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National Insurance Contributions Bill

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 That will mean that by around 2030, the very complex earnings-related structure of the state second pension will be withdrawn, leaving behind a wholly flat rate scheme that will be simple to administer and simple for contributors and pensioners to understand.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.)