MPs pass Bill axing Health and Social Care Levy

The Act implemented two measures: a temporary 1.25 per cent national insurance (NI) increase for employers and employees in the current tax year; and then from April 2023 a new Health and Social Care Levy of 1.25 per cent on earnings, which would have affected not just those of working age but also those of state pension age. The Bill repeals that Act, with the reversal of the temporary NI increase taking effect on 6 November.

The Bill, which contains just three clauses and a schedule, passed through all its Commons stages in a single day – Tuesday 11 October. It is scheduled to pass through all its Lords stages on Monday 17 October and is expected to gain Royal Assent soon after.

The Bill does not implement the reversal of the increase in the rate of tax on dividend income which accompanied the year’s NI rise. This is expected to be in the next Finance Bill and to take effect from April 2023. The Bill also does not affect NI thresholds .

Second reading debate

MPs debated the Bill for nearly two hours at second reading. More than a quarter of this time was taken up by the opening speech, from Chief Secretary to the Treasury Chris Philp, although this included a large number of interventions.

Tension: Chief Secretary Chris Philp (left of image) and James Murray (Lab)

The Chief Secretary said the repeal would allow people to keep more of their own money to help with the cost-of-living crisis. He claimed that the average saving for people in work who are earning more than NICs thresholds will be approximately £330 next year. Combined with the increase in the threshold that took effect in July, the saving for the average worker earning above those thresholds will be £500 next year. We need to make sure that public services are properly funded, but we need to do so in a way that does not impose excessively onerous burdens on taxpayers, the minister said.

Conservative James Cartlidge asked the Chief Secretary to explain about the £17 billion of revenue from the levy to fund social care and the NHS. If the levy is going, surely that implies that borrowing fills the gap or some other change fiscally? Philp said this will be explained in the 31 October fiscal statement.

Labour welcomes the U-turn. Shadow Financial Secretary to the Treasury James Murray is concerned that the Government pressed ahead with the NI rise despite warnings by Opposition parties and others, from the Federation of Small Businesses to the British Chambers of Commerce, the CBI and the TUC, that it would negatively affect business decisions around wage bills and recruitment. Murray called on the Prime Minister and the Chancellor to perform further U-turns on their decision to lift the cap on bankers’ bonuses, on their refusal to extend the windfall tax on oil and gas companies, and on ‘their discredited, dangerous trickle-down approach to the economy’.

Murray said the Government had pushed ahead with this tax rise on working people and their jobs, refusing throughout the debate on the original legislation to ask those with the broadest shoulders to take more of the burden. He said a Labour government would boost NHS investment by, in part, ending the ‘outrageous non-dom tax loophole’ exploited by the ‘super-rich’. He contrasted Labour’s ‘fully and fairly funded’ pledge on the NHS with the Government’s throwaway comments that their approach will be funded by ‘general taxation or through extra borrowing’.

Conservative MP James Cartlidge lamented the axing of the levy, saying it was transparent and provided discipline that we terribly lacked in health spending for many years, under successive governments. He said we need a core NHS that is free at the point of delivery, but we also need to drive up the use of the independent sector and of private healthcare. He used the example of Ireland, Australia and Germany which have tax incentives for people to pay for their healthcare. There is an understanding that people who go to that trouble should have ‘some kind of rebate’, because they are doing everyone else a favour, he said.

Another Conservative, David Rutley, did not lament the axing of the levy. He said he is a strong supporter of free enterprise and that lower taxes have a role to play in driving growth.

Labour MP Kim Johnson welcomed the repeal of the ‘regressive’ hikes to national insurance which, she said, would have seen those least able to pay with the heaviest proportional tax burden to tackle the crisis in social care. She asked for reassurance from the Chief Secretary that new funding for adult social care will come from progressive taxation and the pockets of those who can most afford it.

Alison McGovern, also Labour, commented that ‘no matter whether they raise taxes or lower them, high-quality public services and economic growth will continue to elude the Conservatives’.

For the SNP, Shadow Financial Secretary Richard Thomson welcomed the U-Turn, saying under the original plans it was unclear what the additional resource would be used for, other than in the broadest of terms. He said there was no sign of the accompanying reforms that would be necessary to get better outcomes on integrating health and social care services in England. And he said the levy was introduced, and is now being withdrawn, without our having had any indication from the OBR—although we believe the work has been done—of the impact not just of this but all the other fiscal choices that now sit around it.

Thomson accused the Government of abandoning the NI rise in favour of increased borrowing, just as the Chancellor’s limited fiscal event last month (September 2022) has resulted in borrowing growing more expensive. In general, the MP suggested, it is fairer to spread the burden by increasing income taxes across the board on both earned and unearned income, as well as to look again at areas such as inheritance taxes and capital gains, so that the totality of wealth is taken into consideration when sharing that burden.

His colleague, SNP Shadow Treasury Chief Secretary Peter Grant, also welcomed the U-turn. He opined that other than for very time-limited and precisely defined purposes, hypothecated taxes do not really work. “Filling in a small part of the decades-long underfunding in some of our most important public services is neither time limited nor specific,” he told MPs. Grant asked for a commitment that not only will there not be a reduction in cash terms in health service funding or in social care funding, but that those budgets will increase by enough to cover the cost of inflation as it hits those services.

