National Insurance Contributions(Rate Ceilings) Bill

Public Bill Committee, 27 October 2015.

Andrew Rosindell (Conservative, Romford)

Before we begin, I will make a few preliminary points. Please switch electronic devices to silent. Tea and coffee are not allowed during the sittings. We will first consider the programme motion on the amendment paper. We will then consider a motion to allow us to deliberate in private about our questions before the oral evidence sessions, and then a motion to enable the reporting of written evidence for publication. In view of the time available, I hope that we can take those matter formally, without debate.

Andrew Rosindell (Conservative, Romford)

We will now deliberate in private to discuss lines of questioning. If anyone wishes to remove their jacket, please feel free to do so.

Examination of Witness

Andrew Rosindell (Conservative, Romford)

Ladies and gentlemen, good morning to everyone, including members of the public, officials and the Minister, who have just arrived.

We will now hear oral evidence from the Office of Tax Simplification. Before calling the first Member to ask a question, I should like to remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion that the Committee has agreed. For this session, we have until 10 am. Could the witness please introduce himself for the record?

Rebecca Long-Bailey (Labour, Salford and Eccles)

The Bill legislates to prevent rises in the current rates of class 1 and secondary class 1 national insurance contributions, but says nothing about the thresholds. In your opinion, are changes to thresholds absolutely ruled out for the duration of the Parliament?

John McNally (Scottish National Party, Falkirk)

You will know that there has been a lot of speculation in the past two days regarding the possibility of changing the national insurance contribution because of the tax credit cuts. Have you any comment to make on that as a possibility?

Wendy Morton (Conservative, Aldridge-Brownhills)

The balance of the national insurance fund has continued to fall sharply in spite of the modest economic recovery. Is not legislating to prevent even small rises in national insurance contributions throughout the Parliament irresponsible under those circumstances?

Rebecca Long-Bailey (Labour, Salford and Eccles)

This is linked to the previous question. In the light of the response that you just provided, how would you say the fund would cope if there were an unforeseen crisis, given the restrictions that are placed upon it?

Huw Merriman (Conservative, Bexhill and Battle)

This question is linked to previous questions on the fund. Perhaps using your expertise, would you tell us what steps have been taken to ensure that the fund’s 16.7% threshold is maintained?

Huw Merriman (Conservative, Bexhill and Battle)

May I further ask whether you agree with the Government Actuary that a subsidy from the Treasury will be required this year? If you do agree, do you have a view on how big this would need to be?

Huw Merriman (Conservative, Bexhill and Battle)

In a way, you have just touched on this, but to be absolutely clear, how much money from the fund do you think will be required to maintain it above the threshold for the remainder of the Parliament? I know that is perhaps a little more into the future.

Phil Boswell (Scottish National Party, Coatbridge, Chryston and Bellshill)

I was wondering what the process is for determining the 16.7% threshold and when was the last review.

Rebecca Long-Bailey (Labour, Salford and Eccles)

Are you aware of what steps the Government have put in place to reverse or amend this legislation in the future, and do you believe that there are any specific triggers that should lead to its suspension?

Alan Mak (Conservative, Havant)

The Government have said that the Bill has no financial implications. If a grant is needed from the Treasury to maintain the mandated threshold of 16.7% of expenditure, do you think that this constitutes a financial implication?

Matt Warman (Conservative, Boston and Skegness)

Given the fall in the national insurance fund, are there implications for continued NHS funding from the fund?

Matt Warman (Conservative, Boston and Skegness)

From your perspective, you are not anticipating making any cuts to NHS funding, or NHS funding going down overall?

Lucy Frazer (Conservative, South East Cambridgeshire)

The Bill is part of the Government’s commitment to simplifying the tax system, but might the freeze on rates and on other taxes lead to complicated attempts to raise taxes in other areas? You have already mentioned that there might be a grant, which might necessitate raising taxes in other areas. Does that, in your opinion, exacerbate the problem of simplifying the tax system?

