National Insurance threshold increase sails through Parliament

The Bill implements Chancellor Rishi Sunak’s Spring Statement announcement of an increase in the annual National Insurance Primary Threshold and the Lower Profits Limit from £9,880 to £12,570 from July 2022, to align with the income tax personal allowance. Sunak also announced that from April 2022 self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs.

The wider context is that, in September, the Government announced that employees will pay 1.25p more in the pound from their pay packet in national insurance contributions (NICs) from this April, to help pay for measures to clear the NHS backlog – a tax hit that will turn into the Health and Social Care Levy next year. Some politicians used the debates on the Bill to express broader views about the Spring Statement, including in relation to income tax and VAT.

The Bill passed through all its House of Commons stages on Thursday 24 March, the day after the Spring Statement. It was debated and passed by the House of Lords on Wednesday 30 March. It gained Royal Assent on Thursday 31 March.

Commons second reading debate – 24 March 2022

Opening the debate, Chief Secretary to the Treasury Simon Clarke claimed the Tax Plan published alongside the Spring Statement is ‘sensible, affordable and well targeted’. The health and social care levy will safeguard a dedicated source of funding for our NHS, he said, adding that a long-term funding solution for the NHS and social care is not incompatible with reducing the tax burden on working families.

On the Bill, Clarke said equalising the NICs and income tax thresholds creates a fairer and simpler tax system, calling it the largest single personal tax cut in a decade and the best way to help low and middle earners through tax. About 70 per cent of all workers will have their NICs cut by more than the amount they will pay through the health and social care levy, he claimed.

On the timing of the change, Clarke said that introducing it in early July strikes a balance between ensuring that people benefit from the increase soon, while giving employers and payroll software providers time to update and test their systems so that the change can be delivered safely. That will avoid millions of taxpayers having to make manual claims for refunds at the end of the tax year and employers from having to make major payroll corrections, he said.

The Bill gives the Treasury a power to lay an affirmative statutory instrument. It will mean that from April those with profits between £6,725 and £11,908 will not pay class 2 NICs. That will rise to £12,570 from April 2023. The effect on an individual’s ability to access contributory benefits and to build up state pension entitlement will be unaffected because of the changes to class 2 NICs.

Although supporting the Bill, Labour’s Shadow Financial Secretary James Murray said even after the Bill passes, the tax burden in UK will still be at its highest in 70 years, and the UK is still the only G7 country to be raising taxes on working people this year. Murray reiterated Labour’s opposition to the HSCL saying it is the worst possible tax rise at the worst possible time. He said it is unfair of Sunak to raise taxes for working people, while ruling out a one-off windfall tax on the profits of North Sea oil and gas producers.

Separately, he said the cut in VAT for energy-saving materials announced in the Spring Statement is not anywhere near enough to help most families upgrade their homes.

There was strong support for the Bill from the Conservative backbenchers.

Jacob Young said it would support more than 30 million working people with a tax cut amounting to an increase in income of about £330 for the average family and is the first step on our journey to lower taxes.

Paul Bristow said the raising of the NICs threshold simplifies the tax system, saying we do not want tax to be confusing, lacking sense or difficult to understand.

Alexander Stafford said the simplification Bristow talks about will not only make a huge difference to everyday lives but, hopefully, reduce some of the accounting costs and make it easier for business.

James Daly said it is the right policy at the right time because the route out of the cost-of-living difficulty is good, skilled, high-wage, high-quality employment in all parts of the country.

Shaun Bailey said the balancing of the NICs personal thresholds will enable, to a degree, a tax cut for hard-working people in this country. He said delaying the NICs change to July is helpful for many sole traders and small businesspeople who will have to navigate this change, building systems and putting them in place. On Labour’s windfall tax, he said the one-off nature of what is being proposed makes it very difficult to build a legislative framework that would operate in a way that would enable us to derive the benefit.

Labour MPs tried to broaden the debate to the Government’s tax increases.

Marie Rimmer said people at home are struggling, business is struggling and the Chancellor must do more to ease this struggle. Raising the NICs cap is welcome, but a drop in an ocean compared with the measures that are needed.

Rachel Hopkins said that, although increasing the NICs threshold will provide some respite, it will deliver twice as much benefit to the top 50 per cent - the top half of earners - as it will to those in the lower half.

