National Insurance Contributions (Employer Pensions Contributions) Bill

I beg to move, That the Bill be now read a Second time.

This is a short and simple Bill. It is a stocking filler to yesterday’s Finance Bill. [Interruption.] There are just three clauses for the chuntering Opposition Members to enjoy. They focus on amending the Social Security Contributions and Benefits Act 1992, and they do so to create a power to apply national insurance contributions to salary sacrifice pension contributions above £2,000 a year from April 2029.

I will focus my remarks on three areas: first, why Government action in this regard was inevitable; secondly, the case for the pragmatic, balanced approach that we propose to take; and thirdly, how this sits with wider, crucial questions about pension savings on which the House rightly focuses.

My intervention will be very brief. The Federation of Small Businesses in Northern Ireland has told me of its concerns about national insurance contributions, but it has also told me that utility prices are up by 52.7%, labour costs by 51.5%, and taxes by 47.2%. I ask the Minister respectfully how he and the Government can expect small businesses to survive increases at that level.

I will come to the exact point that the hon. Gentleman raises. The main answer to his question is that we are introducing this change with a very long implementation period—it will not come in until 2029—in order to give businesses and others time to adjust. Businesses have welcomed that across the board, but I will come on to it shortly.

It is always important to keep the effectiveness and value for money of tax reliefs under review; after all, their cost is estimated to be over £500 billion a year. That is always true, but it is especially true when we see the cost explode. That is why we acted in the Budget to reform employee ownership trust capital gains tax relief, because the cost was set to reach more than 20 times what was intended at its introduction.

That is what we see happening in the case of pension salary sacrifice: its cost is on course to almost treble between 2017 and the end of this decade. That would take it to £8 billion a year. For some context, that is the equivalent of the cost of the Royal Air Force. I will repeat that: the cost of pension salary sacrifice was due to rise to the equivalent of our spending, in real terms, on the Royal Air Force. The growth has been fastest among higher earners, with additional rate payers tripling their pension salary sacrifice contributions since 2017. While those on higher salaries are most likely to take part, many others are unable to do so at all.

I understand the justification for making changes to the salary sacrifice arrangements. The Minister mentions higher earners. Can he explain a bit more about the breakdown of those who are benefiting under the current system as a percentage of the whole? I do not know whether he has that data with him.

I will come on to some statistics that might answer my hon. Friend’s question.

While those on the highest salaries are most likely to take part in salary sacrifice, others are completely excluded. This goes to the question from the hon. Member for Strangford (Jim Shannon).

Will the Minister give way?

I will make some progress before giving way again.

The majority of employers do not offer salary sacrifice at all, including many small businesses. Workers on the national living wage are excluded entirely, and so are the 4.4 million self-employed people across the UK. On grounds of cost and fairness, it is near impossible to defend the status quo.

Of course, a major part of the job of the Opposition is to oppose some things that the Government are doing. I do not want to prejudge the remarks that the shadow Minister, the hon. Member for Wyre Forest (Mark Garnier), will offer shortly, but I am confident that we will hear some opposition—maybe a word or two—to the Bill.

I am grateful to the Minister for arguing for more money for the Royal Air Force, and I very much hope that his colleagues in the Ministry of Defence and the Treasury are listening. We were told a little over a year ago that we had wiped the slate clean and that the Government would not be coming back to demand more money to fill various non-existent black holes. What has changed over the past several months that means he is now coming back to levy this very large sum of money?

I think I have already answered the right hon. Member’s question: it is important to keep tax reliefs under review. The cost of pension salary sacrifice is growing very fast indeed, so we have reviewed this tax relief and think it is important to bring in pragmatic changes, as I will come on to.

As I was saying, I am confidently looking forward—

Will the Minister give way?

I am going to make a bit of progress, and then I will give way to the hon. Member.

The truth is that reform was inevitable. Although Conservative Members are not saying it now, they know this is true, because it is what they said in government. In the 2015 summer Budget, they said:

“Salary sacrifice arrangements…are becoming increasingly popular and the cost to the taxpayer is rising”—

[Interruption.] I will come on to what the last Government wanted to do in the pensions space in a second. I am glad that the hon. Member for North Bedfordshire (Richard Fuller) is so keen to hear this; he is setting me up nicely for what is coming in a second.

The summer Budget of 2015 went on to say:

“The government will actively monitor the growth of these schemes and their effect on tax receipts”,

which is the same argument that I just made to the right hon. Member for South West Wiltshire (Dr Murrison). That monitoring led, a year later, to the then Chancellor—now Baron Hammond of Runnymede—announcing benefit-in-kind restrictions. He told this House:

“The majority of employees pay tax on a cash salary, but some are able to sacrifice salary…and pay much lower tax… That is unfair”.—[Official Report, 23 November 2016; Vol. 617, c. 907.]

He was right then, and the same argument holds today.

Former Conservative Ministers should certainly agree, because in government they were planning exactly the kind of change to pensions that we are now introducing. By way of proof, in 2023 the Conservatives commissioned research on restricting salary sacrifice arrangements for pensions, which is exactly the same measure they are opposing today. What was the proposed cap on pension salary sacrifice in that report? It was £2,000 a year, which is exactly the same cap they are opposing today.

The Minister seems to have co-opted the amount of money spent on the Royal Air Force into his argument. Is he aware that absent the defence investment plan—it was promised in the autumn, and the House rises tomorrow—we have no idea about the size, shape and cost of the Royal Air Force, because the Government are late with their homework?

