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National Insurance Contributions Bill

moved Amendment No. 5: 5: After Clause 1, insert the following new Clause— ““Consequences of basic rate limit for income tax falling below upper earnings limit (1) This section applies for 2010–11 and any subsequent tax year. (2) If the basic rate limit for any tax year for the purposes of section 10(2) of the Income Tax Act 2007 (c. 3) is set at an amount which is below the upper earnings limit for that year, the Treasury shall within one month of the passing of the Act which sets the basic rate limit lay before each House of Parliament a paper explaining why the two limits have diverged for the year and setting out the expected future path of the two limits in relation to each other.”” The noble Baroness said: Broadly on the same theme, in moving Amendment No. 5 I am introducing the possibility of a new clause to go after Clause 1. In the previous group of amendments I sought to get the annual uprating of the UEL to align with the uprating of the higher rate tax threshold. That was the scheme that the former Chancellor promised in 2007; the current Chancellor confirmed it in his Pre-Budget Report last October and, again, in his Budget in March. At that stage, it occurred to me that the Government might one day want to take the UEL on a different path of their own to raise billions of extra tax under the guise of national insurance. It also occurred to me that we ought to keep the tax and national insurance limits in step on a statutory basis, which is the substance of the last group of amendments. But it did not occur to me when we prepared for Second Reading, or even when we started to prepare for this Committee, that two weeks after our Second Reading the Chancellor would be panicked into abandoning all previous pledges about rates and allowances when faced with an electoral defeat in the by-election in Crewe. I simply did not have enough imagination to see that the Government would go in that direction. The spectacle of the Government’s second attempt, as it turned out, at a U-turn to get themselves out of the 10p-rate hole made me realise that harmonisation and simplification of tax and national insurance was much more fragile than I had imagined it could possibly be. We know that in the week before the Crewe by-election the Chancellor announced, as the Minister explained, that the personal allowance would go up by £600 and the basic rate limit would come down by £600. That has the effect of the primary threshold being £600 less than the personal allowance. I remind the Minister of what he said at Second Reading—that, "““the arrangements in respect of the primary threshold have worked perfectly well since it was introduced and we have stuck by the commitment to maintain that alignment””.—[Official Report, 30/4/08; col. 314.]" At a stroke the Chancellor has put that into the realms of fantasy. It is clearly perfectly possible for the Government to break the alignment whenever it suits them. The second effect is that the higher rate threshold and the UEL are now £600 closer together. If nothing else happened, that would mean that the Government could proceed with their further simplification and raising of the limits without the need to repeal the 6.5 to 7.5 times limit that is in existence in the current legislation, so there would be no necessity for this bit of the Bill. What happens next seems to be a bit of a mystery. The Chancellor said—and the Minister has repeated it again today—that these changes are for one year only. He said this again when he appeared before the Treasury Select Committee in another place last week. What he did not say is what he intends to do instead. As the Institute for Fiscal Studies pointed out, if he tries to reverse the changes—if they genuinely were made for one year only and he tried to put the situation back where it was—he would have to deal with 13 million households, not 5.3 million. The Government have got themselves in a mess. The panicky changes that the Chancellor announced for this year create even bigger problems for next year. The low end of the primary threshold and the personal allowance are out of kilter for the first time since the primary threshold was introduced. The top limits are a bit closer together, but for how long? One question for the Minister today is what the Government intend to do about the harmonisation and simplification of the tax and national insurance limits next year and beyond. Is it now abandoned? Some people are telling us that they have heard that within the Treasury harmonisation is de facto abandoned because it is too difficult to put back in place having separated it, given the current fiscal position. However, it cannot be right that a Bill that has been justified on the basis of simplification and harmonisation can go through your Lordships’ House at the precise time that that noble aim has been thrown out of the window. Amendment No. 5 reflects the political reality that the Finance Bill gives the Government of the day carte blanche, if they have a majority in another place, to put tax and national insurance out of alignment, temporarily or permanently, whenever it suits them. Because the two are separated by different legislative and structural frameworks and until that is changed, it will be necessary to set national insurance rates ahead of the year. It is always difficult to change them during the year—I completely accept that. That is not true of income tax, because the Government can change their mind at virtually any time during the year. Because of the availability of the PAYE mechanism, the vast majority of tax will be paid in the right place by the right people. It is intended to state in Amendment No. 5 that when the UEL and the higher rate threshold go out of alignment, the Treasury should lay a report setting out what it intends to do about it; that is, it should come clean about how long any divergence is expected to last. We currently have no idea what the Government will do in respect of their 10p U-turn. As the Minister is aware, the amendment is deficient. It refers to the basic rate limit; it should refer to the higher rate threshold, which is not defined in legislation. My amendment should have said that if the basic rate limit plus the personal allowance is set below the UEL, a report should be laid. As I mentioned to the Minister before the Grand Committee started, I discovered that omission at the weekend when preparing my detailed notes for today. I informed the Minister and the noble Lord, Lord Newby, today about that. I apologise to the Grand Committee for any confusion, but I hope that we can debate the idea behind the amendment, even though it is not perfect, because what I was trying to do was pretty plain. I should also say, for completeness, that the amendment ought to refer to the bottom end—to the primary threshold and the personal allowance alignment. I failed to draft that into the amendment, but if I had done so, I am sure that the authorities that struck out my previous set of amendments would have done the same for that part of this amendment. I will leave that issue open for the time being. Parliament is entitled to some explanation when tax and national insurance, which are claimed to be harmonised, are split further apart. As I have noted, the Chancellor has given no indication of what he intends to do. That is regrettable and I hope that the Minister can clear up some of that today, which would be helpful. Going forward, my amendment, or a better version of it, would be essential if there were no other amendment to the Bill to cover the situation that has arisen this year and to provide proper parliamentary scrutiny of that decision. I hope that the Minister can agree with the principles behind the amendment. I beg to move.