Andrew Rosindell (Conservative, Romford)

That concludes the questions of which I have been given notice. Does any Member wish to ask any further or additional questions? No. I thank Mr Whiting for his evidence. We will now move on to the next panel.

Examination of Witnesses

Andrew Rosindell (Conservative, Romford)

We will hear oral evidence from the Treasury. We have until 10.45 am. I ask the panellists to introduce themselves.

John McNally (Scottish National Party, Falkirk)

I will repeat the question I asked earlier. There has been a lot of speculation in the media and the press about the possible effects on the thresholds of the tax credit cuts. The Bill legislates to prevent rises in the current rates of class 1 and secondary class 1 national insurance contributions, but says nothing about the thresholds. Are changes to thresholds absolutely ruled out for the duration of this Parliament?

John McNally (Scottish National Party, Falkirk)

Are you saying that there is a possibility that they will be changed?

John McNally (Scottish National Party, Falkirk)

What I am trying to get at, Minister, is that there will have to be some sort of transition period for working-class people. We in this Committee are trying to find out whether that will be a possibility. During the transition period, it looks as if national insurance contribution thresholds will be moved.

Wendy Morton (Conservative, Aldridge-Brownhills)

How can the fund cope if there is an unforeseen crisis?

Rob Marris (Labour, Wolverhampton South West)

In terms of the national insurance fund, the trend is not looking good. In 2008-09, the fund was sufficient to cover 71% of its liabilities. By last year, that had dropped to 25%. Some commentators are suggesting that this year it will fall below the Government Actuary’s recommended one sixth, which is 16.7%. I understand that the Government Actuary has indicated that a top-up will be required this year from the Consolidated Fund, I imagine as you just indicated. I understand what you said about flexibility. Can you give an indication of how big that top-up from the Consolidated Fund for the national insurance fund is likely to be for this financial year and for the remaining years of this Parliament?

Rob Marris (Labour, Wolverhampton South West)

Forgive my ignorance, but does it require primary legislation? You talked about the £9.6 billion being provided for in legislation for this financial year. Is that secondary or primary legislation? What is the mechanism?

Rob Marris (Labour, Wolverhampton South West)

So if the transfer needed to be more than £9.6 billion in this financial year, that would require fresh secondary legislation this year? I am not saying that will be the case, but asking what would happen if it were.

Rebecca Long-Bailey (Labour, Salford and Eccles)

What steps have the Government put in place to review this legislation in terms of reports or otherwise? Are there any triggers that will lead to its suspension?

Wendy Morton (Conservative, Aldridge-Brownhills)

The Government have said that the Bill has no financial implications. If a grant is needed from the Treasury to maintain the mandated threshold of 16.7% of expenditure, is it your view that this constitutes a financial implication?

Rebecca Long-Bailey (Labour, Salford and Eccles)

There is real concern that, given the fall in the balance of the national insurance fund, there will be implications for NHS funding. Can you confirm that there are no anticipated funding cuts on the horizon in terms of the NHS?

Rebecca Long-Bailey (Labour, Salford and Eccles)

What measures will the Government put in place to provide assurances on this? The Government have imposed the Bill to provide assurance about the ceiling rate on national insurance contributions, but will they do the same to protect the NHS funding element?

Mark Menzies (Conservative, Fylde)

Following up on that point, is there a clear commitment from the Government to put measures in place to ensure that NHS funding is not reduced as a result of the measures in the Bill?

Lucy Frazer (Conservative, South East Cambridgeshire)

The Government have committed to simplifying the tax system. Mr Whiting confirmed that this measure will do that, and that it will bring certainty and stability through lack of change. Do you think that the change will have an impact on any other tax measures?

Andy McDonald (Labour, Middlesbrough)

Rather than simplifying the tax system, this effectively does a big fat nothing. It keeps things exactly as they are. Have you made any assessment of how much the process has cost?

Andy McDonald (Labour, Middlesbrough)

Is keeping things as they are, not making any changes and putting Parliament through this, really a wise use of parliamentary time?

