Lords back non-dom abolition but disagree over impact on NI cuts

At the debate on Monday 18 March, Lords Treasury minister Baroness Vere of Norbiton opened by reiterating that those with “the broadest shoulders should contribute a little more”, and said the decision to abolish the non-dom regime would raise £2.7 billion a year in public finances.

She also praised changes to High Income Child Benefit Charge (HICBC) thresholds and National Insurance (NI) cuts, saying that the government is committed to “tax cuts that reward and incentive work”.

Former Chancellor Lord Lamont of Lerwick (Con) supported the reduction in NICs, referring to it as a “bold” decision that would incentivise work. He criticised those who argued that the Chancellor should have made larger tax cuts, saying: “Tax cuts do not automatically pay for themselves”.

Former Treasury Permanent Secretary Lord Macpherson of Earl’s Court (cross bench) welcomed “sensible tax-raising measures” in the Budget, including the non-dom regime abolition. He said: “If you are going to cut taxes—I recognise that that is a big ‘if’—prioritising national insurance reductions over income tax is the act of a courageous Chancellor”. However, he also expressed concerns over more people being dragged into higher-rate tax due to the NI cut.

Lord Young of Cookham (Con), another former Treasury minister, while welcoming the introduction of a British ISA, raised concerns about the abolition of multiple dwellings relief for stamp duty land tax. He also suggested that it would be an “achievable” goal to merge NI with income tax, arguing that the move could increase transparency and reduce administrative and compliance costs.

Baroness Lawlor (Con) said that with the tax burden remaining high, “should we not be taking the scythe to the overall levels of public spending and public debt?”

Baroness Noakes (Con) said that eliminating employee NI would help “simplify” the tax system. She urged the Chancellor to next look at employers’ NI, saying it is “bizarre that we tax people-intensive businesses more highly than capital-intensive ones”.

Lord Leigh of Hurley (Con) welcomed the abolition of the non-dom regime and HMRC’s decision to create an expert advisory panel to advise on what is “true and proper” research and development. He also urged the government to look into a digital services tax, ensuring online retail giants like Amazon are taxed “properly”.

Lord Sherbourne of Didsbury and Lord Horam (Con) both advocated for a single Budget each year, with the latter saying: “Having more than one Budget every year reinforces uncertainty and often produces underexamined tax changes and too many short-term spending decisions”.

Lord Northbrook (Con) argued that a freeze on tax allowances for five years cancels the benefits of national insurance cuts, resulting in taxpayers facing an additional £81 billion in taxes.

He said he was disappointed about the removal of non-dom status, suggesting that the forecast of extra tax gain from the measure is “highly optimistic”.

Lord Eatwell (Lab) criticised the measures announced in the Budget, arguing that “tax cuts do not generate sustained higher rates of economic growth”. He highlighted the UK’s poor growth performance, adding that the average real household disposable income after taxes and benefits is lower today than 16 years ago.

Baroness Lister of Burtersett (Lab) welcomed the HICBC threshold rise, citing the “unfairness” created by the existing system, but added: “I do not believe that the answer is to jettison the important principle of independent taxation”. She argued that these “significant” reforms to the tax system will likely pose “considerable administrative problems”.

Baroness Lister also criticised the decision to cut NI instead of prioritising investment in public services. She argued that by framing the proposed NI abolition as a simplifying tax cut, “the government appear to be indifferent to the implications for not just pensions but working-age contributory benefits”.

Lord Davies of Brixton (Lab) said the changes to NI were “ill thought out, ill-considered and ill-formed” with two main issues: identifying the source of funding, and understanding the effects on contributory benefits, especially pensions. He requested further clarification from the minister.

Baroness Jones of Moulsecoomb (Green Party) argued that the headline tax reduction would not do anything to “reverse the decades-long real-terms wage freeze that most workers have faced”. She criticised both the Conservatives and Labour for not prioritising a wealth tax, suggesting the levy could deliver cheaper energy and lower bills.

Lord Sikka (Lab) said the measures in the Budget would not help the poorest in the UK, adding that “the poorest fifth pay 28.3% of their disposable income in indirect taxes such as VAT, whereas the richest fifth pay 9%”. He also criticised the government for failing to take action on “the anarchic VAT rules” facing many retailers. As an example, he questioned why “cakes and biscuits are zero-rated, but if they are wholly or partly covered in chocolate they become subject to 20% VAT.”

Baroness Bennett of Manor Castle (Green Party) discussed fuel duty, arguing that the 5p cut has cost the Treasury £90 billion since 2021. She highlighted that recent data suggests that due to the rise in electric car usage, fuel duty revenues for the government are expected to decrease by 2025.

Baroness Sheehan (Lib Dem) criticised the Budget for lacking climate change measures and called for a tax roadmap to align fiscal policies with net-zero goals, government assessments of the environmental impact of taxes and updates on the commitments made in the March 2023 net-zero growth plan.

Lord Lee of Trafford (Lib Dem) suggested that the disposal of the government’s holding of around 30% of shares in NatWest gives the country “a unique opportunity to improve financial education”. The idea, which he said was backed by a cross-party group of peers, “is that government gives by way of gift something like £5,000 of NatWest shares free to all our state secondary schools… [This] would give, at present, a dividend to the school of about £350 a year. Our idea is that the pupils would be empowered to decide how that £350, or the annual dividend, is actually spent.” This might be something for the school, such as a school trip, it might be to support a local charity, or even to reinvest it. This would be ‘transformative’, said Lee, noting that the Chancellor had said last week that it was under consideration.

Lib Dem spokesperson Baroness Kramer supported Lord Lee's proposal. She did not oppose the reduction in NI, but did wonder whether the abolishing NI would mean “huge new borrowing”. She suggested that the Budget missed the opportunity to close loopholes in the oil and gas windfall tax and accused the government of returning “to a focus on low-income people as a major source of new tax revenue.”

Labour spokesperson Lord Livermore expressed concerns about pensions arising from the impact of changes to NICs and asked: “If the plan is instead to merge national insurance and income tax, what will this mean for pensioners’ tax bills?” He added that due to the freeze in the tax threshold for every £10 collected in higher taxes, only £5 is returned, leaving the average family £870 worse off by the end of the forecast period. He questioned why the government did not close the non-dom ‘loophole’ sooner and called for the windfall tax on oil and gas producers to be closed.

Closing, Baroness Vere acknowledged concerns over the UK’s high tax burden and argued that the government has made some difficult choices on tax. She added that she believed the government has taken a “fair approach” to repairing the public finances and said the cut to NI contributions would make the tax system simpler and “reward” hard work.

Responding to points made on the abolition of the non-dom regime, the minister said it was important to strike the “right” balance between ensuring that those who are residents in the UK pay tax here and encouraging those with high wealth to come to the UK and invest their funds.

Read the full debate.