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National Insurance Contributions Bill

I beg to move, That the Bill be now read a Second time. This short Bill has two purposes. First, it allows us to deliver the package of personal tax reforms announced in this year's Budget. By allowing the upper earnings limit to be aligned with the point at which higher rate tax starts to be paid, the Bill makes it possible to simplify the UK's tax and national insurance system significantly. From April 2009, there will be just two main rates of income tax. They will apply to the same bands of income as the two rates of national insurance contributions, thus creating one of the simplest personal tax structures of any developed country. Income tax will be just 20 per cent. for those earning less than £43,155 a year. Secondly, the proposals in the Bill are central to the Government's commitment to provide a solid and simpler state pension. By bringing forward the introduction of the upper accruals point, the Bill returns the timetable for the removal of the earnings-related state second pension to that recommended by the Pensions Commission. That will mean that by about 2030, the very complex earnings-related structure of the state second pension will be withdrawn, leaving behind a flat rate scheme that will be simple to administer and simple to understand by both contributors and pensioners. I should like to explain each of those purposes in a little more detail, starting with the changes to the upper earnings limit. As the House will know, the changes are part of a package of reforms to the personal tax system announced in this year's Budget by my right hon. Friend the Prime Minister. That package is not for debate today, as the majority of the changes will be legislated for in next year's Finance Bill, to which I look forward, albeit with some trepidation. The reforms will take 600,000 pensioners out of income tax altogether, and will help to lift 200,000 children out of poverty. A central part of the package is the alignment of the national insurance upper earnings limit—that is, the point at which national insurance contributions 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 national insurance contributions become payable at 1 per cent., rather than 8 per cent. Moving both those limits will be a two-stage process. In the 2008-09 tax year, the upper earnings limit will be increased to £770 a week. In 2009-10, it will increase again, to align with the level at which higher rate income tax becomes payable. The second stage of that increase requires a change to primary legislation, and that change will be made by the Bill. At present, the maximum upper earnings limit is restricted to seven and a half times the primary threshold—the point at which national insurance contributions start to be paid. To align the two systems from 2009-10, that restriction needs to be removed, and the Bill makes that possible. It means that by 2009, the two main rates of income tax will apply to the same bands of income as the two rates of national insurance contributions, creating one of the simplest personal tax structures of any developed country. The House will want to know that there will be effective parliamentary scrutiny of the upper earnings limit once the restriction on it being more than seven and a half times the primary threshold is removed. I am pleased to be able to tell the House that the annual regulations setting the upper earnings limit will be subject to the affirmative procedure, so Members of both Houses will have the chance to debate any increase. I should like to deal straightaway with the claims that the increase to the upper earnings limit represents a stealth tax rise. As we have made clear, the measure should not be seen in isolation, but as part of a package of reforms that will leave four out of five households better or no worse off, and that will take 600,000 pensioners out of income tax and 200,000 children out of poverty. I now turn to the Bill's second purpose.