Huw Merriman (Conservative, Bexhill and Battle)

To turn the question from the hon. Member for Middlesbrough on its head, does the Treasury keep estimates of how the stability that this gives business will benefit the economy?

Rob Marris (Labour, Wolverhampton South West)

Reversing that, I would suggest that the Bill arguably creates greater uncertainty, because although the Government have chosen, following your party’s manifesto commitment, to lock in a cap on national insurance contributions, you are taking action in some areas and not others. For example, there are about 1,300 tax reliefs and you are not locking all of those in.

In answer to an earlier question, you referred to a review of business taxation, which I think you said would be launched in the spring. That in itself creates uncertainty, and I suggest that the argument that the Bill creates greater certainty is wrong. It creates greater uncertainty because people say, “You’re locking in this but we notice you’re not locking in other stuff, so other stuff might change and adversely affect businesses or individuals.”

Rob Marris (Labour, Wolverhampton South West)

Until then there is uncertainty.

Rob Marris (Labour, Wolverhampton South West)

We did not say that we would do it for business certainty.

Andrew Rosindell (Conservative, Romford)

Those are all the questions of which I have been notified. Does any other hon. Member wish to ask a question or raise an issue that has not been covered thus far?

Rob Marris (Labour, Wolverhampton South West)

On a point of order, Mr Rosindell. May I thank you for your chairing of the Committee today, particularly as I suspect that, like me, you missed the Canadian breakfast this morning?

Andrew Rosindell (Conservative, Romford)

No, I went to it, actually.

Rob Marris (Labour, Wolverhampton South West)

I had a meeting. I thank you, Mr Rosindell, for your commitment to your service as a Chair and for chairing the Committee today.

Andrew Rosindell (Conservative, Romford)

Thank you. I thank the witnesses for their attendance today and for duly answering the questions. If there are no further questions, I thank hon. Members for their attendance.

Adrian Bailey (Labour/Co-operative, West Bromwich West)

We now begin line-by-line consideration of the Bill. Please ensure that all electronic devices are turned off or switched to silent mode. It is unseasonably warm today—very pleasant. If Members want to remove their jackets, they should feel free to do so.

Clause 1 - Main and additional primary percentages

David Gauke (Conservative, South West Hertfordshire)

It is a very great pleasure to serve under your chairmanship, Mr Bailey. I welcome all hon. Members to their places. Progress was brisk and efficient at our evidence session this morning and if it were up to me, that momentum would continue, but of course it is not up to me.

Clause 1 specifies that the class 1 contributions payable by employees at the main primary percentage shall not exceed 12%. Class 1 contributions are payable at 12% on earnings between £155 and £815 a week. For earnings above £815 a week, the additional primary percentage shall not exceed 2%. The provisions in clause 1 will apply to any tax year that begins after the day on which the Bill comes into force before the next election.

Rob Marris (Labour, Wolverhampton South West)

It is a pleasure to serve under your chairmanship again, Mr Bailey. You commented on the weather. Of course, you and I know that that the weather in West Bromwich and in Wolverhampton is always lovely, especially at this time of year.

Through clause 1 the Government are limiting their room for manoeuvre. I am aware, as are all hon. Members, that there was a commitment by the Conservative party in the general election not to freeze but to put a cap on national insurance contributions at both rates. That was also the policy of my party, so I think that we will have a fairly brisk afternoon.

However, the Bill, as primary legislation, puts restrictions on Government, which, as I suggested to the Minister in the evidence session this morning, creates a measure of uncertainty. When some things are restricted, like this and other tax measures, such as the 1,300 tax reliefs, of which the Audit Commission says that only about 200 are tracked properly, it can create uncertainly by a kind of ripple effect—if one is being certain in one sphere but saying nothing about this other sphere, whatever it may be in terms of the tax regime, perhaps one has plans to change that.