Matt Western said the Government’s determination to pursue this increase in NICs will hit hard those businesses that are already ‘hurting’ because of the pandemic and now the war in Ukraine, as well as the consequences of the Brexit changes in certain sectors.

For the SNP, Richard Thomson said his party welcomes the Bill because of the cost-of-living crisis. Thomson’s opinion is that cutting the basic rate of income tax while going ahead with an increase in NICs rates will make the tax system both less equitable and less efficient.

Thomson and Lib Dem Wendy Chamberlain both criticised how the changes to NI and income tax were combining to increase the wedge between higher taxes on earnings and lower taxes on pensions and unearned incomes.

Chamberlain additionally argued that temporarily cutting VAT to 17.25 per cent would shield people from the worst of the increased cost-of-living, put money back in their pocket, and help those on middle and low incomes the most. The VAT cut will increase the economy and increase productivity, and therefore see increased tax receipts, which would cover it.

She also called on the Government to implement a windfall tax on the ‘super-profits’ of oil and gas companies. She said that this is about the additional profits that those companies are making because of the increase in energy prices, and what she is advocating is not the same as the policy proposed by Labour.

Former Shadow Chancellor John McDonnell (Labour) criticised the process around the Spring Statement. He said MPs need to look again at how we try to cram a debate about the whole statement into just one piece of the legislative proposals stemming from it. In future it would be better, just as we do with the Budget, to timetable specific debates on the statement and then we would have the legislation flow from that, he said.

McDonnell additionally suggested that we need to have a proper debate in these coming weeks and months about the nature of poverty in our society, the nature of low incomes, and the options available to us to tackle those issues.

In slightly ‘left-field’ comments, Conservative MP Richard Drax said he would like to scrap VAT altogether in the future, saying it is extraordinary that we ask someone to do something, creating all this work and getting the economy going, and people are taxed to do it.

Winding up the debate for Labour, Shadow Exchequer Secretary Abena Oppong-Asare said that, in the Spring Statement, the Chancellor reversed only about a sixth of the tax rises that he has announced since he took the job. He is raising taxes on millions in the middle, but where is the increased tax contribution from the wealthiest in society, she asked. It is a tax hike on jobs, ultimately passed on to workers through lower wages and higher prices, she worries.

The Financial Secretary to the Treasury Lucy Frazer (photographed below thanks to Parliament UK) closed the second reading debate by saying the Bill cuts taxes to ensure that people have immediate help with the cost of living, it creates better conditions to enable businesses to invest and grow; and it ensures that people keep more of what they earn. She said a windfall tax as suggested by Labour is a short-term measure and the UK needs those energy companies to invest in the future. She told Labour’s Stephen Timms that under the NICs change an individual may be affected by the universal credit taper but will be better off overall because of the change.

Second reading debate Hansard is here.

Commons Committee of Whole House – 24 March 2022

Summary of clauses

• Clause 1 amends the Social Security (Contributions) Regulations 2001 to align the primary threshold for class 1 NICs with the income tax personal allowance.
• Clause 2 raises the lower profits limit for class 4 contributions and ultimately aligns it with the income tax personal allowance.
• Clause 3 gives the Treasury the power to make regulations to align the threshold for paying class 2 NICs with the lower profits limit.
• Clause 4 makes transitional and consequential provisions that are reasonable in the context of the Bill.
• Clause 5 provides that regulations made under the powers in this Act are to be made by statutory instrument.
• Clause 6 sets the short title of the Act as National Insurance Contributions (Increase of Thresholds) Act 2022.

The six clauses were debated in a single group, along with one proposed amendment and four proposed new clauses.

The amendment was a Lib Dem proposal  to bring forward the date of implementation of the increase in NICs thresholds from 6 July 2022 to 6 April 2022. Moving it, Lib Dem Wera Hobhouse said the three-month delay will cost working families £2.1 billion and add to their distress right in the middle of the biggest cost-of-living crisis since the 1950s. Hobhouse cited the Resolution Foundation as saying the typical family will see a hit of £1,100 next year.

Two of the new clauses also came from the Lib Dems. One would have required the Government to produce a report to look at the impact of the 1.25 per cent increase in NICs on disposable incomes. Hobhouse argued this would give a true picture of what working families are facing.