Liberal Democrat Spokesperson on Business, Energy and Industrial Strategy, Sarah Olney, was also pleased at the U-turn, saying the Lib Dems thought the levy would disproportionately impact lower earners and hit working families at precisely the time when they were struggling to pay their bills and prices were starting to increase in shops. She highlighted that businesspeople may have incurred costs in between the national insurance rise and the U-turn. She suggested a windfall tax expanded from the one so far introduced could bring in more tax revenue.

Closing the debate, Chief Secretary Chris Philp criticised opposition policy, saying: “The starting position for Labour’s plan is that this year, 2022-23, those in the top one per cent of the income distribution are estimated to receive 13 per cent of all income, but already pay 30 per cent of all income tax liabilities. Those in the bottom 50 per cent of the income distribution are estimated to pay only 8.3 per cent of all income tax. When Labour says that it wants to fund its plans through general taxation, it is not looking for the one per cent to pay; it is looking for people on average and low incomes to pay. The Conservative Party does not think that is the right way to achieve growth.”

Committee of the whole House

There was debate on two new clauses during a brief (less than one hour) committee stage. A new clause from the Labour frontbench would have required the Treasury to publish an assessment of the Government’s commitment to replace the money for health and social care that will no longer accrue from the levy. A separate new clause that had cross-party support (among opposition parties), moved by Richard Burgon (Lab), would have required the Treasury to report on an alternative to using the Health and Social Care Levy to fund health and social care, by raising more tax revenue from dividends and capital gains.

For Labour, James Murray said the decision by ministers to scrap the national insurance rise is better late than never, but this in-year change means that yet another cost will be paid for through working people’s taxes. He pointed to the “Financial implications of the Bill”, which state: “HMRC anticipates increased call volumes and customer contact as a result of the in-year reduction of NICs rates. There will be delivery costs in implementing this policy. IT changes will be required to be delivered at additional cost to HMRC, to support safe delivery of this policy.”

Murray said Labour had tabled their new clause because of ‘this Government’s lack of willingness to subject themselves to transparent scrutiny’.

Murray noted that the Government had said – when introducing it – that a higher tax rate on dividends means asking better-off people to make a fair contribution. Given this, can he [the minister] confirm “why the Government have decided that it is the right time to cut taxes for those who are better off, even if that means greater borrowing funded by all taxpayers?”

Steve Brine, Conservative, a former Health Minister, said Murray’s new clause ‘looks down the wrong end of the telescope’. Brine said that if we do not believe in prevention, the costs of the NHS predicted in the OBR book are going to look quite conservative.

Labour’s Richard Burgon said his new clause has support from Plaid Cymru, Alba, Labour, Green, and SDLP MPs. Burgon said he is not suggesting the taxing of wealth itself, but taxes on income deriving from wealth. He said it is a ‘scandalous situation in our society in which income derived from wealth is taxed below income derived from work’.

The backbench MP said there is huge potential for increasing tax revenues by simply ending the significant tax discounts that go to income from wealth over income from work. He claimed that ending the lower rates paid on capital gains and share dividends, and removing the related exemptions on those taxes, would raise around £24 billion per year. That is a lot more, nearly double, than the amount from the national insurance tax hike on working people, he claimed. That money can go towards social care and the NHS. Wealthy people living a low-tax lifestyle have been benefiting from even lower capital gains rates than over 30 years ago, so something has gone wrong, and it is now time to put that right, he said.

Sir John Redwood, Conservative, was against the original levy and is against the two new clauses. Redwood said one of the objectionable features of the original proposal was hypothecation, because “I do not think it is possible to identify a single tax that just happens to meet the costs of a particular service, let alone a tax that would then have revenue growth at the right pace to take care of the needs of that service.” This one was particularly misleading, he continued. “There was no way that the amount of tax to be levied got anywhere near paying the full costs of social care. It was misleading to make people feel that social care might be as cheap as this particular tax”.

Labour’s Lloyd Russell-Moyle agrees with Burgon’s view of wealth. Moyle said there are other ways that the revenue could be raised, such as abolishing the upper earnings limit and the ‘scandal’ of people who earn more than £50,000 paying only 3.25 per cent - less once the levy is abolished - on national insurance. That rich people pay less national insurance as a percentage of income than poorer people is a ‘national scandal’. Rather than a progressive tax, it is an innately regressive tax, he claimed. If we had a ‘flat tax’ rather than current NI rates that would have raised £10 billion more than this failed U-turn, he said.

Closing the committee stage, the new Economic Secretary to the Treasury, Richard Fuller, said overall funding for health and social care services will be maintained at the same level as if the levy was in place, and the Government will do that without the tax increase. He said the right way to assess these changes is in the broader context of the medium-term fiscal plan in the round.

On Burgon’s new clause, Fuller said if the taxation of dividends and capital gains were aligned with the taxation of earnings, we could expect to raise less than the levy was forecast to do due to the size of the tax bases and the significant behavioural responses by both tax bases.

Labour’s new clause was pressed to a vote but defeated 257-190. The cross-party new clause was not pressed to a vote.

Just one MP contributed briefly at third reading debate – the DUP’s Jim Shannon, who expressed his concern for what he refers to as ‘the working poor’. “Tonight’s bit will help and it will go a long way. However, we need to do much more than this little measure,” he argued.

The Bill was granted a third reading and sent to the Lords without amendment. The Lords will debate all stages of the Bill on Monday 17 October.