I thank the hon. Gentleman, as I always do, because he always makes interesting points, but my larger point is this: if the Conservative party refuses ever to support any increases in taxation, increases in such spending—I think there is cross-party support for the Ministry of Defence, as the right hon. Member for South West Wiltshire mentioned—cannot be funded and cannot happen.

Almost every tax expert in the country has noted the need for change, and most have called for pension salary sacrifice to be ended entirely. However, we are taking a more pragmatic approach by recognising that change will affect many employers and employees. Our balanced approach has two key parts. The first is time. As I said to the hon. Member for Strangford, nothing will change overnight. We are providing over three years’ notice of the reform’s implementation. What did the previous Government provide to employers? One year’s notice of their reforms to salary sacrifice. This will give everybody involved time to prepare and adjust, which is widely welcomed by firms and business groups. Employers and payroll providers have already been working with His Majesty’s Revenue and Customs to ensure that this change operates in the most effective way, and that process will continue as we approach implementation.

The second key design choice is the cap of £2,000. This cap protects ordinary workers and limits the impact on employers, while ensuring that the system remains fiscally sustainable. The cap means that the majority of those currently using salary sacrifice will be unaffected. It means that almost all—95%—of those earning £30,000 or less, who work disproportionately for small businesses, will be entirely unaffected, and 87% of affected salary sacrifice contributions above the cap are forecast to be made by higher and additional rate taxpayers. This is a pragmatic and fair approach, as well as the fiscally responsible one.

Some will claim—I am sure we will hear this from the Opposition—that salary sacrifice arrangements drive aggregate levels of pension savings. That is simply wrong. After all, salary sacrifice arrangements existed through the 2000s and into the early 2010s, and what happened to pension savings during that period? There were not rises, but big falls in private sector participation in pension savings. The existence of salary sacrifice did nothing to prevent a situation in which, by 2012, only one in three private sector workers were saving into a pension.

I have to say that it is a joy to yet again be locking horns with the Pensions Minister on a topic that is important to us all: saving for our retirement. And it is important to note that there are many things that we agree on. We all acknowledge there is an impending issue with pension adequacy: when 50% of savers are projected to miss a retirement income target set by the 2005 Pensions Commission, we agree there is a problem that needs dealing with. We also all acknowledge that UK pension funds are not investing into the UK equity market to the extent that we would all want, although I would caveat that with a fundamental disagreement: on this side, we want to understand the problem; the Minister wants to tell fund managers what they should and should not be doing in terms of where their investment goes. But we also agree with the noble aim of delivering growth in the UK economy, even if the Government are making a little bit of a mess of delivering that aim— growth slowing, inflation up, unemployment up—but we hope they get the hang of it in due course.

But that is why the Chancellor’s Budget is disappointing. For pensioners, she has flown kites about the tax-free lump sum, frozen the personal allowance threshold, and forced millions of pensioners to start paying income tax. Those are her choices. For savers, she has reduced the cash ISA limit to £12,000, scrapped the lifetime ISA for new investors, and increased tax on dividends and savings by two percentage points. Those are her choices. For hard-working people, this Government have reduced real household disposable income, pulled millions more people into paying the higher rate of income tax, and created perverse incentives that make some better off on benefits. These are her choices. So it is no wonder that this Budget has been dubbed the smorgasbord of misery.

It has now got to the stage where our economy has never been taxed so much, and it will get worse. When coming into office, the tax take was 36.4% of GDP. By the time Labour leaves office in four years’ time, it will be 38.2%. It is worth looking at examples of how it is levied. For example, a basic rate taxpayer earning £100 will pay 20% tax, but they will also pay 12% national insurance—an actual tax rate of 32%. Add to that their employer’s contribution, and for a headline basic rate taxpayer on up to £50,000, for each £100 they earn, the taxman takes £47. For a higher rate taxpayer, the marginal rate goes to 57%. The taxman takes more than the employee.

To the hon. Gentleman’s point about changing behaviour, we have already seen reports that two out of five people are less likely to save if the salary sacrifice scheme goes. We have already seen a reduction in contributions because of the cost of living crisis. Are we not just moving the pain somewhere else? Will we not end up with fewer people able to support themselves in old age and it will be back on the state again?

Absolutely. The Government are really keen to get people to save for their futures and then they do everything they can to try to stop them doing that. The hon. Gentleman is absolutely right. We are just going to kick another problem down the road. By the way, when the Minister talks about hip replacements and so on, it is savers’ money. It is just that they are taxing them less.

At the same time as the Government look to improve pensions adequacy, they will be taking £4.8 billion from savers and employers. They identify a problem, say they will work to make it better, and then make it worse. Surely, when they were writing the Budget—I know the Pensions Minister has been a significant penholder in that process—they must have seen the extraordinary contradictions in their proposals?

The House would expect me to bang on about this—I am the shadow Minister and that is my job—but let us listen to the verdict from a few experts about the policy we are debating today. Pensions UK stated:

“Any change to salary sacrifice would inject uncertainty into a system that needs long-term trust, not sudden shocks…Introducing a cap would weaken incentives to save when we are facing a generation retiring with inadequate retirement savings.”

The Institute of Chartered Accountants in England and Wales stated:

“This cap will make it more complex for employers to offer a simple and flexible solution for retirement savings.”

The Institute and Faculty of Actuaries stated:

“The decision to impose a £2,000 limit…will undermine current efforts to improve retirement outcomes for individuals. In doing so, the act of saving into a pension will now be more expensive, more complex and less attractive to both employees and employers.”

Evelyn Partners stated:

“Restricting this sensible tax benefit that makes private sector saving more attractive adds insult to injury in a two-tier pension system”.