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National Insurance Contributions Bill

I am happy to do that. I was simply placing our position on the record, as other noble Lords have stated their position. Nor do I propose extensively to open up the debate about the nature of national insurance and how close it is to a tax. Perhaps that is for another day. Before I deal with the specifics of the amendment, I should put something else on the record about the 13 May announcement. As noble Lords are aware, the Chancellor announced on that date that the personal allowance for all basic-rate taxpayers under 65 would be raised by £600 in the current tax year, 2008-09. That means that around 22 million basic-rate taxpayers will benefit from the change and the number of households that lose from the Budget 2007 reforms will be reduced from 5.3 million to 1.1 million. The remaining losses will be at least halved. Making this announcement now means that people will see the money in their take-home pay from September. As those paying tax at 40 per cent are unaffected by the Budget 2007 reforms, the point at which people pay higher-rate tax will be reduced, leaving taxpayers who pay at the 40 per cent marginal rate unaffected by the increase in the personal allowance. The thresholds and rates of national insurance for 2008-09 were not affected by the Chancellor’s announcement. The Government will set out plans for future years in the 2008 Pre-Budget Report in the autumn. Our aim is to continue the same level of support for those on lower incomes. We have looked at the case for the alignment of tax and national insurance on an annual basis and found that the savings for employers, individuals and the Government were smaller than would have been expected, with large one-off transitional costs and significant numbers of low-income losers. On that basis the Government have concluded that, on balance, the benefits of this annual alignment do not outweigh the costs. However, we remain committed in principle to bringing the income tax and the national insurance contribution systems closer together to improve fairness and coherence, reduce administrative burdens and make them easier to understand. I appreciate the support, particularly of the noble Lord, Lord Newby, for that endeavour. There has already been progress in aligning tax and NICs in a simplified structure of employers’ NICs that replaces multiple rates with a single rate and abolishes the entry fee. With just two main rates of income tax and two rates of national insurance in this tax year, the UK’s personal tax system is already one of the simplest personal tax structures of any developed country. However, the Government are continuing to look at the scope for further alignment of tax and national insurance contributions, taking into account the changes made on 13 May, in future Pre-Budget and Budget Reports. The Bill removes the restriction that exists on changing the level of the upper earnings limit in order to implement the future alignment of the UEL with the higher rate threshold for income tax. This restriction, as we have heard, currently limits the maximum amount to which the UEL can be raised for any tax year to 7.5 times the primary threshold. These changes still provide the flexibility to align the UEL with the level at which higher rate tax becomes payable in future years, without the need for further primary legislation. As indicated, the amendments are prompted by a concern that the Bill would remove parliamentary control on the setting of the upper earnings limit by abolishing the current restriction that limits the raising of this limit to 7.5 times the primary threshold. The proposed amendment inserts proposed new Section 5A into the Social Security Contributions Act 1992. The objective appears to be to introduce a restriction on rises in the UEL to RPI, but only with effect from 2010-11. They also provide for a new rounding rule, which may have unforeseen consequences. The proposed new section, as I have said, is intended to be effective for 2010-11. This risks misalignment due to the rounding rules it contains. The UEL is a weekly limit, and the personal allowance and basic rate limits from which it would be derived if it were to align—which would be calculated by dividing the aggregate of the two by 52 and rounding to the nearest pound—are annual. This could lead to misalignment on occasions as rounding up of the weekly figure could result in a different figure than rounding an annual figure divided by 52, and would therefore require further primary legislation to correct. If you assume that it could be out by as much as an extra pound each week, that would cost something like £15 million to £20 million a year. As the noble Baroness explained, the intention and the structure of these amendments were to replicate for NICs the Rooker-Wise system that exists for income tax. There is a particular difficulty with this in respect of the NIC system. For income tax there exists the vehicle of the annual Finance Bill in cases where the Chancellor decides to make changes to the personal allowance, for example, either below or above RPI. No such facility for primary legislation exists for national insurance. I do not accept the point that it is simple for the Government to bring forward a one-line Bill on a routine basis just as we do with a Finance Bill. It does not work that way. Programming Bills into the system is often not that easy, particularly with the competing priorities that always confront Governments. I therefore urge the noble Baroness to consider whether that would be a good use of valuable parliamentary time. I think not, but perhaps the noble Baroness has something else in mind when it comes to dealing with the inevitable requirement for annual primary legislation for NICs and whether to bring NICs into the annual Finance Bill cycle. The Government remain committed to continuing to simplify tax and NICs processes where practical and beneficial to do so for future years, including aligning the upper earnings limit with the level at which higher rate tax becomes payable. The changes in this Bill will still allow the alignment announced in Budget 2007 to be delivered in the future. I hope that the noble Baroness will accept the practical difficulties associated with this amendment. Amendment No. 3 would add proposed new Section 5A to the lists of limits and thresholds to be set by affirmative procedures. We have substantial reservations about that, not least because the Bill as drafted already proposes that regulations setting the level of the upper earnings limit should be subject to the affirmative procedure. If one were to read Amendments Nos. 2 and 3 together, the intended effect appears to be that the UEL would be limited to increases by RPI, and the regulations setting the UEL calculated by reference to RPI would be subject to affirmative procedure. That would be a completely new requirement. Why have that second mechanism if you have the first one? We believe that it is a wholly unnecessary restriction and would amount to a huge increase in parliamentary oversight. I am not convinced that there is any need for that, particularly as Amendment No. 2 would be likely to result in annual primary legislation for NICs because of the misalignment through the proposed mechanisms. I note what the noble Baroness said about not extending this amendment to Northern Ireland. To try to summarise things, I return to the difficulty of aligning what is effectively a weekly system with an annual system. Unless you generate that alignment by looking at the annual allowances first, you get real difficulty. You cannot build it up from the bottom in the way that this amendment suggests. In the past, the personal allowance was aligned with the primary threshold. The Rooker-Wise amendment requires the personal allowance to be rated by inflation and rounded to the nearest £10. The basic rate limit is RPI-plus rounded to the nearest £100. If you took that approach, divided it by 52, and then rounded the mechanism into alignment, that is what has happened with the primary threshold. If you do it the way suggested by the noble Baroness, you would inevitably get a misalignment and there would inevitably be a requirement for an annual programme Bill to deal with national insurance contributions. To add to that point about an annual programme Bill to deal with national insurance contributions, if, once there is alignment, the Government wanted to increase the personal allowance or the basic rate limit by more than the rate of inflation, that would also generate a programme Bill. Restricting it in this way as a practical matter is deeply unwise. Considering where we are, I am sure that the noble Baroness will withdraw the amendment, but I hope that she will reflect on the difficulties of having a weekly system on the one hand and an annual system on the other.