Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2020

Motion to Approve

Moved by

That the draft Regulations laid before the House on 30 January be approved.

My Lords, I shall also speak to the Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2020.

The Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations set the national insurance contributions rates, limits and thresholds for the 2020-21 tax year. They will allow the Government to deliver on their manifesto commitment to cut national insurance contributions for 31 million hard-working people across the United Kingdom. National insurance contributions, or NICs, are social security contributions. Payment of NICs determines eligibility for the state pension and other contributory benefits. NIC receipts go towards funding the NHS and these same contributory benefits.

I will first outline the changes to the class 1 primary threshold and class 4 lower profits limit. The primary threshold and lower profits limit indicate the points at which employees and the self-employed start paying class 1 and class 4 NICs, respectively. These thresholds will rise from £8,632 to £9,500 per year. These changes, promised in our manifesto, underline the Government’s commitment to ensure that work pays, putting more money into the pockets of hard-working people. They will benefit around 31 million taxpayers, with a typical employee £104 a year better off compared to 2019-20. Increases to the primary threshold and lower profits limit do not impact on state pension eligibility. This is determined by the lower earnings limit for employees and payment of class 2 NICs for the self-employed.

The lower earnings limit will rise in line with inflation from £6,136 to £6,240 per year. The upper earnings limit, where employees start paying 2% NICs, is aligned with the higher-rate threshold. As announced at the 2018 Budget, it will be frozen and remain at £50,000 per year.

The self-employed pay both class 2 and class 4 NICs. The rate of class 2 NICs will rise in line with inflation from £3 a week to £3.05 a week. The small profits threshold is the point above which the self-employed must pay class 2 NICs. This will rise with inflation from £6,365 to £6,475 per year. For class 4 NICs, as already outlined, the lower profits limit will rise to £9,500. The upper profits limit is where the self-employed start paying 2% NICs. This is also aligned with the higher-rate threshold and will remain at £50,000 per year.

For employers, the secondary threshold determines where they start paying employer NICs. This will rise with inflation from £8,632 to £8,788 per year. The level at which employers of people aged under 21 and apprentices aged under 25 start to pay employer NICs will remain frozen at £50,000 per year.

Finally, class 3 contributions allow people voluntarily to top up their national insurance record. The rate for class 3 will increase in line with inflation from £15 to £15.30 per week.

This meets our manifesto commitment to end the benefits freeze, with most elements and thresholds of tax credits and both rates of child benefit being increased for the first time in four years. This means the Government will be spending an additional £800 million to support tax credits, child benefit and guardian’s allowance payments. This proposed legislation makes changes to the rates, limits and thresholds for national insurance contributions and provision for a Treasury grant. It increases the rates of tax credits and guardian’s allowance in line with prices. I hope colleagues will join me in supporting these regulations.

The regulations make important changes. The Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2020 ensure that these benefits keep their value in relation to prices. I commend the draft regulations to the House.

My Lords, I wish to say a few words about child benefit. I will not repeat the general arguments about the four-year benefit freeze that I made in Grand Committee but simply want to underline the implications of that freeze for child benefit, particularly because the freeze about to end must be seen in the context of the treatment of child benefit since 2010.

Child benefit had already been frozen between 2010-11 and 2013-14 and was then increased by only 1% for two years before being subjected to the freeze in working-age benefits. This means that, with the exception of two years when inflation was really low, its value has been reduced every year since 2010. The result is that not only has its real value been reduced by around 6% because of the four-year freeze but, according to the House of Commons Library briefing, it is now worth 17% less for the first child and 16.5% less for subsequent children than it would have been had it been uprated in line with the CPI since 2010. That means a loss of nearly £370 this year for a two-child family.

The Resolution Foundation calculates that for second and subsequent children the benefit is now worth less than when it was fully introduced in 1979, is less than half as generous as it used to be compared to average earnings and, shockingly, is less generous than the post-war family allowance. For first children, it is close to an historic low. The Resolution Foundation concludes that

“it is fair to say that child benefit is at its stingiest in forty years.”

Thus, while we are of course all pleased that the freeze has come to an end, as required by law, simply uprating benefits in line with inflation is not good enough. The Minister said that an extra £800 million was going to be spent on this and tax credits. Is that £800 million simply due to inflation-proofing? If so, it is not extra at all but simply keeping things as they are. If austerity is genuinely coming to an end, the Government should make good at least some of the loss that child benefit has suffered during the past decade, as it is unfair that families with children should bear the brunt of austerity. Raising child benefit by more than inflation would be much more effective in helping low-income working families than a further rise in personal tax allowances.

My Lords, we are indebted to the noble Baroness, Lady Lister, for illuminating the underlying policy issues that underpin these statutory instruments. There is a real fear in my party—and I know in hers—that the changes that are taking place today embed, in effect, austerity for those on benefits and those on the lowest incomes. However, because we are looking at statutory instruments, I am going to make my comments extremely narrow. I recognise that for the annual rerating of NIC contributions and various other benefits, we are simply implementing a mechanism that has been through a normal parliamentary process. Frequently, this has been part of a Budget; it would certainly have been debated in both Houses, and MPs would have had an opportunity to express an opinion in the Commons if they wished to make changes. However, I am somewhat at a loss—and perhaps the Minister will help me—as to how any of that applies to the changes in PT and LPL.