Hobhouse said that, with a ‘floundering economy’, we need people to spend money on our high streets, which would boost our local economies. A cut to VAT of 2.75 per cent would give an immediate boost to every household, she argued.

The other Lib Dem new clause would have required the Government to produce a report on taxation on earned income versus taxation on unearned income. Hobhouse argued the Government’s changes mean that if someone is wealthy enough to get their income from savings and properties they will pay less tax, while workers and particularly the less well-off continue to pay more and more.

Opposing the changes, Sarah Atherton, Conservative, said employers, HMRC and payroll systems do not have time to bring these measures into effect by April. MPs’ own pay body, IPSA, could not make these changes in time, ‘let alone small and medium-sized enterprises and bigger companies’, she claimed. Atherton was also against a backbench Labour new clause that says the Bill should only become law if the Government first publishes a report on its impact on low pay and poverty. The MP said we should not postpone this measure by undertaking impact reports that would cause unnecessary delays for families who need support with the cost of living now.

But Labour backbencher John McDonnell, the proposer of that new clause, came back at Atherton by saying he wishes the Government would always publish a full report on their assessment of the implications of their legislation for both low pay and poverty, and that that report should include their assessment of the other options available to them that they could have taken. If not the Government, maybe a report should be published by the OBR or some other body that MPs establish to enable that to happen?

Supporting McDonnell, Matt Rodda, also Labour, said the Prime Minister and the Chancellor have made a series of choices that have made the cost-of-living crisis worse. They decided to increase NICs, break the triple lock and failed to increase the state pension in line with inflation.

Clive Efford, Labour, said his new clause would require the Government to confirm in a report whether his fears and estimates are right that people on universal credit who pay national insurance will lose roughly half the money that they gain. The report can identify how much the Government will gain from some of the poorest workers in the country because of the changes. (He would like the report published within 30 days of this Act being passed). If we highlight how much that is, he hopes that the Government will attempt to do something about it and compensate such people for their loss. He said it would be an ‘extremely callous move’ if the Government knew that, because of the NICs threshold being lifted, people would miss out in this way.

Labour’s Shadow Financial Secretary James Murray said the decision to implement this change from 6 July rather than 6 April reflects the last-minute nature of the Chancellor’s proposals and gives the impression of a Chancellor who has made the wrong choices and is ‘now scrabbling at the eleventh hour to limit the damage’. When was a decision taken by the Chancellor to raise the threshold? he asked. Could his decision not have been announced and legislated for sooner? Was consideration given to backdating the increase to April?

Murray also asked why the changes to class 2 contributions are being made by way of regulations, rather than being implemented through this Bill. Labour has warned since the NICs hike was introduced that it would be a tax on working people and their jobs, yet none of the Bill’s clauses address the level at which employers will have to pay the raised rate of NICs. We know from the OBR that this is not just an issue for employers who want to create jobs; the rise in employers’ NICs will also hit workers through a ‘double whammy’, as the increase is passed on by way of lower wages and higher prices, he said.

The SNP’s Shadow Financial Secretary Richard Thomson said that. quite apart from the evidence base they would provide for legislative scrutiny, the opposition amendments might provide a corrective to the poor policy choices that ministers have made in recent times.

Replying to the debate, Financial Secretary Lucy Frazer told Hobhouse that delivering the threshold increase to an April timeline would see millions of individuals paying the incorrect amount of NICs at the start of the tax year, in just two weeks’ time. There would then be an additional administrative burden on employers, who would have to manually re-run the payroll once the software was ready. A July start date will avoid millions of taxpayers having to make manual claims for refunds, she claimed.

Frazer told McDonnell that the kind of report he was suggesting would consider a variety of hypothetical scenarios which makes it time-consuming, which is why that is not traditionally done. Frazer said Efford was right to point out that an individual may be affected by the universal credit taper, but overall they will be better off because of this change. She said the impacts of the provisions in the Bill have already been published in a tax impact information note and the impact of the income tax basic rate cut will be published ahead of implementation in 2024.

