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National Insurance Contributions Bill

moved Amendment No. 1: 1: Clause 1, page 1, line 4, leave out ““““which”” to the end”” and insert ““““those of”” to the end and insert ““the upper earnings limit from 2010–11 shall be made in accordance with section 5A below”””” The noble Baroness said: I shall speak also to Amendments Nos. 2 and 3 in this group, which concerns the value of the upper earnings limit. This is not a long Bill and the list of amendments is necessarily short. I had also sought to table amendments dealing with the value of the primary threshold, but these were ruled inadmissible on the basis that they did not fall within the Long Title, which refers only to the upper earnings limit. Despite that, when speaking to these amendments, I shall also address the primary threshold, as it raises issues identical to those of the upper earnings limit. The Bill has been presented by the Government as simplification but we are not fooled. It is just another way for the Government to raise money to shore up the poor and deteriorating government finances. It raises some £2 billion a year, which is not an inconsiderable sum, and that is why the Government are particularly keen on it. The Minister will be pleased to know that I shall not spend all afternoon rehearsing that argument. Instead, for the purpose of this group of amendments and the next, I shall enter the Government’s world and pretend that the Bill is all about harmonisation. I remind the Committee that this harmonisational simplification involves harmonising the national insurance and tax thresholds so that, in general terms, below a certain level a person pays neither tax nor national insurance and above a certain level he pays the higher rate but only the 1 per cent rate of national insurance. This nice theory has the taxpayer paying basic rate income tax and the normal national insurance contributions on the same tranche of income. If that were the position in the current fiscal year—and before the U-turn on the 10p rate, which I shall address in particular in the next debate—the theory runs that someone earning less than £5,435 would pay no tax or national insurance, for income levels between £5,435 and £41,435 an individual would pay basic rate tax at 20 per cent and national insurance at 11 per cent, and above that he would pay higher rate tax of 40 per cent and national insurance of 1 per cent. With regard to the lower limits, the personal allowance for income tax and the primary threshold for national insurance have been aligned since, I believe, 2001, but the upper earnings limit has always been below the higher rate threshold. It is now being raised in two stages. In the current fiscal year it is being raised by 75 per cent over inflation but it needs to be raised further next year to catch up with the higher rate threshold. The Government have also announced that, having harmonised and simplified the two rates, they want to add another £800 on to the two together, as in that way the amount of national insurance that can be grabbed is maximised. That would have been a problem in the context of the current requirements of Section 5 of the Social Security Contributions and Benefits Act 1992 because of the restriction in that Act on raising the upper earnings limit to between 6.5 and 7.5 times the primary threshold. We accept that that is a problem in achieving that harmonisation, but the Government’s response in the Bill is to remove any restriction whatever on where the upper earnings limit can be set. That is what Clause 1(1)(b) does. A consequence of bringing together the upper earnings limit and the higher rate threshold at the proposed new level is that the Government have removed any restraints on the point at which the UEL can be set. All that the Government offer in return for that extraordinary power is the affirmative procedure when setting the UEL. The Minister will be aware from many discussions on the subject that we do not regard the affirmative procedure as affording much protection against the misuse of power. It is better than the negative procedure, but only marginally so. Under the guise of achieving harmonisation in tax and national insurance, the Government have achieved an even greater prize—no restriction of any substance on the amount at which they can set the UEL and therefore collect national insurance at 11 per cent. It used to be the settled policy of the Labour Party that the upper earnings limit would be abolished so that the top rate would be payable on earnings without limit. The Labour Party abandoned that—along with the now noble Lord, Lord Kinnock—after 1992 to get elected, but there is nothing to say that that policy might not re-emerge; there will be no statutory protection against it. I said earlier that I would enter into the Government’s world of harmonisation, and that is precisely what this group of amendments seeks to do. I accept that the Government want to harmonise the upper limits and that current law puts an obstacle in their way. My amendments fully allow the harmonisation at the higher level that the then Chancellor announced in the 2007 Budget but, it having been aligned at the higher level in 2010, my amendments would take effect from 2010-11 onwards and mirror the indexation of the rates and thresholds that apply for income tax purposes. That mechanism is known as the Rooker-Wise amendment after the now noble Lord, Lord Rooker, who achieved it when he was in another place. It applies the RPI to uplift tax limits and allowances annually. The wording of my amendment is lifted directly from the Income Tax Act 2007, which as part of the Tax Law Rewrite Project simplified the wording of Rooker-Wise. Amendment No. 2—the substantive amendment in the group—provides that the UEL will rise by not more than RPI. In that, it mirrors what Sections 21 and 57 of the Income Tax Act 2007 do in relation to the basic rate limit and the personal allowance, which together make the point at which the higher rate of tax takes over. If the Government mean what they say about harmonisation—I am trying hard to take them at their word—the amendment achieves what they want to do. At the same time, my amendment provides reassurance to the body of national insurance payers that the limit cannot be hiked for the kind of tax-raising reasons that, in truth, lie behind the Bill. If the Government decide that they want to raise the UEL by an amount above inflation in future, they will have to come to Parliament using primary legislation. If necessary, they would have to introduce a one-clause Bill increasing the limit. Having done that, indexation could kick in again at whatever higher level was taken in primary legislation. We do not think that that will cause the Government any trouble at all. The rates of tax and national insurance are announced in the Pre-Budget Report, and if there were to be another major reassessment of levels, which could well happen from time to time, the Government would have a minimum legislative window of four months, assuming a very late Pre-Budget Report, to effect national insurance changes. We recognise that the different structure of national insurance compared with income tax requires the rates to be in existence before the beginning of the tax year, but there would be plenty of time for that. The Government have argued that no statutory provision is necessary because none has been protecting the amount of the primary threshold. Before the primary threshold was introduced, there was a requirement to link the lower earnings limit to the amount of the state pension. When the Government moved away from that and introduced into law a primary threshold which was supposed to move in line with the personal allowance, they failed to reflect the Rooker-Wise automatic indexation of the personal allowance. At that time, they should have put in some protection to ensure that it was raised in line with the personal allowance at least annually and kept with it. I was not in your Lordships' House when the Welfare Reform and Pensions Act was considered—nor, I think, was the Minister—and I have not summoned up the energy to research whether the matter was debated at that time. It is a great pity that the noble Baroness, Lady Hollis, has decided not to be in her place today because I have no doubt that she would have remembered whether it was. However, it is not currently in the law. If the Bill goes through, the Government could abandon harmonisation at the lower and upper end at will. That is why, in addition to tabling this group of amendments, I tried to do virtually the same in relation to the primary threshold—that is, to move it in line with inflation—but that was struck down from the list of amendments last week. I do not buy the argument that because nothing protects the value of the lower limit there should be no protection at the upper limit. The ability of big government to raise by regulation the upper limit to whatever they choose represents too great a tax-raising power. That temptation should be kept away from government. My amendments would have equal force for Northern Ireland. The fact that I have not amended Clause 2 is not a sign of lack of regard for the national insurance payers of the Province. The points remain the same, but I confess that I have not researched the niceties of the governing legislation nor sought to produce a detailed amendment. If the Minister gives me encouragement for the essence of my amendments, I am sure that we could achieve a similar result for Clause 2 in time for Report. I hope that the Government will see that the powers that they are taking with this Bill are too great for the simple task of harmonisation at the levels on which the former Chancellor decided. In that light, I hope that he will see that true harmonisation would mirror the Income Tax Act and thus ensure through indexation that harmonisation would endure. I beg to move.