It is not that I have a particular objection to the changes, but it appears that their basis lies in the Conservative manifesto, not in actions taken in the other place either in the form of a Budget—because the Budget is not due for another week—or in a finance Bill, which is where I would expect fundamental changes such as this, which affect most working people, to be embedded. It is hard to accept that changes are being made to national insurance contributions, which have a major impact on the Budget, but not within the context of the Budget. I am rather concerned that the Government might be returning to a pattern that we have seen in the past, when major policy change was introduced by statutory instrument rather than through primary legislation or being put into the Budget framework, where full debate and challenge could take place. It happened with universal credit, as I think everybody who is present in the House today will remember, and I am now concerned to see this appearing here within two of these statutory instruments. So that is where I would like the Minister to focus: to explain why a change which, as far as I can see, perfectly belongs to next week’s Budget and a finance Bill, is appearing in a statutory instrument, where, by definition, the debate is extremely limited and challenge is, frankly, near impossible.

My Lords, I will take a similar self-denying ordinance to that of the noble Baroness, Lady Kramer, and speak relatively briefly. I would like simply to put on record my support for the excellent speech by my noble friend Lady Lister. I join with the noble Baroness, Lady Kramer, in failing to understand why this is not part of the Budget. Because it is not part of the Budget, it is lacking in process. In some senses, virtually all the changes that the Minister described are designed to introduce the CPI increases of 1.7%. Insomuch as that has previously been announced in budget processes, I cannot object, except on the wider basis that my noble friend Lady Lister outlined.

There is one particular increase, however—the increase in PT, which I am told is the “primary threshold”—which is not in line with inflation. Its excuse for being introduced is that it is in the Conservative manifesto. I have a copy of that manifesto and I have to admit that I could not find it. Fortunately, a member of the Treasury was able to advise me that it was on page 15—which was conveniently not numbered, but never mind. It says:

“We not only want to freeze taxes, but to cut them too. We will raise the National Insurance threshold to £9,500 next year—representing a tax cut for 31 million workers.”

I thought that a basic rule of introducing a change of policy would be that it would be properly costed. Just to make sure that this was not trivial, I did a few sums. The effect, as the Minister said, is to increase the threshold by £868; it would have increased a little anyway because of the 1.7%, but the policy impact is something like a real £720 increase. If you multiply that by the 12% rate and the 31 million people involved, you get a figure of, say, £2.7 billion. My concern is that such a sizable sum ought to have been properly set out and illustrated.

The Explanatory Memorandum says:

My Lords, I will try to deal with the queries raised by the noble Baronesses and the noble Lord. I will start with the question asked by the noble Baroness, Lady Lister, on the impact of the historic benefit freeze. We have to put all these events into some context. When the freeze was originally announced in 2010, we were putting the public finances back on track. For example, before 2010, welfare spending was rising at an unsustainable rate. Between 1997-98 and 2010-11, welfare spending rose by £84 billion in real terms—a 65% increase. The Government are committed to building a welfare system that ensures that work pays, that there is a strong safety net for people who need it, and that the system is fair for claimants and taxpayers. As I mentioned in my earlier comments, this is a substantial payment back into the system to support some of our most needy and vulnerable people. However, the Government are not able to provide a blank cheque for an unlimited uprating from the years of austerity that we have had to come through.

The first question from the noble Baroness, Lady Kramer, was on national insurance, and there are two answers. The first is perhaps a slightly technical one, which is that national insurance is not a tax and is therefore not covered in a finance Bill, but there is also another reason. First, we want to get on with delivering our manifesto commitments—as the noble Lord, Lord Tunnicliffe, said, it is there in the manifesto—and, again, this is a meaningful uprating for some of the most vulnerable people in our society. It also gives early certainty to employers.

On the points made by the noble Lord, Lord Tunnicliffe, we will write to the noble Lord with the detailed calculation of this impact. However, personally, I am proud to be part of a Government one of whose first acts since we were returned to office is to deal with the most vulnerable people in our society. To conclude—

I asked some specific questions, which I do not believe the noble Lord has answered. I will not get into a long debate about sustainability and so forth, although I addressed that in Grand Committee—there is no evidence at all that it was unsustainable. First, I asked about the extra £800 million to which the noble Lord referred. What is that? Is it simply raising in line with inflation? If so, that is not new money. I asked him what the justification was for continuing to freeze the high-income charge threshold, and whether the Government were still committed to child benefit.

The answer to the first part of the noble Baroness’s question is that this is what it will cost; the figure I mentioned earlier in my comments, which I think was £800 million, is the cost. The second question was: what about the people at the top end? Again, I am proud to represent a Government who are focusing our attention on those at the very bottom end of income, so this is where we are at the moment. I cannot speak for the Budget—

Can I just check the Minister? The area that I was concerned about, which is the increase in the PT, affects virtually every taxpayer and is not in any way concentrated at the bottom end of employment.