The minister said the Government has taken steps over several years to ensure that landlords pay a fair tax contribution, such as a higher rate of stamp duty land tax for those purchasing additional properties. Responding to Murray’s questions, Frazer declined to say when Sunak decided on this NICs change in this Bill but certainly not the day of Spring Statement.  The reason that the measures will be brought in through regulations is that we need to consult, including those who will be doing the payroll. The need to consult was one of the points made by the Low Incomes Tax Reform Group, she said. She would not be drawn on the earned versus unearned income debate.

No amendment or new clause was pushed to a vote. The clauses were all passed without opposition.

The Bill was then given a Third Reading without debate and passed to the Lords.

The committee stage Hansard is here. Amendments can be read here.

Lords Second Reading debate – 30 March 2022

Government spokesperson Baroness Penn claimed the Tax Plan in the Spring Statement will deliver significant benefits to people and the economy, ‘underpinned by fiscal responsibility’. She said the increase in NICs thresholds will lead to a ‘fairer and simpler’ tax system, including taking two million people out of paying the health and social care levy. The Bill represents the largest cut to personal tax in a decade, she claimed.

Labour’s Baroness Ritchie of Downpatrick asked for more from the Government to mitigate the rising cost of food, energy and other commodities because of Brexit, the war in Ukraine and the COVID-19 recovery. She said in the long-term we need to reform the welfare social security system to focus on people’s needs, investment in the housing market such as building more energy-efficient social housing and targeted employability support to people.

Lord Davies of Brixton (Labour) said the Government’s proposals ride roughshod over the original concept of the National Insurance Fund and treat the idea of national insurance with contempt by ‘making changes to NICs as a short-term political fix’. He is unimpressed by a promise of a cut in the standard rate of income tax in the future that is effectively being funded by an increase in NICs: “In other words, a cut in progressive taxation is being funded by an increase in a more regressive form of tax.” National insurance is also regressive because it only applies to earned income, whereas in the past it applied to unearned income, leaving massive opportunities for taxation arbitrage, he said.

Lord Tunnicliffe (Labour) said the freezing of income tax thresholds will reverse the Government’s previous good work in removing people from tax. Under current plans, the benefit derived from the promised pre-election income tax cut in 2024 will have been offset by other increases across the tax system, he said.

Baroness Kramer, Lib Dem, (photographed below thanks to Parliament UK) is unimpressed that the lowest paid get no help from this at all because they fall below the existing lower threshold. The Government should have not just raised the threshold but scrapped the whole NICs increase, she added. After all, it had a £26 billion bonus of unexpected tax revenues available and they could have easily imposed a windfall tax on the super-profits of the oil and gas companies.

Kramer observed that the Government say that the increase in NICs and the future levy are hypothecated to the NHS and then social care. “The National Insurance Fund was created to fund the state pension but it is increasingly just a piggy bank. In that context, will the Minister today make clear what the impact on the fund will be from the drop in expected income arising from the increase in the threshold? This is not to criticise the increase, but I would like to understand how this will impact the fund and even more understand the consequences for funding the NHS and social care. After all, if this were truly a hypothecated levy, there ought to be a drastic impact on the money flowing to the NHS and social care. Is that what is going to happen?”

Green Party peer Baroness Bennett of Manor Castle said the cost-of-living crisis is not a one-off crisis. Rather: “It is part of a long-term trend which has seen multinational companies not paying their taxes, rich people becoming richer and richer, and general society having a smaller and smaller share of the pie and, for many people, fewer and fewer of the crumbs.”

Cautioning against any more austerity measures, Bennett said two-fifths of total government debt that we owe to ourselves is government borrowing from government, and four-fifths of government debt is owed to people and institutions within the UK. Therefore, when we pay interest, we are putting money into the economy.

She complained about our ‘incredibly complicated tax code’ – the result of ‘an expedient fix here, a gesture to a vested interest there’. She suggests we could set a single rate of national insurance. Rather than earnings above £50,000 being charged at only two per cent, their rate of national insurance could be raised to 12 per cent. On its own, that would raise £11 billion. This would simplify everything and mean that we do not have the regressive system of national insurance that we do now, she said. Why not have ‘a single, unified income tax’ she asked – one where, whatever the source, everyone’s income would be paid at the same rate of tax? Leaving things at the same level they are at now, this could raise £24 billion, she suggested. It would neither penalise workers nor favour the generally well-off in society, whose wealth and income come from property and other investments, she said.