Do the Government currently have any plans to change, in any way, the regime for national insurance contributions, whether in terms of the upper earnings limit or the percentage rates at which it is levied? There are different rates, of course, depending on the different classes, including class 3A, which runs out at the end of next March. Are there any proposed changes to the regime?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the hon. Gentleman’s comments and I am encouraged, as I am sure you are, Mr Bailey, by the consensus, at least on being brisk this afternoon.

As for future plans for national insurance contributions, of course, all taxes—and for these purposes, we count national insurance contributions as a tax—are kept under review. Any announcements are made by the Chancellor in Budgets and autumn statements. I have nothing to add to what has previously been said in Budgets and autumn statements. As was touched upon in our evidence session this morning, the Office of Tax Simplification is looking at national insurance contributions and their alignment with income tax. It has examined that in the past, and it and the Government believe that it would be helpful to draw out some of the related issues in quite a complex matter.

Rob Marris (Labour, Wolverhampton South West)

I appreciate that consultation is ongoing and evidence is still being gathered, but is the Government’s preferred option at this point to have such an alignment?

David Gauke (Conservative, South West Hertfordshire)

The Government’s position is very much an open one. There is no preferred position as such. Clearly, the matter has been raised on numerous occasions over many years. I suspect that all parties have looked at this issue to a greater or lesser extent. The Office of Tax Simplification has made recommendations in the past on this matter, and we think that it would be beneficial for it to continue to look at the subject with a view to developing potential ideas and then, after that further investigation, for us to have an informed debate on whether to take the proposals forward. The Government do not have a predetermined position, but we think that it would be beneficial to the general debate for the OTS, which is a respected organisation that has already done good work in this area, to take the matter forward.

In short, we do not have further proposals other than those that we previously set out—not least, of course, the cap. The hon. Gentleman is right to say that the Bill provides for a cap, not a freeze.

Clause 2 - Secondary percentage

David Gauke (Conservative, South West Hertfordshire)

Like clause 1, clause 2 is a simple provision and I do not intend to detain the Committee for long in explaining it. The rate of secondary class 1 contributions payable by employers for employees who are not under the age of 21 is 13.8%. It is payable on earnings above £156 per week. The clause simply provides that the rate shall not exceed 13.8%.

Rebecca Long-Bailey (Labour, Salford and Eccles)

Again, as this is part of the Government’s policy to cap national insurance contributions for this Parliament, we do not oppose it in principle, but I hope that the Minister will address a few issues.

The national insurance fund is used almost exclusively to pay for contributory benefits. However, one portion, as we discussed this morning in the evidence session, is used for the NHS. Will the Minister assure us that the Government are not tying their own hands should there be another economic crisis? There could be a danger in such circumstances that the Chancellor may decide to reduce public spending further, just at the point when a stimulus is needed.

Economists the world over warn that the global economic situation is becoming increasingly precarious, and the Minister will no doubt be acutely aware that the Opposition have concerns that the Government are not taking sufficient measures to increase our financial resilience. I ask the Minister, in the words of Keynes: if the facts change, will the Chancellor change his mind? Alternatively, if the Government are committed to keeping this framework in place regardless, what contingency plans exist to protect the fund if unemployment starts to rise and receipts from national insurance consequently fall?

On Second Reading, the point was made that the Chancellor’s spending plans are predicated on,

“a forecast rise in revenue yield from NICs”.—[Official Report, 15 September 2015; Vol. 599, c. 941.]

However, should this yield be less than forecast, whether due to unforeseen circumstances, simple miscalculation or, indeed, economic policy failures, what will the Government do? Will further cuts be imposed on public expenditure, or will borrowing rise and the Chancellor simply change his targets once again?

I was grateful for the Minister’s response this morning when he confirmed that NHS funding would not be cut directly as a result of any impact that the Bill has. However, in the same way as the Bill provides an assurance to the market that the Government will keep their promise on national insurance, it would be prudent to legislate for the promise on the NHS. I trust that the Minister has listened diligently to my concerns and I look forward to his response.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the hon. Lady for her questions. She asked whether we are tying our hands in these circumstances. To the extent that we are not putting up the employers’ rate of national insurance contributions, for which the clause provides, or the employees’ rate, for which clause 1 provides, we are making it clear that we do not believe that that would be the right thing to do.

