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National Insurance Contributions Bill

moved Amendment No. 1: 1: Clause 1, page 1, line 4, leave out from ““(1),”” to ““, and”” and insert ““for the words from ““those limits”” in the second place where they appear to the end substitute ““the upper earnings limit from 2010–2011, shall be made in accordance with section 5A below”””” The noble Baroness said: My Lords, I shall speak also to Amendments Nos. 2 to 4. The first two amendments deal with Great Britain and the second two are identical in substance for Northern Ireland. The Government introduced the Bill under the guise of simplification of the tax and national insurance thresholds. The document issued on the day of the last Queen’s speech said that the Bill, "““would ensure that the Government begins to implement its commitment to provide a solid and simpler state foundation while delivering the Budget 07 personal tax reforms””." In fact, the Bill gives the Government an unlimited power to increase the income on which ordinary national insurance contributions are payable with only the minimal constraint of an affirmative resolution. My amendments are designed to ensure that the Bill sticks to its original stated purpose: the simplification of the thresholds. Under the Social Security Contributions and Benefits Act 1992, the Government can set the upper earnings threshold—the point at which employees stop paying ordinary national insurance contributions—at an amount between six and a half and seven and a half times the primary threshold, which is the point at which ordinary national insurance contributions begin. The Government’s policy, as set out by the Prime Minister in his last Budget as Chancellor in April 2007, is to continue to align the primary threshold with the personal allowance for tax purposes and to align the upper earnings limit with the point at which higher rate tax is paid. This would create a neat symmetry between income tax and national insurance and should be easier for tax and national insurance payers to understand. We do not object to the policy, even though it means that the Government are able to hike the upper earnings limit way above inflation and, in so doing, raise a large amount—around £1.5 billion a year—from middle-income earners. Noble Lords will recall that the April 2007 Budget had a package of changes to income tax and national insurance tax, including the abolition of the 10p rate of tax. The further changes, which the Chancellor announced in late April in the face of the Crewe by-election defeat and a Back-Bench revolt in another place, mess about with the convergence of the income tax and national insurance thresholds. The personal allowance is now £600 above the primary threshold, so that national insurance contributions are paid on that amount even through no income tax is paid. The higher-rate threshold has been moved down by £600, although that means that the higher-rate threshold is now closer to the upper earnings limit. The Chancellor has said that these changes to the income tax thresholds are for this year only. We on these Benches simply do not understand how that can happen, since more than 13 million families would be affected, mostly adversely, by the reversal of this year’s changes. However, we are told to wait for this year’s Pre-Budget Report to find out how the Government will achieve this. The Government have been even less clear about what that means for harmonisation with national insurance thresholds, but they have restated their commitment to harmonisation. The amendments allow the Government to achieve harmonisation next year at whatever levels the Chancellor sets in the PBR. That is what they said that they wanted when the Bill was introduced. The Government said that they needed the Bill to remove the limit on the upper earnings limit by reference to a multiple of the primary threshold, so that they could achieve the harmonisation of the upper earnings limit with the higher rate threshold for tax purposes. Recent history shows that in the face of political difficulties the Government will abandon harmonisation whenever it suits them. There is a legitimate question about whether the Government have the will to achieve harmonisation. The amendments give the Government the benefit of the doubt; but in so doing we do not believe that it is appropriate or reasonable for a constraint at the top end of the national insurance thresholds to be removed for all time, subject only to the affirmative resolution procedure. That leaves workers open to the ultimate stealth tax of national insurance contributions being raised at 11 per cent on all earned income. I remind the House that this is not fanciful; it was mainstream Labour Party policy until the mid-1990s. Let me put it in context. The noble Baroness, Lady Hollis, received a Written Answer on 21 May to a Question about the revenues that would be generated by the removal of the upper earnings limit. The Answer can be found at col. WA 204 of Hansard of that day. Noble Lords might like to take a deep breath before hearing that the Bill would allow the Government to raise £8.5 billion in extra class 1 national insurance contributions. That is the equivalent of nearly 3p on the basic rate of tax, or raising all the personal allowances and the basic rate limit by about 15 per cent. My amendments do not stop the Government dispensing with the 6.5 to 7.5 times formula for next year. They can complete the convergence that they have planned. But from 2010-11, we have taken the Government at their word in wanting to harmonise the thresholds and then keep them in step. The amendments would mean that the upper earnings limit after 2009-10 would keep pace with the higher rate threshold for tax purposes. That threshold is uprated each year by RPI, by what is known as the Rooker-Wise process, named after an amendment moved successfully by the noble Lord, Lord Rooker, when he was in another place. An uprating order in conformity with Amendment No. 2 would do exactly the same thing for the upper earnings limit. If the Government wanted to raise the amount by even more than RPI, which they may want to do from time to time, for example, because they want to raise the overall limits and thresholds in income tax and wish to harmonise at a higher level, they would have to bring forward a one-clause or two-clause Bill prior to the start of the tax year. As I explained in Committee, there would be plenty of time for that after the Pre-Budget Report, which each autumn announces all the rates and thresholds for the following tax year. However, such a procedure would clearly be the exception rather than the rule, since the higher rate threshold would generally follow the Rooker-Wise uprating path. I moved a beta version of the amendments in Grand Committee. The Minister pointed out that it would be over-egging the pudding to have had a largely automatic uprating process as well as the affirmative procedure and, as I promised him in Grand Committee, I have removed the latter. The Minister also helpfully pointed out that my Committee amendment would have meant rather too many one-clause Bills because of the mismatch between the weekly basis of national insurance contributions and annual tax allowances. So I have added a step three to the calculation, which is set out in Amendment No. 2. I have modelled the impact of varying rates of inflation and varying levels of income tax thresholds. If the Treasury wants to set the upper earnings limit at one-52nd of the higher rate threshold, rounded to the nearest pound, the amount that is produced by steps one and two of my amendment would need to be altered at most by an extra £2 up or down. Two pounds will in fact be the exception as there would generally be an adjustment of nothing or plus or minus £1. I also tested out the position if the Treasury wanted to round the one-52nd calculation up by one to the nearest £1, which is perhaps a more natural stance for the Treasury. That produces no requirement to reduce the amount arrived at in step 2 at all and at most a £2 upward increase would be required. Hence step 3 of Amendment No. 2 gives the Secretary of State power to alter the amount arrived at in step 1—which is RPI indexation rounded up to the nearest pound—by up to £2 for the purposes of harmonisation. I believe that this gives the Government all the powers they need to avoid unnecessary legislation while allowing them to fulfil their aims of simplification. Most importantly, my amendment would protect National Insurance payers from a Government running short of budgetary options and being tempted by the opportunity that this Bill would otherwise present. I beg to move.