Lord Macpherson of Earl’s Court, crossbencher, was slightly disappointed that the Government has, in a sense, sold the pass on employers, because this is also a burden on employment.

Closing the debate, Baroness Penn said she agreed with the IFS that raising the NICs threshold is the best way to help low and middle earners through the tax system currently. She contested that there was any return to austerity, saying total departmental spending will grow in real terms at 3.7 per cent a year on average this Parliament.

Penn said that the universal credit taper rate could impact on the benefit felt by those on universal credit by the increase in the threshold. It is important to note that these individuals will be better off overall thanks to the change in the threshold, she said. She said the Government is increasing the employment allowance to help small businesses fulfil their potential and boost employment.

Responding to Kramer’s point about hypothecation, Penn said amounts raised through the health and social care levy will all go to health and social care spending. They are not the only things that determine the overall amount of health and social care spending and therefore responsible bodies’ budgets. She said that by the forecasts produced by the OBR alongside the Spring Statement, even with the increase to the thresholds, the amounts forecast to be raised through the levy are more than previously anticipated when the levy was announced. But this left some peers confused and Penn said she would write to Kramer on this.

The second reading debate Hansard is here.

Lords committee stage – 30 March 2022

The Bill then went to a Committee of Whole House that same day (30 March), where Baroness Kramer, like her Lib Dem colleagues in the Commons, spoke for an amendment that would bring forward the date of implementation of the increase in thresholds from 6 July 2022 to 6 April 2022.

To argue her case, Kramer cited the Resolution Foundation as saying that if we consider just the changes to income tax and NI due in 2022-23 and reflect that the NI threshold will not fall until July, earners on less than £25,000 will gain, and those above will lose from all the measures being introduced in the next fiscal year (if the NI threshold had fallen in April, this cut-off point would have risen to £32,000). The peer said the Government does not have to go and change the whole universal credit system or require every employer to make a change; they could simply access the data and then find a way to make a rebate.

She said the notion that NICs are an entirely separate, protected, segregated, hypothecated pot is merely an ‘accounting fallacy’. It is all just smoke and mirrors. Considering this, her separate amendment would require the Secretary of State, within six months, to lay before Parliament a report on the impact of the Act’s provisions on disposable incomes. She would also like to see that same calculation done if the change combined with a reduction in the national insurance rate of 1.25 per cent. Her third amendment would require the Secretary of State, within six months of the Act being passed, to lay before Parliament a report considering the impact of the Act’s provisions on the levels of taxation on earned and unearned income. It is an important philosophical issue that needs to be ‘highly transparent’, she argued.

Lord Davies of Brixton, Labour, asked about classes 2 and 4 NICs. Contributions by the self-employed have become a mess and need to be sorted out because, first, they are confusing, and, secondly, they create the opportunity for arbitrage between employment status and self-employment, he said. Effectively, the self-employed have an advantage in terms of their NICs, and, because of the way the lower threshold is being changed, that advantage is being increased. He is calling for a more thoroughgoing reassessment of how the self-employed pay NICs.

Lord Tunnicliffe, Labour, said had the Chancellor acted quicker to deal with people’s genuine financial concerns, systems could have been fully operational by the start of the tax year next week. The decision to cover only three-quarters of the tax year will inflict additional pain on many in the coming weeks and months. Separately, he complained that a real-terms cut to social security payments will leave many at the lower end of the income scale facing genuine financial difficulties. He has no issue with the people who benefit from unearned income, but that should not necessarily be given preferential treatment over wages in the tax system.

Closing the debate, Baroness Penn told Kramer that the delivery timetable strikes the important balance between ensuring that individuals see the benefits of the increase and allowing employers and payroll software providers sufficient time to update and test their systems.

She said the impact of government policy since spending round 2019 on the bottom four deciles is expected to be worth more than £1,000 a year. She said unearned income is generally excluded from a liability to NICs as it is not derived from paid employment. The Government already publish tax information and impact notes ahead of implementation. She said dividend tax rates will rise as planned this April and will not reduce in 2024. Around half of landlords are in employment or self-employment and will contribute to the health and social care levy in relation to their earned income, she said. There are no plans to look at reforming class 4 NICs.

The Bill was then given a Third Reading and passed.

The Bill gained Royal Assent the following day.

By Hamant Verma, CIOT Senior External Relations Officer