The hon. Lady draws me on to hypothetical ground when she asks what would happen if there were a crash, but even on a Keynesian analysis, I do not think anyone would particularly advocate, as an immediate response to an economic downturn, increasing employers’ or employees’ national insurance contributions. I do not claim to be an expert on Keynesian orthodoxy, but I do not think that that would constitute an orthodox Keynesian response to a downturn.

On the hon. Lady’s points about the impact on the national insurance fund, let me repeat the assurances that I gave this morning. There is no question of the fund not being able to fund pensions or the NHS. The Government will introduce the new state pension from 2016, which will make pensions affordable and improve the sustainability of the national insurance fund in the long term and provide the right support for private saving.

The Government Actuary recommends a working balance of one sixth of benefit expenditure for the national insurance fund, as we heard this morning. There is provision to top up the national insurance fund from the Consolidated Fund to maintain the balance at that level. For the 2015-16 tax year, a top-up of £9.6 billion has been provided for in legislation. The future funding of contributory benefits, should NICs receipts prove insufficient, is a matter for the Chancellor and that decision would need to be made at the relevant fiscal event, based on the latest projections available at the time, and taking account of this Bill. I hope that that provides some reassurance that there is flexibility.

It is not the case—nor is this an argument that a future Government would make—that, if the national insurance fund were lower than we expected, we would not honour our commitments on the NHS and on the state pension. I have to make the point that, when it comes to ensuring that we can have a properly funded NHS and properly funded pensions, we need to make sure that the economy is on a sound footing, and that the public finances are strong. That means that we have to make choices, and, in some cases, difficult choices about public finances. That includes, for example, identifying savings in the welfare budget, but, Mr Bailey, that would be taking me away from clause 2.

Adrian Bailey (Labour/Co-operative, West Bromwich West)

You are getting very close.

David Gauke (Conservative, South West Hertfordshire)

Tempting though that is, I should return to the clause. I hope that those points of clarification are helpful to the Committee and that clause 2 can stand part of the Bill.

Clause 3 - Upper earnings limit

David Gauke (Conservative, South West Hertfordshire)

This clause provides that the upper earnings limit for any tax year for the duration of the Parliament shall not exceed the weekly equivalent of the income tax higher rate threshold proposed for that tax year. The class 1 upper earnings limit is the point at which an employee transitions from paying class 1 contributions at the main rate of 12% to paying class 1 contributions at 2%. Since April 2009, this point has been aligned with the higher rate tax threshold.

Rebecca Long-Bailey (Labour, Salford and Eccles)

Hon. Members will be pleased to hear that I do not wish to go into great detail on clause 3. We are aware that the clause links the upper earnings limit to the higher rate income tax threshold by setting out that it shall not exceed the weekly equivalent of the proposed higher rate threshold for that tax year. That means that employees stop paying national insurance contributions at the 12% rate when their income reaches the higher rate income threshold, and thereafter the rate of national insurance is 2%.

The upper earnings limit has been in line with the higher rate income tax threshold since April 2009. However, the Prime Minister made a pledge to legislate formally for this link before the general election. If this is already common practice, will the Minister explain why it has been necessary to legislate on this point in the Bill? Surely, this is another clear example of the irrelevance of the Bill and the political game the Chancellor is playing with the legislative integrity of this place. This is 15 minutes of Members’ time that we will never get back. That puts the matter into perspective.

I do not want to repeat previous discussion, and we broadly support the principles of the clause, but it is simply not necessary. None the less, we will not oppose it at this stage.

David Gauke (Conservative, South West Hertfordshire)

I am sorry if we are detaining the hon. Lady. I am sure she has many useful things to do this afternoon, so I will not detain her longer than I have to. I come back to the point that we debated this morning. It was a manifesto commitment that we would legislate for this and it is similar to the argument on rates that we have just had on clauses 1 and 2. It underlines our commitment.

