MPs rush National Insurance cuts through Commons in 90 minutes

Debating the National Insurance Contributions (Reduction in Rates) Bill on Thursday 30 November, MPs from each side of the House backed the cut, but disagreed on how far UK households would benefit.

Measures in the Bill, announced at last week’s Autumn Statement, include:

• A reduction in Class 1 (employee) national insurance contributions (NICs) from 12% to 10% from January
• Cutting the Class 4 (self-employed) rate from 9% to 8% from April
• Removing the requirement for self-employed people to pay Class 2 NICs from April

The Bill passed through all its Commons Stages – second reading debate, committee stage and third reading – in a single day, with just 90 minutes of debate.

Speaking for the Government, Treasury Chief Secretary Laura Trott said the country had reached a “landmark moment” and “the economy has turned a corner”. She said the measures in the Bill will “put more money in the pockets of working families” and make work “more appealing” by cutting taxes for 27 million people. She added it would simplify the system for self-employed taxpayers, while ensuring that those who pay Class 2 contributions voluntarily, to get access to benefits such as the state pension, will continue to be able to do so.

Trott said: “These reductions in tax will not only benefit those in work, they will lead to the equivalent of almost 100,000 people entering work, because they will ensure that work pays and will drive more people to seek employment.”

Opposition questions

However, Shadow Financial Secretary James Murray said the “inescapable truth” is that the tax burden in Britain is on course to reach its highest level since the Second World War and that “personal taxes are going up, not down”.

He said the measures in the Bill are “more than eclipsed” by previous tax rises including the freezing of national insurance and income tax thresholds for the last six years. “There have been 25 tax rises in this Parliament alone,” he added.

While Murray welcomed the cut in national insurance, he said that by the end of the decade, taxes in the UK will have risen by the “astonishing” equivalent of £4,300 per household.

Thanking the Chartered Institute of Taxation for sharing its views with him, Murray questioned whether the implementation of the cut to Class 1 contributions in January allowed enough time for payroll software to “get ready” for the changes, especially as some operators in the retail sector have a “moratorium” on releasing software updates from November to January due to heavy workloads. He asked whether HMRC “accepts” that some software will not be ready in time and how these delays would affect employees.

Murray proposed a new clause to the Bill which would have required the Treasury to explain how someone earning the national living wage would be impacted by the combined effects of the changes in the Bill and the freezing of national insurance thresholds at their 2022-23 level over the period 2023-24 to 2027-28.

He said: “Our analysis shows that a full-time worker on the national living wage will pay an estimated £70 more in national insurance next year, even with the cut in the Bill, as a result of the thresholds being frozen.”

A second subsection of the new clause would also require the Government to “come clean” on some of the implementation costs to businesses and the Government of “what the Chartered Institute of Taxation described last week as the ‘national insurance roller-coaster’ in recent years”.

Murray withdrew the clause following reassurances from the FST.

Shadow Economic Secretary Tulip Siddiq (Labour) said despite the measures announced, “the reality is that households have not given the state this much of their earnings since the 1940s”. She said while Labour would support the decision, it is “a cynical attempt to draw voters’ attention away from the fact that, under this Government, their living standards are going down and taxes are going up, while their wages continue to stagnate”.

Siddiq said economic forecasts from bodies such as the Office for Budget Responsibility showed disposable incomes will drop by 7% next year and the national insurance reductions “pale into insignificance” compared with the threshold freezes announced by the Chancellor.

SNP spokesperson Drew Hendry said the Government has “chosen to ignore the burning cost of living crisis that they put in place for families”, and that “the Chancellor’s attempt to masquerade the Bill as meaningful support for people is nothing short of a farce”.

He said families in Scotland are “already grappling with the harsh realities of the soaring cost of living” and are now faced with a “future of perma-austerity”. Hendry added that the Scottish Government has been handed a real-terms reduction grants but is “miraculously” expected to maintain public services with this reduced budget.

While he joined Labour in backing the Bill, he also questioned how HMRC, which he said is “under severe pressure” and “unable to cope” with phone and postal enquiries currently, would deal with the expected increase in contacts as a result of the changes.

Conservative contributions

Harriett Baldwin (Conservative), Chair of the Treasury Committee, praised measures taken by the Government a year ago which have led to the “turning point” the economy has reached, including efforts to reduce the rate of inflation.

She also welcomed the “simplification of taxes” the Bill provides, adding: “Far too many things in our tax system act as disincentives to doing an extra hour of work. There are too many complicated withdrawal rates. The steps taken on class 2 and class 4 contributions represent a simplification of the tax system.”

David Simmonds (Conservative) said the cuts to Class 2 contributions alone per household equate to “more than the cost of a child’s school uniform for a year”, or a quarter of what the average household in the UK spends on Christmas. “These are significant amounts of money for a good many of our constituents,” he said. “Taken in concert with the rest of the measures, it will make a significant difference to many household budgets and ensure that people have more money in their pocket in the New Year.”

Simmonds also suggested the Treasury consider charging higher rates of national insurance on foreign students who remain in the UK at the end of their studies. He said: “It would then become absolutely clear to everyone in this country that people who are here for a short period will pay a contribution that reflects the potential benefits available to them, whereas those who are lifelong citizens, for whom those costs will be spread out across their entire working life, will enjoy the benefit of a lower rate.”

Richard Graham (Conservative) said as no party would oppose the cut to national insurance, the Treasury had “clearly got it right”. He said many people have seen their salaries increase in the last 10 years, while Government action during the pandemic kept many others in employment or self-employment “when so many people around the world were struggling horribly”.

Priti Patel (Conservative) said: “Conservative policies have, over the last decade, helped to restructure the economy, rebuild our country and create jobs and economic growth.” She added that “any measure” that brings down the tax burden should be welcomed and the measures in the Bill will particularly help the self-employed, whose numbers have dwindled since the pandemic.

Patel agreed the “alignment” of national insurance with the tax-free threshold should also help with the future plans to simplify the tax system but added: “More should be done in that area—by merging income tax and national insurance together. Such a move would simplify taxes for the entrepreneurs and self-employed even further.”

Concluding, Financial Secretary Nigel Huddleston said the “important” Bill “delivers tax cuts and rewards and incentivises work, while growing the economy in a sustainable way”.

He said the UK had been affected by two global crises: the pandemic and the cost of living challenges, but the Conservative party has made “remarkable progress” made over the last 13 years, such as by raising tax thresholds. “That is a remarkable achievement and shows that we look after the lowest paid in society,” he added.

The FST said the OBR has forecast that the economy will be 0.5% larger as a result of the spring Budget and Autumn Statement. He added that HMRC is “engaging” with the industry in order to deliver the changes on time, saying: “We expect the majority of companies to be able to do so.”

The Bill was agreed by MPs and passed.

Read the full transcripts of second reading debate and committee stage.