The reform will benefit almost 30 million working people and it is a tax cut for a typical employee worth over £330 in the year from July 2022. I also acknowledge the request to publish the impacts of the income tax basic rate cut on earned and unearned income such as savings. The impacts will similarly be published in a tax information and impact note ahead of implementation in 2024.
I noted the concerns raised at Second Reading and in Committee about the different approaches to taxing earned and unearned income. I am sure that the noble Baroness is right that this is not the last debate we will have on that subject. I reassure the noble Lord, Lord Tunnicliffe, in particular, who raised some specific points in this area, about our approach to treating earned and unearned income in a similar manner. I can reassure noble Lords that the income tax cut does not apply to dividend income. Dividend tax rates will rise as planned this April and will not reduce in 2024. Dividend tax rates have always been separate to the main rates of income tax whereas savings rates have been aligned in recent years, and I see no reason for that to change now.
I also reassure noble Lords that the Government have taken significant steps to ensure that rental income is taxed fairly, including restricting finance cost relief so that landlords no longer get relief at their marginal rate if they are a higher or additional tax rate payer. Purchases of additional properties are liable to higher rates of additional dwellings surcharge, which are three percentage points above the standard stamp duty rates and part of the Government’s commitment to support first-time buyers. In addition, around half of landlords are also in employment or self-employment and will contribute to the health and social care levy in relation to their earned income. As noble Lords will have heard me say before, the levy establishes a long-term and sustainable source of revenue to give healthcare the extra funding it needs to recover from the pandemic and implement our social care reforms as soon as possible.
The noble Lord, Lord Davies of Brixton, pointed to the differences between class 2 and class 4 NICs and the possibility for arbitrage because the self-employed are treated differently from the employed. I will largely resist the temptation to debate that in too much detail here. However, I note to the noble Lord that previous Governments have looked at this issue—I have scars on my own back from a Budget, I think in 2017, which looked at this issue. Members of the party opposite were not hugely in support of any reforms at that point, and I would be interested to know if that has changed since then. All I can say on the Government’s behalf is that there are no plans to look at reforming class 4 NICs.
With those comments, I hope I have addressed the points raised by this small group of amendments. I hope that the noble Baroness, although I know I will have disappointed her with some of my answers, has heard sufficient to withdraw her amendments.
Amendment 1 withdrawn.
Clause 1 agreed.
Clauses 2 and 3 agreed.
Amendments 2 and 3 not moved.
Clauses 4 to 6 agreed.
House resumed. Bill reported without amendment. Report and Third Reading agreed without debate.
My Lords, it has been a brief Bill, so my comments will match that. As ever, I am grateful to all noble Lords for their interest in and contributions to the Bill. I am grateful to the House authorities and parliamentary staff for their hard work behind the scenes in turning this Bill around at short notice and on a single day.
I want to acknowledge the officials who have worked so hard on this Bill at pace: the Bill team, the policy teams at HMRC and Her Majesty’s Treasury, the lawyers in both departments, the Office of the Parliamentary Counsel and the clerks in this place. I also thank the noble Lord, Lord Tunnicliffe, the noble Baroness, Lady Kramer, and their researchers for being so adaptable and contributing to the Bill in their normal detailed and constructive way, also at short notice but with welcome brevity.
I could remind noble Lords of the benefits of the Bill a further time but, given that we have taken all stages in one day, I will refrain from putting them forward again. The Bill delivers a significant tax cut to many working people at a time when they really need it. I therefore commend it to the House and beg to move.