I suspect that, had the Bill contained just clauses 1 and 2, and not dealt with the upper earnings limit alignment, the hon. Lady would have been one of the first to identify an apparent lacuna in the legislation and would say that there was nothing to stop us increasing the 12% band of national insurance contributions above the point at which the higher rate threshold came into place. Indeed, I think that that was Labour party policy in 1992, so it is not an immaterial issue or one that has never been considered in public debate.

To be consistent with the capping of the employees’ NICs rate, it is right to set out the threshold and the fact that that is tied in with the higher rate threshold. That has been the practice for some years now and we wish to maintain it.

Rebecca Long-Bailey (Labour, Salford and Eccles)

On highlighting a lacuna, several need to be highlighted and we will take the same approach as the Government to the Bill. If they are going to legislate for every single pre-election promise, surely they should apply the same sort of legislation to every manifesto pledge. They are certainly not doing that.

As my hon. Friend the Member for Wolverhampton South West rightly said this morning, while the Government might be providing assurances to the market on this issue, they are certainly not providing any assurances on all their other pre-election promises because they are not legislating for them in the same way.

David Gauke (Conservative, South West Hertfordshire)

Again, I come back to the central point. The Conservative party, and indeed the Labour party, made pledges during the last general election campaign not to increase rates. We wished to underline our commitment to the British people by announcing during the election campaign that we would legislate for this. It further emphasised our commitment on this issue.

Having set out that we would legislate on rates, it is also right that we legislate on the way in which the national insurance thresholds currently tie in with the income tax thresholds, which is at the point where the upper earnings limit meets the higher rate threshold. It was logical to include clause 3, which meets exactly the same objective as clauses 1 and 2. We made a commitment that we would not increase the 12% band above the point at which higher rate income tax would be paid, and I think—I am sure I will be corrected—that the Labour party made the same commitment. Given that we are legislating in the Bill on rates, it made sense also to address that threshold point. That is why the clause is part of the Bill, and why I hope the Committee will support it.

David Gauke (Conservative, South West Hertfordshire)

On a point of order, Mr Bailey. I am not sure whether it is appropriate or necessary to make a point of order at this point, but I think I should. I thank you for your guidance over the last 21 minutes. You have demonstrated all the skills we needed this afternoon, and I am grateful for that. I also thank Mr Rosindell for his assistance this morning.

I thank all hon. Members for their participation in our proceedings. They can report back to the Whips that they have served on yet another Bill Committee, and I hope they feel that this has been a day well spent.

I thank the Whips—the Lord Commissioner of Her Majesty’s Treasury, my hon. Friend the Member for Central Devon, and the hon. Member for St Helens North—for their assistance. I also thank Opposition Members, including the Front-Bench spokespeople, the hon. Members for Wolverhampton South West and for Salford and Eccles, for their constructive engagement with the Bill.

This is the second Bill that some of us have completed in recent days. It has taken considerably less time than the Finance Bill, for which I, for one, am very grateful.

May I conclude by thanking the Clerks, the Hansard reporters, the police and the attendants, as well as the officials from Her Majesty’s Revenue and Customs and the Treasury, for their assistance with this short but important Bill? I look forward to discussing these issues again—no doubt at some length—on Third Reading.

Rebecca Long-Bailey (Labour, Salford and Eccles)

Further to that point of order, Mr Bailey. I reiterate the thanks the Minister has expressed. I also thank him for what has, as always, been a lively and engaging debate. It has been a pleasure.

John McNally (Scottish National Party, Falkirk)

Further to that point of order, Mr Bailey. This is the first Bill Committee on which I have sat. May I, too, thank the Minister and the Clerks for taking us through the Bill and for the guidance they have given us? I am equally glad that our proceedings have been quite short and relatively simple to follow and that I could associate them with my constituents back home in Falkirk.